<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to section 240.14a-11(c) or
section 240.14a-12
The Kroger Co.
.............................................................................
(Name of Registrant as Specified In Its Charter)
The Kroger Co.
..............................................................................
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
.......................................................................
2) Aggregate number of securities to which transaction applies:
.......................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
.......................................................................
4) Proposed maximum aggregate value of transaction:
.......................................................................
* Set forth the amount on which the filing fee is calculated and state how
it was determined.
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
1) Amount Previously Paid: $125
......................................................
2) Form, Schedule or Registration Statement No.: PRE 14A
......................................................
3) Filing Party: THE KROGER CO.
......................................................
4) Date Filed: 3-15-94
......................................................
<PAGE>
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
AND
1993 ANNUAL REPORT
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LOGO
<PAGE>
LOGO
COVER PRINTED ON RECYCLED PAPER
<PAGE>
TO OUR FELLOW SHAREHOLDERS:
The Kroger Co. achieved record levels of sales and cash flow in 1993. This
accomplishment is a tribute to the 190,000 Kroger colleagues who are committed
to customer service--every day--in our supermarkets, convenience stores,
warehouses, manufacturing plants, and offices. To each of our associates we
extend our congratulations and sincere thanks. Well done!
For the fiscal year, earnings before extraordinary items related to the early
retirement of high-cost debt totaled $170.8 million, or $1.50 per fully-diluted
share, compared to $101.2 million, or $1.11 per fully-diluted share, in 1992.
Operating cash flow improved 7.5% to $976.8 million from $908.2 million. Sales
totaled $22.4 billion and identical food store sales increased 1.2% after
adjustment for an extra week in 1992, and exclusion of results from the San
Antonio stores sold in mid-1993 and from Michigan.
Results in the fourth quarter were especially strong, bolstered by a robust
holiday season in all retail divisions. Operating earnings for the quarter rose
25.7% to $86.5 million.
The performance of Kroger-brand products was particularly noteworthy. Our
Company now offers 4,500 private label items for sale; approximately 60% are
produced in Kroger's 37 highly efficient manufacturing plants. Private label
sales continue to increase at a faster rate than total corporate revenues.
Kroger brand products now account for approximately 20% of grocery sales.
Improved operating results, coupled with the completion of our debt refinancing
objectives, have substantially widened the cushion between operating cash flow
and interest expense. Free cash flow has risen to $587 million in fiscal year
1993 from $263 million in 1989. This increase, combined with the $203.5 million
equity offering completed during 1993, has reduced debt from $5.3 billion in
1989 to $4.2 billion at year-end 1993 and has enabled Kroger to rapidly
increase capital investment.
OPERATING STRATEGY, 1994-1996
The past year was characterized by little or no food inflation, causing
heightened competition for value-sensitive customers. We expect these
conditions to remain much the same in 1994. In order to compete successfully in
this challenging environment, we are following a strategy with these
components:
.Accelerated growth in food store square footage. Kroger's retail food store
square footage is expected to expand by 4 1/2% to 5% each year between 1994 and
1996 as compared to an increase of 3.2% in 1993 and an average annual growth of
2.5% in 1990-92. During the next three years, the Company intends to invest
approximately $1.5 billion in new stores, remodels and expansions targeted
toward geographic areas where Kroger holds a leading market share.
.Integration of new technology. In 1992, Kroger committed $125 million for new
technology to be installed Company-wide by year-end 1994. This investment
timetable is "on schedule" and is generating a broad spectrum of hardware and
software installations ranging from the satellite communications network to
more powerful store computers to sophisticated software designed to reduce
costs of operation and distribution. These projects have required substantial
up front costs, but they are already resulting in selective expense reductions.
We expect the payback to increase substantially in 1994 and beyond.
.Procurement and distribution efficiencies. Kroger and its suppliers are
pursuing dozens of cooperative programs to cut inventory and distribution
expenses. We are aggressively implementing programs to reduce product
acquisition costs by coordinating purchasing and distribution systems among our
retail divisions. For example, net product cost savings in the grocery category
increased from $8.6 million in 1991 to $14.3 million in 1993.
NEW STORE DEVELOPMENT
During 1993, Kroger built or expanded 46 stores and remodeled 70 others. At
mid-year, we withdrew from the San Antonio market and sold 15 retail stores
located there. In early 1994, the Company purchased 10 stores in Houston from
AppleTree Markets, Inc. In addition, Kroger expects to open or expand another
60 stores and complete 60-70 remodels for a square footage increase of 4 1/2 to
5%.
FINANCIAL STRATEGY
The Company has made significant progress in restructuring the debt on our
balance sheet by extending maturities, reducing interest costs, and increasing
flexibility. During 1993, we called the remaining 15 1/2% junior subordinated
discount debentures and bought in $216.3 million of other high-cost debt. The
average interest rate for long-term debt at year-end 1993 was 8.2% compared to
11.6% in 1989. Interest expense declined 18% in 1993 to $390 million. We
anticipate a further interest cost decline to a level of $330-$340 million in
1994.
1
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LABOR RELATIONS
New contracts were successfully negotiated covering the Company's operations in
Texas and Louisiana, Denver, Indianapolis, Atlanta, and Toledo and southwestern
Ohio during 1993. However, the Company experienced a 3 1/2-week strike in City
Market and a 10-day strike in Paducah, KY before agreements were signed.
Future negotiations will be affected by the new, low-cost competitors that are
rapidly entering Kroger's markets. The principal threat is from Wal-Mart, Kmart
and Meijer supercenters which combine food, pharmacy and extensive general
merchandise departments in stores that range in size from 150,000 to 200,000
square feet. By 1995, approximately 12% of Kroger's total sales base is
expected to be in direct competition with Wal-Mart or Kmart supercenters, as
compared to 4% at year-end 1993. During the next few months, supercenters will
enter such key Kroger markets as Denver and Indianapolis, as well as dozens of
smaller communities. These new competitors offer limited employee benefits,
have few work rule constraints, and are generally supported by sophisticated
logistical systems. They represent Kroger's major challenge.
COMMUNITY INVOLVEMENT
Charitable contributions from The Kroger Foundation declined to $2.6 million--
about half the amount available in 1992. However, the Company's operating
divisions, manufacturing units, convenience stores and office staffs have shown
great resourcefulness in finding alternative ways to maintain community
involvement. Kroger divisions raised more than $10 million for local non-profit
and charitable activities in 1993 through a variety of fund-raising events,
typically organized by employees and supported by customers and suppliers. This
figure does not include the substantial cash value of products donated by
Company stores and manufacturing plants for local community events.
Our divisions also contributed to their communities in dozens of other ways.
During the summer, Kroger hired 5,250 teenagers from low income households, far
exceeding the 1,200 positions that the Company had pledged in support of
President Clinton's "Summer Challenge" job initiative. Kroger divisions and
manufacturing plants contributed thousands of dollars of product and cash to
aid Midwest flood victims. Our customers and suppliers generously joined with
us to provide groceries in support of relief operations.
EXECUTIVE CHANGES
During 1993, Donald Dufek was named Senior Vice President--Logistics; Cleve
Gorman was named Vice President--Reengineering Analysis; and Thomas D. Murphy
joined Kroger as Vice President--Management Information Services. Early in
1994, Michael S. Heschel was promoted to Senior Vice President--Information
Systems and Services. These new positions reflect the Company's focus on
process implementation and cost reduction. In addition, Warren F. Bryant was
promoted to Senior Vice President, Dillon Companies, Inc., and Rodney McMullen
was promoted to Vice President--Control and Financial Services.
At the division level, William D. Parker was named President of the Columbus
Marketing Area, succeeding Robert L. Shafer, who retired after 32 years of
distinguished service. Lyle Yates, formerly Vice President--Merchandising in
the Company's Atlanta division, was promoted to President of the Dallas
division, replacing Mr. Parker. Don McGeorge, formerly Vice President--
Merchandising in Nashville, was promoted to President of the Michigan division,
succeeding Joel Greenisen, who retired after 35 years of dedicated service to
Kroger customers. Also, Robert G. Colvey was appointed President of Dillon
Stores, succeeding John L. Baldwin, who retired after a distinguished 47-year
career.
THE YEAR AHEAD
With debt refinancing accomplished and cash flow improving, Kroger will
accelerate the process of growing the business and further reducing interest
expense in 1994. Our improved financial condition and our abiding commitment to
customers will continue to provide rewards to Kroger shareholders, employees,
and the communities we serve.
LOGO LOGO
Joseph A. Pichler Chairman Richard L. Bere President and Chief
and Chief Executive Officer Operating Officer
2
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 6, 1994
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the
CLARION HOTEL, 141 WEST SIXTH STREET, Cincinnati, Ohio, on May 19, 1994, at 10
A.M., for the following purposes:
1. To elect six directors to serve until the annual meeting of
shareholders in 1997 and to elect one director to serve until the
annual meeting of shareholders in 1995 or until their successors have
been elected and qualified;
2. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1994;
3. To consider and act upon a proposal to amend the Amended Articles of
Incorporation to increase the authorized shares of Common Stock from
350,000,000 to 500,000,000;
4. To consider and act upon a proposal to approve the 1994 Long-Term
Incentive Plan; and
5. To transact such other business as may properly be brought before the
meeting; all as set forth in the Proxy Statement accompanying this
Notice.
Holders of common shares of record at the close of business on March 22, 1994,
will be entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF THE SHAREHOLDERS REPRESENTED
AT THE MEETING, IN PERSON OR BY PROXY. PLEASE SIGN AND DATE THE ENCLOSED PROXY
AND MAIL IT AT ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
By order of the Board of Directors,
Paul W. Heldman, Secretary
PROXY STATEMENT
Cincinnati, Ohio, April 6, 1994
The accompanying proxy is solicited by the Board of Directors of The Kroger
Co., and the cost of solicitation will be borne by the Company. The Company
will reimburse banks, brokers, nominees, and other fiduciaries for postage and
reasonable expenses incurred by them in forwarding the proxy material to their
principals. The Company has retained Hill & Knowlton, Inc., 420 Lexington
Avenue, New York, New York to assist in the solicitation of proxies and will
pay such firm a fee estimated at present not to exceed $15,000. Proxies may be
solicited personally, or by telephone, as well as by use of the mails.
Joseph A. Pichler, Patricia Shontz Longe and T. Ballard Morton, Jr., all of
whom are directors of the Company, have been named members of the Proxy
Committee.
The principal executive offices of The Kroger Co. are located at 1014 Vine
Street, Cincinnati, Ohio 45202-1100. Its telephone number is 513-762-4000. This
Proxy Statement and Annual Report, and the accompanying proxy, were first sent
or given to shareholders on April 6, 1994.
As of the close of business on March 22, 1994, the Company's outstanding voting
securities consisted of 109,243,086 shares of Common Stock, the holders of
which will be entitled to one vote per share at the annual meeting. The shares
represented by each proxy will be voted unless the proxy is revoked before it
is exercised. Revocation may be in writing to the Secretary of the Company or
in person at the meeting or by appointment of a subsequent proxy. The laws of
Ohio, under which the Company is organized, provide for cumulative voting for
the election of directors. If notice in writing is given by any shareholder to
the President, a Vice President, or the Secretary of the Company not less than
48 hours before the time fixed for holding the meeting that the shareholder
intends to cumulate votes for the election of directors and if an announcement
of the giving of such notice is made by or on behalf of any such shareholder or
by the Chairman or Secretary upon the convening of the meeting, each
shareholder shall have the right to cumulate votes at such election.
3
<PAGE>
If cumulative voting is in effect, a shareholder voting for the election of
directors may cast a number of votes equal to seven times the number of shares
held on the record date for a single nominee or divide them among the nominees
in full votes in any manner. Any vote "FOR" the election of directors will
constitute discretionary authority to the Proxy Committee to cumulate votes to
which such proxies relate as it, in its discretion, shall determine, if
cumulative voting is requested.
The effect of broker non-votes and abstentions on matters presented for
shareholder vote is as follows. The election of directors is, pursuant to Ohio
law, determined by plurality; broker non-votes and abstentions, therefore, will
have no effect on such proposals. Amendments to the Company's Amended Articles
of Incorporation authorizing additional shares of Common Stock require approval
of holders of a majority of the shares. Broker non-votes and abstentions,
therefore, will have the effect of a vote against such proposal. In order to
comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended,
the 1994 Long-Term Incentive Plan must be approved by a majority of the shares
represented at the meeting. Broker non-votes will have no effect and
abstentions will have the effect of a vote against the proposal.
4
<PAGE>
PROPOSALS TO SHAREHOLDERS
ELECTION OF DIRECTORS
(ITEM NO. 1)
The Board of Directors, as now authorized, consists of fifteen members divided
into three classes. Six directors are to be elected at the annual meeting to
serve until the annual meeting in 1997 and one director is to be elected at the
annual meeting to serve until the annual meeting in 1995 or until their
successors have been elected by the shareholders, or by the Board of Directors
pursuant to the Company's Regulations, and qualified. Candidates for director
receiving the greatest number of votes cast by holders of shares entitled to
vote at a meeting at which a quorum is present are elected, up to the maximum
number of directors to be chosen at the meeting. The committee memberships
stated below are those in effect as of the date hereof. It is intended that,
except to the extent that authority is withheld, the accompanying proxy will be
voted for the election of the following seven persons:
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- -------------------------------------------------------------------------------------------------
NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE CONTINUING UNTIL 1997
<S> <C> <C> <C>
REUBEN V. ANDERSON Mr. Anderson is a member, in the Jackson, Mississippi of- 51 1991
fice, of Phelps Dunbar, a New Orleans law firm. Prior to
joining this law firm, he was a justice of the Supreme
Court of Mississippi. Mr. Anderson is a director of
Trustmark National Bank and BellSouth Corporation. He is a
member of the Audit and Corporate Responsibility Commit-
tees.
RICHARD L. BERE Mr. Bere is President and Chief Operating Officer of Kro- 62 1990
ger. He is vice chair of the Executive Committee and a
member of the Corporate Responsibility Committee.
RAYMOND B. CAREY, Mr. Carey is a retired Chairman of the Board and Chief Ex- 67 1977
JR. ecutive Officer of ADT, Inc., an electronic protection
company. He is a director of Thomas & Betts Corporation
and C.R. Bard. Mr. Carey is vice chair of the Compensation
Committee and a member of the Executive and Corporate Re-
sponsibility Committees.
JOHN D. ONG Mr. Ong is Chairman and Chief Executive Officer of The 60 1975
BFGoodrich Company, a chemical and aerospace company. He
is a director of Cooper Industries, Inc.; Ameritech Corpo-
ration; The Geon Company; and ASARCO Inc. Mr. Ong is chair
of the Nominating Committee and a member of the Financial
Policy Committee.
JOSEPH A. PICHLER Mr. Pichler is Chairman of the Board and Chief Executive 54 1983
Officer of Kroger. He is a director of The BFGoodrich Com-
pany. Mr. Pichler is chair of the Executive Committee and
a member of the Financial Policy Committee.
MARTHA ROMAYNE SEGER Dr. Seger is a Financial Economist and currently is a Dis- 62 1991
tinguished Visiting Professor at Central Michigan Univer-
sity. From 1991-1993 she was the John M. Olin Distin-
guished Fellow at The Karl Eller Center of the University
of Arizona. She had been a member of the Board of Gover-
nors of the Federal Reserve System from 1984-1991. She is
a director of Amerisure Companies; Amoco Corporation; Cap-
ital Holding Corporation; Fluor Corporation; Johnson Con-
trols, Inc.; and Xerox Corporation. Dr. Seger is a member
of the Financial Policy and Nominating Committees.(2)
</TABLE>
5
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<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- -------------------------------------------------------------------------------------------------
NOMINEE FOR DIRECTOR FOR TERM OF OFFICE CONTINUING UNTIL 1995
<S> <C> <C> <C>
JAMES D. WOODS Mr. Woods is Chairman of the Board, President and Chief 62 --
Executive Officer of Baker Hughes Incorporated, a company
that provides equipment and services to the petroleum and
process industries. He is a director of Varco Internation-
al; Wynn's International Inc.; and Carter Hawley Hale
Stores, Inc.
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1996
RICHARD W. DILLON Mr. Dillon is Chairman Emeritus of the Board of Dillon 66 1983
Companies, Inc., a wholly-owned subsidiary of Kroger. Mr.
Dillon is chair of the Corporate Responsibility Committee.
(3)
LYLE EVERINGHAM Mr. Everingham is the retired Chairman of the Board and 67 1970
Chief Executive Officer of Kroger. He is a director of
Federated Stores, Inc.; Cincinnati Milacron Inc.; and Cap-
ital Holding Corporation. Mr. Everingham is a member of
the Financial Policy and Nominating Committees.
JOHN T. LAMACCHIA Mr. LaMacchia is President, Chief Executive Officer, and a 52 1990
director of Cincinnati Bell Inc., a telecommunications
holding company. He is a director of Multimedia, Inc. Mr.
LaMacchia is vice chair of the Audit Committee and a mem-
ber of the Compensation, Executive, and Financial Policy
Committees.
T. BALLARD MORTON, Mr. Morton is Executive in Residence of the College of 61 1968
JR. Business & Public Administration of the University of Lou-
isville. He is a director of PNC Bank, Kentucky, Inc. and
LG&E Energy Corp. Mr. Morton is vice chair of the Finan-
cial Policy Committee and a member of the Executive and
Nominating Committees.
KATHERINE D. ORTEGA Ms. Ortega served as an Alternate Representative of the 59 1992
United States to the 45th General Assembly of the United
Nations in 1990-1991. Prior to that, she served as Trea-
surer of the United States from September 1983 through
June 1989. Ms. Ortega is a director of Diamond Shamrock,
Inc.; Ralston Purina Co.; Long Island Lighting Company;
The Paul Revere Corporation; and Rayonier Inc. She is a
member of the Audit and Corporate Responsibility Commit-
tees.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1995
<C> <S> <C> <C>
JOHN L. CLENDENIN Mr. Clendenin is Chairman of the Board and Chief Executive 59 1986
Officer of BellSouth Corporation, a holding company with
subsidiaries in the telecommunications business. He is a
director of Wachovia Corp.; Equifax Incorporated; National
Service Industries, Inc.; Capital Holding Corporation;
Springs Industries, Inc.; Coca Cola Enterprises, Inc.; and
New York Stock Exchange, Inc. Mr. Clendenin is chair of
the Audit Committee and vice chair of the Corporate Re-
sponsibility Committee.
RAY E. DILLON, JR. Mr. Dillon is Chairman Emeritus of the Board of Dillon 69 1983
Companies, Inc., a wholly-owned subsidiary of Kroger. He
is a director of Emprise Bank. Mr. Dillon is chair of the
Financial Policy Committee and a member of the Audit Com-
mittee. (3)(4)
PATRICIA SHONTZ Dr. Longe is an Economist and a Senior Partner of The 60 1977
LONGE Longe Company, an economic consulting and investment firm.
She is a director of The Detroit Edison Company; Jacobson
Stores, Inc.; Comerica, Inc.; Comerica Bank & Trust, FSB;
and Warner-Lambert Company. Dr. Longe is chair of the
Compensation Committee and a member of the Audit Commit-
tee.
THOMAS H. O'LEARY Mr. O'Leary is Chairman, President and Chief Executive 60 1977
Officer of Burlington Resources, Inc., a natural resources
business. He is a director of The BFGoodrich Company. Mr.
O'Leary is vice chair of the Nominating Committee and a
member of the Compensation Committee.
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</TABLE>
(1) Except as noted, each of the directors has been employed by his or her
present employer (or a subsidiary) in an executive capacity for at least
five years.
(2) Dr. Seger was on unpaid leave of absence from Board meeting attendance from
February through November 1993.
(3) Ray E. Dillon, Jr. and Richard W. Dillon are brothers.
(4) Mr. Dillon will retire from the Board upon reaching retirement age on May
7, 1994. Mr. Woods has been nominated to fill the vacancy created by this
retirement.
7
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INFORMATION CONCERNING THE BOARD OF DIRECTORS
DIRECTORS' COMPENSATION
Each non-employee director is currently paid an annual retainer of $25,000 plus
fees of $1,500 for each board meeting and $1,000 for each committee meeting
attended. Committee chairs receive an additional annual retainer of $4,000.
Directors who are employees of the Company do not receive any compensation for
service as directors. The Company provides accidental death and disability
insurance for directors at a cost to the Company in 1993 of $176 per director.
The Company also provides a major medical plan for directors.
The Company has an unfunded retirement program for outside directors. The
retirement benefit is the average compensation for the five calendar years
preceding retirement. Directors who retire from the Board prior to age 70 will
be credited with 50% vesting after five years of service and an additional 10%
for each year served thereafter. Benefits for directors who retire prior to age
70 will commence at the time of retirement from the Board or age 65, whichever
comes later.
COMMITTEES OF THE BOARD
The Board of Directors has a number of standing committees including Audit,
Nominating and Compensation Committees. During 1993, the Audit Committee met
three times, the Nominating Committee met one time, and the Compensation
Committee met five times. Committee memberships are shown on pages 5 through 7
of this Proxy Statement. The Audit Committee reviews external and internal
auditing matters and recommends the selection of the Company's independent
auditors for approval by the Board and ratification by shareholders. The
Compensation Committee determines the compensation of the Company's senior
management and administers its stock option and benefit programs. The
Nominating Committee is responsible for developing criteria for selecting and
retaining members of the Board and seeks out qualified candidates. The Board of
Directors met eight times in 1993. During 1993, all directors attended at least
75% of the number of Board meetings and committee meetings, in the aggregate,
on which such director was a member, with the exception of Mr. Ong and Dr.
Seger.
The Nominating Committee will consider shareholder recommendations for nominees
for membership on the Board of Directors. Recommendations intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1995, together with a description of the proposed nominee's
qualifications and other relevant information, must be submitted in writing to
Paul W. Heldman, Secretary of the Company, and received at the Company's
executive offices not later than December 8, 1994.
CERTAIN TRANSACTIONS
The Company purchased certain seafood and private label products to be sold in
Company stores from suppliers represented by two firms in which Mr.
Everingham's son, Mark Everingham, owned a 36% and 50% interest, respectively.
The two firms earned gross revenues of approximately $6,949,630 in fees paid by
the suppliers for services performed by the firms on behalf of the suppliers.
The management of the Company views these transactions, and the amounts paid
for the goods supplied, as fair and competitive.
In 1989, Ray E. Dillon, Jr. purchased for approximately $2.1 million and leased
back to the Company five convenience stores. These convenience stores were part
of a group of convenience stores offered for sale and leaseback to the public
on identical terms, and the stores purchased by Mr. Dillon first were offered
publicly on those terms. During 1993, Ray E. Dillon, Jr. received $220,818 from
the Company as rent for these stores. The management of the Company has
determined that the terms of the transaction were developed at arm's length and
are fair and competitive, and that the sale and leaseback of those convenience
stores is in the best interests of the Company.
The law firm of Gilliland & Hayes, of which Bradley D. Dillon, son of Richard
W. Dillon, is a partner, rendered legal services to the Company which resulted
in fees paid to the law firm by the Company in 1993 of $104,251. The management
of the Company has determined that these amounts paid by the Company for the
services supplied are fair and competitive.
In addition, the law firm of Phelps Dunbar, of which Reuben V. Anderson is a
partner, rendered legal services to the Company which resulted in fees paid to
the law firm by the Company in 1993 of $23,118. The management of the Company
has determined that amounts paid by the Company for the services are fair and
competitive.
8
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COMPENSATION OF EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION
The following table shows the compensation for the past three years of the
Chief Executive Officer and each of the Company's four most highly compensated
executive officers, excluding the Chief Executive Officer (the "named executive
officers"):
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION(1)
------------------------------ -------------------------
AWARDS
----------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(2) (3) (4)(5) (6) (7)
Joseph A. Pichler 1993 $416,923 $582,343 $9,127 25,000 $19,249
Chairman and Chief 1992 $417,885 $149,484 $8,417 20,000 $17,526
Executive Officer 1991 $410,000 $190,537 20,000
Richard L. Bere 1993 $306,231 $349,406 $9,590 16,000 $20,819
President and Chief 1992 $305,769 $108,382 $9,142 16,000 $19,434
Operating Officer 1991 $300,000 $133,781 16,000
William J. Sinkula 1993 $265,400 $264,701 $8,674 13,500 $18,959
Executive Vice Presi-
dent 1992 $265,000 $ 85,896 $8,319 13,500 $17,763
and Chief Financial Of-
ficer 1991 $260,000 $101,350 13,500
David B. Dillon 1993 $286,833 $201,416 15,000 $ 1,349
Executive Vice Presi-
dent, 1992 $280,000 $129,228 15,000 $ 873
and President, Dillon 1991 $280,000 $ 74,484 13,000
Companies, Inc.
Patrick J. Kenney 1993 $199,769 $206,415 $5,576 15,000 $11,770
Senior Vice President 1992 $189,769 $ 44,353 $5,166 13,000 $ 9,781
1991 $180,938 $ 99,129 13,000
</TABLE>
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(1) The Company has no long-term incentive plans other than those related to
restricted stock and stock options.
(2) Messrs. Pichler, Bere and Sinkula received no salary increase in 1992. The
increase shown is the result of Kroger's 53 week fiscal year 1992. Mr.
Dillon's salary is reflective of Dillon Companies' annual compensation
based on a 365 day year.
(3) Represents reimbursement for the tax effects of payment for certain
premiums on a policy of life insurance.
(4) Restrictions remaining on outstanding restricted stock awards lapse for
equal numbers of shares over the next two years. These restrictions relate
to stock awarded in 1990. The Company is currently prohibited by contract
from paying dividends on its Common Stock but, should this prohibition be
lifted, dividends, as and when declared, would be payable on these shares.
(5) Messrs. Pichler, Bere, Sinkula, Dillon and Kenney had 24,000, 12,000,
8,000, 8,000, and 0 shares outstanding, respectively at January 1, 1994
with an aggregate value of $483,000, $241,500, $161,000, $161,000, and $0,
respectively. The aggregate value is based on the market price of the
Company's Common Stock on January 1, 1994.
(6) Represents options granted during the respective fiscal year. The options
vest 6 months from grant date and terminate in 10 years if not earlier
exercised or terminated. No stock appreciation rights ("SARs") were granted
in any of the three years presented.
(7) These amounts represent the Company's matching contribution under The
Kroger Co. Savings Plan in the amounts of $899, $1,349, $1,349, $1,349 and
$450, respectively, for Messrs. Pichler, Bere, Sinkula, Dillon and Kenney,
and reimbursement of certain premiums for policies of life insurance in the
amounts of $18,350, $19,470, $17,610 and $11,320, respectively, for Messrs.
Pichler, Bere, Sinkula and Kenney.
9
<PAGE>
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which
options to purchase Common Stock of the Company are granted to officers and
other employees of the Company and its subsidiaries. The following table shows
option grants in fiscal year 1993 to the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- --------------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR BASE
GRANTED(1) FISCAL PRICE EXPIRATION
NAME (#) YEAR(2) ($/SHARE) DATE 0% 5% 10%
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A.
Pichler 25,000 7.94% $18.88 4/21/2003 $0 $296,634 $751,922
Richard
L. Bere 16,000 5.08% $18.88 4/21/2003 $0 $189,846 $481,230
William
J.
Sinkula 13,500 4.29% $18.88 4/21/2003 $0 $160,183 $406,038
David B.
Dillon 15,000 4.76% $18.88 4/21/2003 $0 $177,981 $451,153
Patrick
J.
Kenney 15,000 4.76% $18.88 4/21/2003 $0 $177,981 $451,153
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year. These options
vest 6 months from grant date and terminate in 10 years if not earlier
exercised or terminated.
(2) The Company made a general grant of stock options to employees other than
senior officers in December, 1992, and deferred the grant to senior
officers until April, 1993. As a result, the percentages shown are
significantly higher than they would have been if all options had been
granted in the same year. No named executive officer received more than
0.82% of the aggregate number of options granted in 1992 and 1993.
The assumptions set forth in the chart above are merely examples and do not
represent predictions of future stock prices or a forecast by the Company with
regard to stock prices.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR AND OPTION/SAR VALUES
The following table shows information concerning the exercise of stock
options during fiscal year 1993 by each of the named executive officers and the
fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES TABLE
- --------------------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT F/Y AT F/Y
END (1) (#) END (1) ($)
SHARES
ACQUIRED
ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (2) (2)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph A. Pichler 0 $ 0 214,080 $1,509,931
Richard L. Bere 0 $ 0 116,777 $ 744,084
William J. Sinkula 0 $ 0 85,500 $ 405,405
David B. Dillon 9,000 $93,942 167,505 $1,518,504
Patrick J. Kenney 0 $ 0 134,703 $1,169,644
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year.
(2) All options are exercisable.
LONG-TERM INCENTIVE PLAN AWARDS
The Company provided no Long-Term Incentive Plan awards to any named
executive officer during fiscal year 1993.
10
<PAGE>
COMPENSATION COMMITTEE REPORT
Since 1987, the Company's compensation policies applicable to executive
officers, and to virtually all other levels of its work force, have been:
.be competitive in total compensation
.include, as part of total compensation, opportunities for equity ownership
. utilize incentives that offer more than competitive compensation when the
Company achieves superior results
. base incentive payments on earnings before interest, taxes, depreciation
and LIFO charges ("EBITD") and on sales results.
Pursuant to these policies, Kroger and the Compensation Committee have granted
stock options to and established compensation plans for executives, management,
and hourly employees. The number of options granted to an executive, including
the Chief Executive Officer, is determined by reference to his or her salary
and industry data for comparable positions as described below. The number of
options granted to Kroger executive officers is substantially below that for
comparable positions in the retail food industry because the Company grants
options to several thousand management and hourly employees instead of, as is
common in the industry, only a small group of executives.
The Committee establishes the fixed portion of executive officer cash
compensation, or salary, by considering internal equity and competitor salary
data as described below. Additionally, a large percentage of employees at all
levels of the organization are eligible to receive a bonus incentive based upon
Company or unit performance. Bonus potentials are established by level within
the Company, based on achievement of sales and EBITD targets. Actual payouts
can exceed these potentials if results exceed the targets. In the case of the
executive officers, approximately 50% of total potential cash compensation is
based on Company or unit EBITD and sales performance. Salary and bonus levels
are compared to those of a peer group, the Wholesale/Retail Compensation Survey
(see Performance Graph, below) consisting of top supermarket and food
wholesaling companies, to ensure that executive and management compensation is
competitive. The Committee establishes salaries for executive officers that
generally are below the median of compensation paid by peer group companies for
comparable positions (where data for comparable positions are available) with a
bonus potential that, if realized, would cause their total cash compensation to
be in the upper quartile of peer group compensation. Bonuses paid for the last
fiscal year represented approximately 105% of potential, compared to
approximately 23% for the previous year, reflecting an outstanding performance
in 1993.
The compensation of Kroger's Chief Executive Officer is determined annually
pursuant to the same policies. Mr. Pichler's variable compensation or bonus for
the last fiscal year, which represented 105% of his bonus potential, reflects
the extent to which the Company achieved the EBITD and sales targets that were
established by this Committee at the beginning of the year. Mr. Pichler's bonus
for the previous year represented 31.8% of its potential. The stock options
granted to Mr. Pichler in the last fiscal year represent a form of compensation
that varies with the Company's performance in the stock market.
Effective January 1, 1994, certain compensation paid to any named executive
officer in excess of $1,000,000 in a taxable year will not be deductible for
income tax purposes. The Company intends to conform its future long-term
incentive plans to permit exclusion of compensation earned thereunder from the
limitation.
Compensation Committee:
Patricia Shontz Longe, Chair
Raymond B. Carey, Jr., Vice-Chair
John T. LaMacchia
Thomas H. O'Leary
11
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the 5-year cumulative total
shareholder return on the Company's Common Stock, based on the market price of
the Common Stock and assuming reinvestment of dividends, with the cumulative
total return of companies on the Standard & Poor's 500 Stock Index and the
largest food companies selected from the Wholesale/Retail Compensation Survey
along with last year's peer group, the S&P Retail Stores-Food Chains Index:
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN* OF THE KROGER CO., S&P 500 AND
PEER GROUP**
LOGO
<TABLE>
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG KROGER CO., S&P 500 INDEX AND PEER GROUP**
<CAPTION>
S&P Retail
Measurement Period S&P Stores-Food
(Fiscal Year Covered) KROGER 500 INDEX PEER GROUP Chains
- ------------------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Measurement Pt-
12/31/88 $100 $100 $100 $100
FYE 12/31/89 $173 $132 $129 $136
FYE 12/31/90 $161 $127 $135 $143
FYE 12/31/91 $223 $166 $146 $151
FYE 12/31/92 $163 $179 $186 $198
FYE 12/31/93 $232 $197 $185 $192
</TABLE>
The Company's fiscal year ends on the Saturday closest to December 31.
- ------
*Total assumes $100 invested on January 3, 1989 in The Kroger Co., S&P 500
Index, the largest food companies selected from the Wholesale/Retail
Compensation Survey (the "Peer Group") and the S&P Retail Stores-Food Chains
Index, with reinvestment of dividends.
**The Peer Group consists of Albertson's Inc., American Stores Co., Fleming
Companies Inc., Giant Food Inc. (Class A), Great Atlantic & Pacific, Safeway
Inc., Supervalu Inc., The Vons Companies Inc. and Winn-Dixie Stores. The
return for last year's peer group, S&P Retail Stores-Food Chains Index,
comprised of Albertson's Inc., American Stores Co., Bruno's, Giant Food Inc.
(Class A), Great Atlantic & Pacific, The Kroger Co. and Winn-Dixie Stores,
also is shown.
The Company changed the peer group reflected in the Performance Graph for
1993 from the S&P Retail Stores-Food Chains Index to a grouping of the nine
largest food companies measured by total revenue for 1992 (excluding the
Company) within the Wholesale/Retail Compensation Survey (the "Survey"). This
change was made to compare the return of the Company's shareholders to that of
companies against which executive compensation levels are measured. The
Compensation Committee establishes the compensation for executives and
management by comparison to compensation reported in the Survey. Five of the
constituent companies in the S&P Retail Stores-Food Chains Index are also
contained within the Peer Group.
Neither the foregoing Compensation Committee Report nor the foregoing
Performance Graph shall be deemed incorporated by reference into any other
filing, absent an express reference thereto.
12
<PAGE>
COMPENSATION PURSUANT TO PLANS
The Company maintains various benefit plans which are available to management
and certain other employees. The Company derives the benefit of certain tax
deductions as a result of its contributions to some of the plans. Each of the
executive officers of the Company was eligible to participate in one or more of
the following plans.
THE KROGER CO. EMPLOYEE PROTECTION PLAN
The Company adopted The Kroger Co. Employee Protection Plan ("KEPP") during
fiscal 1988. All management employees, including the executive officers, and
administrative support personnel of the Company with at least one year of
service are covered. KEPP provides for severance benefits and the extension of
Company paid health care in the event an eligible employee actually or
constructively is terminated from employment without cause within two years
following a change of control of the Company (as defined in the plan). For
persons over 40 years of age with more than six years of service, severance pay
ranges from approximately 9 to 18 months' salary and bonus, depending upon
Company pay level and other benefits. KEPP may be amended or terminated by the
Board of Directors at any time prior to a change of control.
PENSION PLANS
The Company maintains the Kroger Retirement Benefit Plan, a defined benefit
plan, to provide pension benefits to retired or disabled management employees
and certain groups of hourly personnel. The Plan generally provides for
benefits at age 62 or later equal to 1 1/2% times the years of service, after
attaining age 21, (or, for participants prior to January 1, 1986, after
attaining age 25) times the highest average earnings for any five years during
the ten calendar years preceding retirement, less an offset tied to Social
Security benefits. The Company also maintains an Excess Benefits Plan under
which the Company pays benefits under this formula which exceed the maximum
benefit payable under ERISA by defined benefit plans. The following table gives
examples of annual retirement benefits payable on a straight-life basis under
the Company's retirement program.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FIVE YEAR -----------------------------------------------------------------
AVERAGE REMUNERATION 15 20 25 30 35 40
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
450,000 101,250 135,000 168,750 202,500 236,250 270,000
650,000 146,250 195,000 243,750 292,500 341,250 390,000
850,000 191,250 255,000 318,750 382,500 446,250 510,000
900,000 202,500 270,000 337,500 405,000 472,500 540,000
1,200,000 270,000 360,000 450,000 540,000 630,000 720,000
</TABLE>
No deductions have been made in the above table for offsets tied to Social
Security benefits.
Remuneration earned by Messrs. Pichler, Bere, Sinkula and Kenney in 1993, which
was covered by the Plan was $566,407, $414,613, $351,296 and $244,122,
respectively. As of January 1, 1994, they had 6, 36, 14, and 32 years of
credited service, respectively.
DILLON PLANS
Dillon Companies, Inc. and its subsidiaries maintain pension, profit sharing,
stock ownership, and savings plans that provide benefits at levels comparable
to the plans described above. David B. Dillon participates in these plans. In
addition, Mr. Pichler has six years of credited service under certain of the
pension and profit sharing plans, but no further credited service will be
accrued for him under such plans.
13
<PAGE>
Under the Dillon Profit Sharing and Savings Plans, Dillon and each of its
subsidiaries contributes a certain percentage of its net income, determined
annually, to its plans to be allocated among its participating employees based
on the percent each such participating employee's total compensation bears to
the total compensation of all participating employees employed by such entity.
On participating employees' termination after the age of 60 (or prior thereto
after 7 years of service), death or disability, they are entitled to their full
account balance. To update and supplement these plans, Dillon and several of
its subsidiaries have adopted Pension Plans for their eligible employees. Under
these plans, the normal retirement benefit for eligible employees is a certain
percentage of average compensation during a certain period of employment
multiplied by the years of credited service (in some of these plans there is a
maximum period of credited service), minus the benefit provided by the Profit
Sharing and Savings Plans (except as may be limited by provisions of ERISA).
The following table shows the estimated annual pension payable upon retirement
to persons covered by Dillon's Pension Plans. Benefits payable under the Profit
Sharing Plan may exceed the amount payable under the Pension Plan, and
participants are entitled to the greater of the two. The table does not reflect
benefits payable under Dillon's Profit Sharing and Savings Plans, since
benefits under those plans are not determined by years of service.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -----------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500 $ 60,000
250,000 37,500 50,000 62,500 75,000 87,500 100,000
300,000 45,000 60,000 75,000 90,000 105,000 120,000
400,000 60,000 80,000 100,000 120,000 140,000 160,000
500,000 75,000 100,000 125,000 150,000 175,000 200,000
600,000 90,000 120,000 150,000 180,000 210,000 240,000
</TABLE>
The amounts contributed by Dillon and its subsidiaries pursuant to these
Pension Plans is not readily ascertainable for any individual, and thus is not
set forth with respect to Mr. Dillon. Mr. Dillon has 18 years of credited
service.
EMPLOYMENT CONTRACTS
The Company entered into an amended and restated employment agreement with Mr.
Pichler dated as of July 22, 1993. During his employment, the Company agrees to
pay Mr. Pichler at least $420,000 a year, unless the amount is reduced due to
adverse business conditions. Mr. Pichler's employment may be terminated at the
discretion of the Board of Directors. The contract also provides that the
Company will continue to pay Mr. Pichler's salary to his beneficiary for a
period of five years after a termination of employment resulting from his
death, or will pay to Mr. Pichler his salary for a term equal to the lesser of
five years or until October 4, 2005, if Mr. Pichler's termination of employment
results from his involuntary separation. The Company also has agreed to
reimburse Mr. Pichler for premiums on a policy of life insurance plus the tax
effects of that reimbursement. After his termination of employment for any
reason after age 62 if he is not entitled to receive the salary continuation
described above, Mr. Pichler will, in exchange for his availability to provide
certain consulting services, then receive each year until his death an amount
equal to 25% of the highest salary paid him during the term of this agreement.
14
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of February 14, 1994, the directors of the Company, the named executive
officers and the directors and executive officers as a group, beneficially
owned shares of the Company's Common Stock as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP
- -------------------------------------------------------------------------------
<S> <C>
Reuben V. Anderson................................. 1,000
Richard L. Bere.................................... 208,677(8)(9)
Raymond B. Carey, Jr............................... 2,000
John L. Clendenin.................................. 400
David B. Dillon.................................... 291,100(1)(8)(9)
Ray E. Dillon, Jr.................................. 111,800(2)
Richard W. Dillon.................................. 213,625(3)
Lyle Everingham.................................... 330,782(4)(8)
Patrick J. Kenney.................................. 155,740(8)(9)
John T. LaMacchia.................................. 1,000
Patricia Shontz Longe.............................. 4,000
T. Ballard Morton, Jr.............................. 10,000
Thomas H. O'Leary.................................. 800
John D. Ong........................................ 400
Katherine D. Ortega................................ 460
Joseph A. Pichler.................................. 425,067(5)(8)(9)
Martha Romayne Seger............................... 200
William J. Sinkula................................. 246,137(8)(9)
Directors and Executive Officers as a group (in-
cluding those named above)........................ 2,855,210(6)(7)(8)(9)
</TABLE>
- --------------------------------------------------------------------------------
(1) This amount does not include 29,730 shares owned by Mr. Dillon's wife,
13,506 shares in his children's trust or 10,584 shares owned by his
children. Mr. Dillon disclaims beneficial ownership of these shares.
(2) This amount does not include 138,200 shares owned by Mr. Ray E. Dillon,
Jr.'s wife or 489,800 in his father's trust of which he and Richard W.
Dillon are co-trustees. Mr. Dillon disclaims beneficial ownership of these
shares.
(3) This amount does not include 93,116 shares owned by Mr. Richard Dillon's
wife or 489,800 in his father's trust of which he and Ray E. Dillon, Jr.
are co-trustees. Mr. Dillon disclaims beneficial ownership of these shares.
(4) This amount does not include 56,453 shares owned by Mr. Everingham's wife.
Mr. Everingham disclaims beneficial ownership of these shares.
(5) This amount does not include 705 shares owned by Mr. Pichler's wife or
3,064 shares owned by his children. Mr. Pichler disclaims beneficial
ownership of these shares.
(6) The figure shown does not include an aggregate of 3,906 additional shares
held by, or for the benefit of, the immediate families or other relatives
of all directors and executive officers as a group not previously listed
above. In each case the director or executive officer disclaims beneficial
ownership of such shares.
(7) No director or executive officer owned as much as 1% of Common Stock of the
Company. The directors and executive officers as a group beneficially owned
2.6% of Common Stock of the Company.
(8) This amount includes shares which represent options exercisable on or
before April 14, 1994, in the following amounts: Mr. Bere, 116,777; Mr.
Dillon, 167,505; Mr. Everingham, 110,000; Mr. Kenney, 134,703; Mr. Pichler,
214,080; Mr. Sinkula, 85,500; and all directors and executive officers as a
group, 1,467,194.
(9) The fractional interest resulting from allocations under Kroger's 401(k)
plan and Dillon's ESOP and 401(k) plan has been rounded to the nearest
whole number.
15
<PAGE>
As of February 14, 1994, the following persons reported beneficial ownership of
the Company's Common Stock based on reports on Schedule 13G filed with the
Securities and Exchange Commission or other reliable information as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE
NAME ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Kroger Co. Savings Plan 1014 Vine Street 14,958,083(1) 13.8%
Cincinnati, OH 45202
The Dillon Cos. Employee Master Trust 700 East 30th Street 8,404,705(1) 7.8
Hutchinson, KS 67052
</TABLE>
- ------
(1) Shares beneficially owned by plan trustees for the benefit of participants
in employee benefit plans.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Such officers, directors and shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during fiscal year 1993
all filing requirements applicable to its officers, directors and ten percent
beneficial owners were satisfied except that Mr. Michael Heschel failed to
report two separate sales of 4,000 shares each of stock by his spouse. Mr.
Heschel has disclaimed beneficial ownership of these shares. Upon discovery of
the error, Mr. Heschel disclosed the omission on an amended Form 5.
16
<PAGE>
SELECTION OF AUDITORS
(ITEM NO. 2)
The Board of Directors, on February 10, 1994, appointed the firm of Coopers &
Lybrand as Company auditors for 1994, subject to ratification by shareholders.
This appointment was recommended by the Company's Audit Committee, comprised of
directors who are not employees of the Company. If the firm is unable for any
reason to perform these services, or if selection of the auditors is not
ratified, other independent auditors will be selected to serve. Ratification of
this appointment requires the adoption of the following resolution by the
affirmative vote of the holders of a majority of the shares represented at the
meeting:
"RESOLVED, That the appointment by the Board of
Directors of Coopers & Lybrand as Company auditors
for 1994 be and it hereby is ratified."
Fees for all audit services provided by Coopers & Lybrand in 1993 totaled
$854,169. In addition, fees totaling $346,065 were charged for non-audit
services.
A representative of Coopers & Lybrand is expected to be present at the meeting
to respond to appropriate questions and to make a statement if he desires to do
so.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
INCREASE AUTHORIZED SHARES OF COMMON STOCK
(ITEM NO. 3)
The Board of Directors believes it would be in the best interest of the Company
and its shareholders and therefore proposes that the Amended Articles of
Incorporation be amended to increase the number of shares of common stock
("Common Stock") which the Company may issue from the 350,000,000 shares
presently authorized to 500,000,000 shares (the "Proposal"). On February 11,
1994, there were 108,129,456 shares of Common Stock issued and outstanding. An
additional approximately 12,300,000 shares of Common Stock have been reserved
for issuance pursuant to the Company's stock option and other employee benefit
plans; 8,000,000 shares to be reserved for issuance under the proposed 1994
Long-Term Incentive Plan (subject to shareholder approval as described below
under the caption "APPROVAL OF THE 1994 LONG-TERM INCENTIVE PLAN");
approximately 17,074,000 shares reserved for issuance upon conversion of
convertible securities; and approximately 145,512,000 shares reserved for
issuance under the Company's warrant dividend plan. The rights under the
warrant dividend plan, when exercisable, permit the holder to purchase one
share of Common Stock for each share owned at $60 per share. The Company may
redeem the rights at a price of $.025 per right, prior to the rights becoming
exercisable. The rights expire March 19, 1996.
The purpose of the Proposal is to provide additional shares which could be used
for proper corporate purposes, including, without limitation, stock splits,
acquisitions, other compensation plans, and raising additional capital. The
officers of the Company are from time-to-time engaged in general discussions
with principals of other organizations and other companies with a view toward
possible acquisitions by the Company. If the Proposal is adopted, the Board of
Directors will have the authority to issue the additional authorized shares or
any part thereof to such persons and for such consideration as it may determine
without further action by the shareholders except as shareholder action may be
required by law or contractual arrangements. Any such issuances (or an issuance
of authorized but unissued preferred stock) could have the effect of
discouraging an attempt to acquire control of the Company. For example, stock
could be issued to persons, firms or entities known to be friendly to
management. With the exception of the warrant dividend plan and redemption
provisions contained in debt instruments exercisable upon a change in control,
there are no other provisions of the Company's Amended Articles of
Incorporation, Regulations, or debt instruments that management believes could
reasonably be deemed to have an anti-takeover effect. Except as set forth in
the preceding paragraph, the Company does not now have any commitments,
arrangements or understandings which would require the issuance of additional
shares of Common Stock.
17
<PAGE>
Under Ohio law, a plan of merger requires shareholder approval if the non-
surviving entity acquires one-sixth or more of the voting power of the Company.
In addition, the Company is required by the rules of the New York Stock
Exchange to submit certain transactions to a vote of its shareholders,
including, without limitation, mergers involving subsidiaries (which otherwise
are not subject to required approval of the Company's shareholders), where the
issuance of shares of Common Stock could result in an increase in the number of
outstanding shares by 20 percent or more. Approval of the Proposal would not
alter in any way the Company's obligations under these authorities.
Each additional share of Common Stock authorized by the proposed amendment will
have the same rights and privileges as each share of outstanding Common Stock.
Shareholders of Common Stock have no preemptive rights to receive or purchase
any shares of the presently authorized but unissued Common Stock or to the
shares authorized by this proposed amendment.
In order for the Proposal to be adopted, it must be approved by the holders of
a majority in voting power of the outstanding shares of Common Stock.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
APPROVAL OF THE 1994 LONG-TERM INCENTIVE PLAN
(ITEM NO. 4)
On December 3, 1993, the Board of Directors adopted, subject to shareholder
approval, The Kroger Co. 1994 Long-Term Incentive Plan ("Plan") for which a
maximum of 8,000,000 shares of Common Stock will be reserved. The purpose of
the Plan is to assist in attracting and retaining employees and directors of
outstanding ability and to promote the identification of their interests with
those of the shareholders of the Company.
In order for the Plan to comply with Rule 16b-3 of the Securities Exchange Act
of 1934 (the "Exchange Act"), the Plan must be approved by a majority of the
shares represented at the meeting. If approved, the Plan will be effective as
of May 19, 1994.
DESCRIPTION OF THE PLAN
General. The Plan consists of three separate programs; the Insider Program, the
Non-Insider Program and the Outside Director Program. Officers of the Company,
including inside directors, subject to Section 16(a) of the Exchange Act are
eligible for grants or awards under the Insider Program while all other
employees of the Company are eligible for grants or awards under the Non-
Insider Program. Non-employee directors will receive grants under the Outside
Director Program as more particularly described below. Currently 14 officers
are eligible to participate in the Insider Program and the remaining
approximately 190,000 employees of the Company are eligible to participate in
the Non-Insider Program. Grants will be made under the Outside Director Program
to all non-employee directors who own a minimum of 1,000 shares of Common Stock
of the Company on the date of the grant. As of February 14, 1994, eight of the
thirteen non-employee directors are eligible for grants under the Outside
Director Program.
Administration. The Insider Program and the Outside Director Program will be
administered by a committee of the Board of Directors which meets the standards
of Rule 16b-3(c)(2)(i) under the Exchange Act and initially shall be those
members of the Compensation Committee of the Board of Directors who qualify as
"outside directors" under Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Non-Insider Program will be administered by a
committee appointed by the Chief Executive Officer, the members of which are
ineligible to receive grants or awards under the Non-Insider Program. The
administering committee in each case shall be referred to as the "Committee."
The Committee is authorized to grant stock options, performance units and stock
appreciation rights, and to award incentive shares and restricted stock to
participants under the Insider Program and the Non-
18
<PAGE>
Insider Program. Annually, the Committee will grant to eligible participants
under the Outside Director Program a nonstatutory stock option to purchase
2,000 shares of Common Stock of the Company. Stock appreciation rights and
performance units may be granted independently of any stock options or in
tandem with the grant of an option under the Plan. The Committee will determine
the types and amounts of awards or grants, the recipients of such awards or
grants, vesting schedules, restrictions, performance criteria, and other
provisions of the grants or awards, all of which shall be set forth in a
written agreement with the participant.
In addition to other rights of indemnification they may have as directors or
employees of the Company, members of the Committee shall be indemnified by the
Company for reasonable expenses incurred in connection with defense of any
action brought against them by reason of action taken or failure to act under
or in connection with the Plan or any grant or award thereunder, if the members
acted in good faith and in a manner which they believed to be in the best
interests of the Company.
The Board of Directors may terminate or amend the Plan at any time without
shareholder approval, except that it may not increase the number of shares
under the Plan, materially modify eligibility requirements, change the class of
persons eligible to receive incentive stock options or materially increase
benefits to participants without shareholder approval if required by applicable
law or to comply with Rule 16b-3 under the Exchange Act. Unless earlier
terminated by the Board of Directors, the Plan shall terminate on December 3,
2003. Termination of the Plan shall have no effect on the validity of any
options, rights, performance units, incentive shares or restricted stock
outstanding on the date of termination. Unless otherwise provided in the
agreement, awards and grants will not be transferable other than by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order.
Shares Subject to Grant. Under the Plan up to 8,000,000 authorized but unissued
or reacquired shares of Common Stock may be issued upon the exercise of
incentive stock options within the meaning of Section 422 of the Code,
nonstatutory stock options, stock appreciation rights and performance units,
and as incentive shares and restricted stock. In no event may any participant
receive awards and grants totaling more than 200,000 shares of Common Stock in
the aggregate under the Plan.
If an option, right or performance unit expires or terminates without having
been fully issued, or if incentive shares or restricted stock are not issued or
are forfeited prior to the payment of a dividend on such shares to a
participant, the shares not exercised, unissued or forfeited, as the case may
be, shall generally become available for other grants or awards under the Plan.
Shares issued upon exercise of stock appreciation rights or performance units
(or to the extent that all or a portion of the exercise is for cash, that
number of shares having a fair market value equal to the cash payable upon such
exercise) shall be charged against the number of shares issuable under the
Plan.
Outside Director Program. The Outside Director Program is a formula plan in
which non-employee directors who own at least 1,000 shares of Common Stock of
the Company at the time of the grant will receive annually during the term of
the Plan a nonstatutory stock option to purchase 2,000 shares of Common Stock
at an option price equal to the fair market value of the Common Stock on the
date of the grant. The option generally will have a 10-year term (subject to
earlier termination in the event of termination of Board membership other than
by reason of retirement) and will vest in 666, 667 and 667 share amounts,
respectively, on the first, second and third annual anniversary dates from the
date of grant. The Plan provides for the first grant to eligible directors of
nonstatutory options covering 2,000 shares of Common Stock to be made as of the
date the Plan is approved by the Company's stockholders.
Stock Options. Incentive stock options and nonstatutory stock options granted
under the Plan shall have exercise prices not less than the greater of the fair
market value per share of the optioned stock or the par value of a share of
Common Stock, a term of not more than ten years after the date of grant, and
generally may not be exercised before six months from the date of grant.
Subject to the terms of the Plan, the Committee determines the vesting schedule
and other terms and conditions applicable to stock options granted to
19
<PAGE>
employees. An eligible participant may receive more than one option.
The Committee may in its discretion provide for the payment of the option
exercise price otherwise than in cash, including by delivery of Common Stock,
valued at its fair market value on the date of exercise, or by a combination of
both cash and Common Stock. To the extent authorized by the Committee, partial
payment may be made by means of a promissory note secured by the shares of
Common Stock acquired pursuant to exercise of the option.
Stock Appreciation Rights. Stock appreciation rights may be granted in
connection with the grant of an incentive or nonstatutory option under the
Plan, or by amendment of an outstanding nonstatutory stock option granted under
the Plan ("related rights"). In the Committee's sole discretion, a related
right may apply to all or a portion of the shares of Common Stock subject to
the related option. Stock appreciation rights may also be granted independently
of any option granted under the Plan. A stock appreciation right entitles the
grantee upon exercise to elect to receive in cash, Common Stock or a
combination thereof, the excess of the fair market value of a specified number
of shares of Common Stock at the time of exercise over the fair market value of
such number of shares of Common Stock at the time of grant, or, in the case of
a related right, the exercise price provided in the related option. To the
extent required to comply with the requirements of Rule 16b-3 under the
Exchange Act or otherwise provided in an agreement under the Plan, the
Committee shall have sole discretion to consent to or disapprove the election
of any grantee to receive cash in full or partial settlement of a right.
A stock appreciation right generally will not be exercisable until at least six
months from the date of grant (or in the case of a related right to an
incentive stock option, may be exercisable only when and to the extent the
related option is exercisable) and will have a term of not more than ten years
from the date of grant (or, in the case of a related right, not beyond the
expiration of the related option).
Performance Units. Performance units may be granted in connection with the
grant of a nonstatutory stock option under the Plan, or by amendment of an
outstanding nonstatutory stock option granted under the Plan ("related
performance unit"). In the Committee's sole discretion, a related performance
unit may apply to all or a portion of the shares of Common Stock subject to the
related option. Performance units may also be granted independently of any
option granted under the Plan. In connection with the grant of performance
units, the Committee will establish Performance Goals (as defined below) for a
specified period.
Upon the exercise of performance units, a grantee will be entitled to receive
the payment of such units in accordance with the terms of the award in shares
of Common Stock, cash, or a combination thereof, as the Committee may
determine. The values generally will depend upon the extent to which the
performance goals for the specified period have been satisfied, as determined
by the Committee. Performance goals may be particular to a grantee or the
department, branch, subsidiary or other unit in which the grantee works, or may
be based on the performance of the Company generally. For purposes of the Plan,
"Performance Goals" means performance goals established by the Committee which
may be based on earnings or earnings growth; sales; return on assets, equity or
investment; regulatory compliance; satisfactory internal or external audits;
improvement of financial ratings; achievement of balance sheet or income
statement objectives; or any other objective goals established by the Committee
and may be absolute in terms or measured against or in relation to other
companies comparably, or otherwise situated to the Company.
Performance units may be exercised only upon the achievement of minimum
Performance Goals during the period as determined by the Committee. The
Committee shall determine the period during which performance units shall be
exercisable and specifically set forth such period in any agreement granting
performance units to a participant in the Plan, provided, however, that a
performance unit generally may not
20
<PAGE>
be exercised until the expiration of at least six months from the date of
grant. Performance units will expire no later than ten years from the date of
grant (or in the case of a related performance unit, the expiration of the
related option). Any performance units paid in the form of cash are deemed to
be paid in shares of Common Stock, with the number of shares being deemed paid
equal to the amount of cash paid to the employee divided by the fair market
value of a share of Common Stock on the date of payment.
Incentive Shares. The Committee may grant incentive shares to participants.
Incentive share awards shall consist of shares of Common Stock issued or to be
issued at such times, subject to achievement of such Performance Goals or other
goals and on such other terms and conditions as the Committee shall deem
appropriate and specify in an agreement relating thereto.
Restricted Stock. The Committee may grant restricted stock to participants
which shares shall be subject to restrictions on transferability and such other
restrictions for such time periods as specified in the agreement, and shall be
subject to forfeiture. The Committee has authority to impose such other terms
and conditions as it may determine in its discretion including making the
vesting of awards contingent on the achievement of Performance Goals. During
the period that a restricted stock award is subject to restrictions, an
employee has the right to vote such shares and to receive dividends.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. A grantee will not recognize income on the grant of an
incentive stock option, and, except as described below, generally will not
recognize ordinary income on the exercise of an incentive stock option. Under
these circumstances, no deduction will be allowable to the Company in
connection with either the grant of such options or the issuance of shares upon
exercise thereof. However, if the exercise of an incentive stock option occurs
more than three months after the grantee ceased to be an employee for reasons
other than death (or more than one year thereafter if the grantee ceased to be
an employee by reason of permanent and total disability), the exercise will not
be treated as the exercise of an incentive stock option. In addition, to the
extent the aggregate fair market value (determined at the time options are
granted) of shares subject to incentive stock options that become exercisable
for the first time by any grantee in any calendar year exceeds $100,000, the
options will also be treated as options which are not incentive stock options.
In either instance, the grantee will be taxed upon exercise of those excess
options in the same manner as on the exercise of nonstatutory stock options, as
described below.
Gain or loss from the sale or exchange of shares acquired upon exercise of an
incentive stock option generally will be treated as capital gain or loss. If
shares acquired pursuant to the exercise of an incentive stock option are
disposed of within two years after the option was granted or within one year
after the shares were transferred pursuant to the exercise of the option
special rules apply. Under these rules, the grantee generally will recognize
(a) ordinary income at the time of the disposition equal to the excess (if any)
over the exercise price of the lesser of the amount realized or the fair market
value of the shares at the time of exercise (or, in certain circumstances, at
the time such shares became either transferable or not subject to a substantial
risk of forfeiture) and (b) capital gain to the extent of any excess of the
amount realized on such disposition over the fair market value of the shares of
Common Stock on the date the incentive stock option is exercised (or capital
loss to the extent of any excess of the exercise price over the amount realized
on disposition). If a grantee recognizes ordinary income as a result of a
disposition as described in this paragraph, the Company will be entitled to a
deduction in the same amount.
The exercise of an incentive stock option may result in a tax to the grantee
under the alternative minimum tax provisions of the Code because as a general
rule the excess of the fair market value of stock
21
<PAGE>
received on the exercise of an incentive stock option over the exercise price
is an adjustment item for purposes of determining alternative minimum taxable
income.
Nonstatutory Stock Options, Stock Appreciation Rights, and Performance Units. A
grantee will not recognize income on the grant of a nonstatutory stock option,
stock appreciation right or performance unit, but generally will recognize
ordinary income upon the exercise thereof. The amount of income recognized upon
the exercise of a nonstatutory stock option generally will be measured by the
excess, if any, of the fair market value of the shares at the time of exercise
over the exercise price, provided the shares issued are either transferable or
not subject to a substantial risk of forfeiture. The amount of income
recognized upon the exercise of a stock appreciation right or a performance
unit, in general, will be equal to the amount of cash received and the fair
market value of any shares received at the time of exercise, provided the
shares issued are either transferable or not subject to a substantial risk of
forfeiture, plus the amount of any taxes withheld. Under certain circumstances,
income on the exercise of a performance unit will be deferred if the grantee
makes a proper election to defer such income.
In some cases the recognition of income by a grantee from the exercise of a
performance unit may be delayed for up to six months if a sale of the shares
would subject the grantee to suit under Section 16(b) of the Exchange Act
unless the grantee elects to recognize income at the time of receipt of such
shares. In either case, the amount of income recognized is measured with
respect to the fair market value of the Common Stock at the time the income is
recognized.
In the case of ordinary income recognized by a grantee as described above in
connection with the exercise of a nonstatutory stock option (or the exercise of
an incentive stock option that is treated as the exercise of a nonstatutory
stock option), a stock appreciation right, or a performance unit, the Company
will be entitled to a deduction in the amount of ordinary income so recognized
by the grantee, provided the Company satisfies certain federal income tax
withholding requirements.
Incentive Shares and Restricted Stock. A grantee of incentive shares or
restricted stock is not required to include the value of such shares in
ordinary income until the first time the grantee's rights in the shares are
transferable or are not subject to a substantial risk of forfeiture, whichever
occurs earlier, unless the grantee elects to be taxed on receipt of the shares.
In either case, the amount of such income will be equal to the excess of the
fair market value of the stock at the time the income is recognized over the
amount paid for the stock. The Company will be entitled to a deduction in the
amount of the ordinary income recognized by the grantee for the Company's
taxable year which includes the last day of the grantee's taxable year in which
such grantee recognizes the income, provided the Company satisfies certain
federal income tax withholding requirements.
General. The rules governing the tax treatment of options, stock appreciation
rights, performance units, incentive shares and restricted stock and stock
acquired upon the exercise of options, stock appreciation rights and
performance units are quite technical, so that the above description of tax
consequences is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are, of course, subject to change, as
are their interpretations, and their application may vary in individual
circumstances. Finally, the tax consequences under applicable state law may not
be the same as under the federal income tax laws.
Tax Deductibility Cap. Section 162(m) of the Code provides that certain
compensation received in any year by a "covered employee" in excess of
$1,000,000 is non-deductible by the Company for federal income tax purposes.
Section 162(m) provides an exception, however, for "performance-based
compensation." The Committee currently intends to structure grants and awards
made under the Plan to "covered employees" as performance-based compensation
that is exempt from Section 162(m).
22
<PAGE>
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1994 LONG-TERM INCENTIVE
PLAN
----------------------------
NAME AND POSITION(1) DOLLAR VALUE NUMBER OF UNITS
- -------------------- ------------ ---------------
<S> <C> <C>
Non-Executive Director Group....................... $0(2) 14,000(3)
</TABLE>
- ------
(1) Awards, values and benefits are not determinable for other than the Non-
Executive Director Group.
(2) Options to be granted to Non-Executive Directors upon approval of
shareholders at fair market value of stock.
(3) Based on number of eligible Non-Executive Directors as of February 14,
1994, excluding Ray E. Dillon, Jr. who will be retiring from the Board on
May 7, 1994.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
-------------
SHAREHOLDER PROPOSALS--1995 ANNUAL MEETING. Shareholder proposals intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1995 should be addressed to the Secretary of the Company and
must be received at the Company's executive offices not later than December 8,
1994.
-------------
Attached to this Proxy Statement is the Company's 1993 Annual Report which
includes a brief description of the Company's business indicating the general
scope and nature of such business during 1993, together with the audited
financial information contained in the Company's 1993 report to the Securities
and Exchange Commission on Form 10-K. A COPY OF THAT REPORT IS AVAILABLE TO
SHAREHOLDERS ON REQUEST BY WRITING: LAWRENCE M. TURNER, TREASURER, THE KROGER
CO., 1014 VINE STREET, CINCINNATI, OHIO 45202-1100 OR BY CALLING 1-513-762-
1220.
The management knows of no other matters that are to be presented at the
meeting but, if any should be presented, the Proxy Committee expects to vote
thereon according to its best judgment.
By order of the Board
of Directors,
Paul W. Heldman,
Secretary
23
<PAGE>
FINANCIAL REPORT 1993
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Kroger Co. has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis and are not misstated due to material
error or fraud. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the report and is responsible for its accuracy and consistency
with the financial statements.
The Company's financial statements have been audited by Coopers & Lybrand,
independent certified public accountants, approved by the shareholders.
Management has made available to Coopers & Lybrand all of the Company's
financial records and related data, as well as the minutes of stockholders' and
directors' meetings. Furthermore, management believes that all representations
made to Coopers & Lybrand during its audit were valid and appropriate.
Management of the Company has established and maintains a system of internal
control that provides reasonable assurance as to the integrity of the financial
statements, the protection of assets from unauthorized use or disposition, and
the prevention and detection of fraudulent financial reporting. The system of
internal control provides for appropriate division of responsibility and is
documented by written policies and procedures that are communicated to
employees with significant roles in the financial reporting process and updated
as necessary. Management continually monitors the system of internal control
for compliance. The Company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto. In addition, as part of its audit of
the Company's financial statements, Coopers & Lybrand completed a review of
selected internal accounting controls to establish a basis for reliance thereon
in determining the nature, timing and extent of audit tests to be applied.
Management has considered the internal auditor's and Coopers & Lybrand's
recommendations concerning the Company's system of internal control and has
taken actions that we believe are cost-effective in the circumstances to
respond appropriately to these recommendations. Management believes that, as of
January 1, 1994, the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which
is publicized throughout the Company. The code of conduct addresses, among
other things, the necessity of ensuring open communication within the Company;
potential conflicts of interests; compliance with all domestic and foreign
laws, including those relating to financial disclosure; and the confidentiality
of proprietary information. The Company maintains a systematic program to
assess compliance with these policies.
JOSEPH A. PICHLER WILLIAM J. SINKULA
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors is composed of six independent
directors. The committee held three meetings during fiscal year 1993. In
addition, members of the committee received and reviewed various reports from
the Company's internal auditor and from Coopers & Lybrand throughout the year.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareowner
approval, the selection of the Company's independent public accountant, Coopers
& Lybrand. The Audit Committee discussed with the Company's internal auditor
and Coopers & Lybrand the overall scope and specific plans for their respective
audits. The committee also discussed the Company's consolidated financial
statements and the adequacy of the Company's internal controls. At each
meeting, the committee met with the Company's internal auditor and Coopers &
Lybrand, in each case without management present, to discuss the results of
their audits, their evaluations of the Company's internal controls, and the
overall quality of the Company's financial reporting. Those meetings also were
designed to facilitate any private communications with the committee desired by
the Company's internal auditor or Coopers & Lybrand.
JOHN L. CLENDENIN
Chairman--Audit Committee
A-1
<PAGE>
THE COMPANY
The Kroger Co. (the "Company") was founded in 1883 and incorporated in 1902. As
of January 1, 1994 the Company was the largest grocery retailer in the United
States based on annual sales. The Company also manufactures and processes food
for sale by its supermarkets. The Company's principal executive offices are
located at 1014 Vine Street, Cincinnati, Ohio 45202 and its telephone number is
(513) 762-4000.
As of January 1, 1994, the Company operated 1,277 supermarkets, most of which
are leased. Of this number, 1,038 supermarkets were operated principally under
the Kroger name in the Midwest and South. Dillon Companies, Inc. ("Dillon"), a
wholly-owned subsidiary of the Company, operated 239 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".
As of January 1, 1994, the Company, through its Dillon subsidiary, operated 931
convenience stores under the trade names of "Kwik Shop", "Quik Stop Markets",
"Time Saver Stores", "Tom Thumb Food Stores", "Turkey Hill Minit Markets",
"Loaf 'N Jug", and "Mini-Mart". The convenience stores offer a limited
assortment of staple food items and general merchandise and, in most cases,
sell gasoline.
The Company intends to develop new food and convenience store locations and
will continue to assess existing stores as to possible replacement, remodeling,
enlarging or closing.
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SALES
Sales in the fourth quarter 1993, which included 12 weeks, decreased 5.2% below
the same quarter in 1992, which included 13 weeks. Adjusting 1992's sales for
the extra week and excluding sales from the Company's San Antonio, Texas stores
which were sold in August 1993, sales in the 1993 fourth quarter increased
3.8%. Sales for the full year, including the extra week in 1992 and the San
Antonio sales, increased 1.1% over those for 1992. Excluding the extra week and
the San Antonio stores, full year 1993 sales increased 3.6% over 1992. A review
of sales by lines of business for the three years ended January 1, 1994, is as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
% OF 1993 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
------------------------------------------------------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Food Stores.............. 91.3% $20,443 +1.1% $20,199 +3.4% $19,533 +5.7%
Convenience Stores....... 4.3% 951 +3.9% 916 +6.0% 864 +0.2%
Other sales.............. 4.4% 990 -3.9% 1,030 +8.0% 954 +4.4%
------ ------- ------- -------
Total sales.............. 100.0% $22,384 +1.1% $22,145 +3.7% $21,351 +5.4%
</TABLE>
Sales in identical food stores for the full year 1993 (those operating a full
year and not expanded) increased 1.6% from the prior year. Excluding Michigan,
which had a sixty-seven day strike during the second and third quarters of
1992, identical food stores sales increased 1.2% for all of 1993 and 1.1% in
the fourth quarter 1993 versus the same periods in 1992. These increases were
achieved despite low overall food inflation and deflation in some commodities
in both 1993 and 1992, intense new supermarket competition in markets like
Houston, Texas and Toledo, Ohio, and expanding supercenter competition in many
other markets.
1993 convenience stores sales changes as compared to the same periods in 1992
were as follows:
<TABLE>
<CAPTION>
4TH QUARTER YEAR-TO-DATE
--------------------------
<S> <C> <C>
Total Sales............................................ -3.8% 3.9%
Identical.............................................. 1.7% 3.6%
In-Store Sales:
Total................................................ -4.1% 2.7%
Identical............................................ 3.9% 4.5%
Gasoline Sales:
Total................................................ -3.5% 5.2%
Identical............................................ -.6% 2.6%
Gasoline Gallons:
Total................................................ .1% 7.7%
Identical............................................ 3.4% 5.3%
</TABLE>
The fourth quarter and full year 1993 sales for the seven-company convenience
store group were enhanced by strong in-store sales and increases in gasoline
gallons sold but were depressed by decreases in gasoline retail prices.
Other sales include outside sales by the Company's manufacturing divisions and
sales of general merchandise to a drug store company in which the Company
maintains an equity interest. The drug store company is expected to complete an
expansion of its warehouse in early 1994 and to discontinue its purchases from
the Company. The Company expects that this will result in a decline of
approximately 45% to 50% in other sales.
Total food store square footage, excluding the San Antonio stores disposition,
increased 3.2%, 2.5% and 2.2% in 1993, 1992, and 1991, respectively. The
Company expects to increase retail food store square footage by 4 1/2 to 5%
each year from 1994 through 1996. Convenience store square footage declined .7%
and 2.1% in 1993 and 1991 respectively, and increased .2% in 1992. Sales per
average square foot for the last three years were:
<TABLE>
<CAPTION>
TOTAL SALES
PER
AVERAGE SQUARE
FOOT
--------------
1993 1992 1991
-------------------------
<S> <C> <C> <C>
Food Stores...................................................... $398 $402 $398
Convenience Stores............................................... $405 $389 $364
</TABLE>
A-3
<PAGE>
Food stores sales per average square foot for 1992 includes the extra week.
Without the extra week the amount would have been $394.
The Company was able to maintain sales growth in 1993 in the face of new and
intense competition for a number of reasons. Fierce price competition in
markets, such as Dayton, Ohio and Houston and Dallas, Texas, has abated
somewhat. The Company's Michigan operations have begun to recover from a
prolonged strike in 1992. The Company's efforts to reduce the cost of products
through improved procurement and distribution practices have made the Company
more price competitive and attractive to consumers without sacrificing gross
profit. Finally, the shift in customer interest to private label products has
enhanced sales. The Company's line of private label products, many of which are
manufactured by the Company, have met with increasing acceptance by consumers.
While these factors likely will continue to benefit the Company in 1994, the
ability to generate sales growth may be limited by significant competitive
entries into markets such as Atlanta and Indiana, as well as continued
supercenter growth.
Sales in 1992 showed an improvement over 1991 primarily due to the extra week
in the fiscal year. Sales in 1991 benefited from the purchase of the former
Great Scott! Stores in Michigan in late 1990, the continued maturation of the
Company's combination food store format, and significant growth in private
label products.
EBITD
The Company's Credit Agreement, dated January 21, 1992, and the indentures
underlying approximately $1.7 billion of publicly issued debt contain various
restrictive covenants, many of which are based on earnings before interest,
taxes, depreciation, LIFO charge, unusual and extraordinary items ("EBITD").
These covenants are based, among other things, upon generally accepted
accounting principles ("GAAP") as applied on a date prior to January 3, 1993.
The ability to generate EBITD at levels sufficient to satisfy the requirements
of these agreements is a key measure of the Company's financial strength. The
presentation of EBITD is not intended to be an alternative to any GAAP measure
of performance but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At January 1, 1994 the Company was
in compliance with all covenants of its Credit Agreement and publicly issued
debt. The Company believes it has adequate coverage of its debt covenants to
continue to respond effectively to competitive conditions.
During 1993, EBITD, which does not include the effect of Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", or the charges related to the
disposition of the San Antonio stores, increased 7.5% to $976.8 million
compared to $908.2 million in 1992 and $968.0 million in 1991. 1992's EBITD was
negatively affected by a Michigan strike which reduced EBITD by approximately
$69 million and was increased by the extra week in the fiscal year. 1993's
EBITD increase was primarily the result of increased sales combined with an
improved gross profit rate.
MERCHANDISE COSTS
Merchandise costs include warehousing and transportation expenses and LIFO
charges or credits. The following table shows merchandising costs as a percent
of sales and the relative effect of LIFO charges:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
---------------------
Merchandise costs as reported............................. 76.43% 77.12% 77.19%
LIFO charge (credit)...................................... (.02%) .03% .12%
------ ------ ------
Merchandise costs as adjusted............................. 76.45% 77.09% 77.07%
</TABLE>
The Company's gross profit rate in 1993 improved over previous years in all
categories with the exceptions of pharmacy and deli. The improvement was due in
large measure to improved results in Michigan which was affected by a strike in
1992, an increase in private label sales, a reduction in coupon costs, and
A-4
<PAGE>
cost reduction programs in procurement and warehousing.
The Company expects gross profit as a percent of sales to improve in the future
as benefits are derived from coupon scanning and a decline in multiple
couponing. Coupon scanning allows the Company to readily determine the validity
of coupons presented. The effect of reduced multiple couponing is enhanced by a
reduction in the face value and quantity of vendor coupons. The Company also
expects to show gross profit improvement from coordinated procurement and the
continued expansion of private label sales. The Company produces many of its
own private label products and, therefore, has lower product costs for such
items than could be obtained through procurement. Some of the gross profit
benefit will be reflected in lower prices to protect or enhance the Company's
competitive position.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in 1993,
1992 and 1991 were 17.98%, 17.51% and 17.15%, respectively. Excluding the
effect of SFAS No. 106 from 1993, operating, general and administrative
expenses as a percent of sales were 17.89%.
The increase in operating, general and administrative expenses over last year
was due in part to the increase in incentive pay for both management and store
employees, reflecting 1993's improved performance compared to 1992. The Company
also has experienced increases in collectively bargained wages, health
insurance, general liability claims, and other store expenses.
Controlling operating, general and administrative expenses is a significant
challenge to the Company. Beginning in 1992 and continuing through 1995, the
Company expects to spend approximately $125 million of capital to increase
technological capabilities with the goal of reducing operating costs. The
Company has dedicated management resources to improve its procurement,
logistics, administrative, and accounting functions, both to realize the
benefits of improved technological capability and otherwise to control costs.
The Company also has begun the redesign of some specialty departments within
the food stores to realize cost savings. The Company currently is absorbing the
expense of converting some full service departments to self service. This
effort will continue during 1994 and 1995, and the Company expects to realize
some benefit from these efforts beginning in late 1994.
INCOME TAXES
The effective income tax rates were 39.8%, 41.7% and 40.3% for 1993, 1992 and
1991, respectively. 1993's income tax expense includes a $4.2 million charge to
increase deferred taxes for the change in the federal income tax rate.
NET EARNINGS (LOSS)
Net earnings (loss) totaled $(12.2) million in 1993 compared to $(5.9) million
in 1992 and $79.9 million in 1991. Earnings in 1993 compared to 1992 and 1991
was affected by: (i) a 1993 charge against earnings of $159.2 million after
taxes for the cumulative effect of a change in accounting for retiree benefits,
(ii) an extraordinary loss from the early retirement of debt in 1993 of $23.8
million compared to $107.1 million in 1992 and $20.8 million in 1991, (iii) a
sixty-seven day strike in Michigan during 1992, (iv) a LIFO credit in 1993 of
$3.2 million versus a charge of $8.1 million in 1992 and $26.2 million in 1991,
and (v) net interest expense in 1993 of $390.0 million versus $474.8 million in
1992 and $531.1 million in 1991. 1993's net earnings also include a $4.4
million pre-tax ($2.7 million after tax) one-time charge related to a change in
the estimated useful life of certain computer equipment and a $22.7 million
charge ($15 million after tax) in connection with the disposition of the San
Antonio stores. Severance pay, unemployment benefits costs and loss on sale of
assets are included in this charge.
A-5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
DEBT MANAGEMENT AND INTEREST EXPENSE
The Company continued to reduce interest expense during 1993. The Company was
successful in placing $1.6 billion of senior subordinated or senior secured
debt during 1992 and 1993 with an average rate of 9.39% and $200 million of
convertible junior subordinated notes with a rate of 6.375%. The Company also
borrowed $100 million at a rate equal to LIBOR + 1.25% or, at the Company's
election, such lenders' base rate + .25%, pursuant to a term facility under the
Credit Agreement. The proceeds from these offerings and the issuance of
13,275,000 shares of common stock with proceeds of $203.5 million, were used to
redeem or repurchase, on the open market, high yield subordinated debt with an
average rate of 14.2% (see "Repurchase and Redemption of Subordinated Debt").
As a result of these transactions the Company has reduced the weighted average
cost of its long-term debt including capital leases to 8.2% at year-end 1993
versus 11.6% at the beginning of 1990. Long-term debt, including capital leases
and current portions thereof, decreased $348 million to $4.206 billion at year
end 1993 from $4.554 billion at year end 1992.
Required principal repayments over the next five years increased to $1.048
billion at year end 1993 versus $534.5 million and $541.3 million at year-end
1992 and 1991, respectively. Scheduled debt maturities for the five years
subsequent to 1993, 1992 and 1991 were:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year 1....................................... $ 63,053 $ 73,248 $ 73,580
Year 2....................................... 111,010 115,017 123,368
Year 3....................................... 117,434 111,549 114,927
Year 4....................................... 146,784 118,032 111,451
Year 5....................................... 609,769 116,669 117,926
</TABLE>
1993's Year 5 maturities include the entire $362.0 million outstanding under
the Company's Working Capital Facility under its Credit Agreement, $68.0
million of Facility D under its Credit Agreement, and the remaining 11 1/8%
Senior Notes outstanding at January 1, 1994 of $138.4 million. The Company has
notified the trustee for the Senior Notes that it will redeem these notes on
March 15, 1994. Maturities shown for 1991 reflect the restated Credit Agreement
dated January 21, 1992.
The Company's interest rate on Credit Agreement borrowings is variable. The
average interest rate, including the effect of interest rate swaps, on the
Company's bank debt, which totaled $847.0 million at year-end 1993, including
Facility D, versus $851.0 million at year-end 1992, was 4.57% compared to 5.42%
at the end of 1992 and 6.13% at the end of 1991. The decline is due to
generally lower market interest rates and achieving a .25% interest rate step
down in January, 1993.
The Company currently has in place various interest rate hedging agreements
aggregating $1.4 billion. The effect of these agreements is to: (i) fix the
rate on $100 million floating rate debt until July, 1994 (ii) swap the
contractual interest rate on $350 million of seven and ten year debt
instruments to the rates available on three to five year fixed rate instruments
(upon expiration of the three to five year swap agreements the fixed
contractual rate will become floating for the remainder of the seven and ten
year term of debt), (iii) swap the contractual interest rate on $600 million of
seven and ten year fixed-rate instruments into floating-rate instruments and
(iv) cap six month LIBOR on $350 million for one to five years at rates of
3.70% to 5.50%. $50 million of the caps expire in each of July 1994, July 1995,
July 1997 and July 1998. The remaining $150 million cap expires in November
1995.
The Company currently expects 1994 net interest expense, based on year-end 1993
rates, to total $330-$340 million compared to $390.0 million, $474.8 million
and $531.1 million in 1993, 1992 and 1991, respectively.
A-6
<PAGE>
To meet any short-term liquidity needs, the Company has available an $850
million Working Capital Facility under its Credit Agreement. A portion of the
Company's short-term borrowings are permitted to be in the form of commercial
paper. At January 1, 1994, the Company had outstanding $98.0 million of
commercial paper and $264.0 million under the Working Capital Facility. At
year-end 1993, after deducting amounts set aside as backup for the Company's
unrated commercial paper program and stand-by letters of credit, $317.8 million
was available under the Working Capital Facility. There are no annual principal
payments required under the Working Capital Facility, which expires on January
3, 1998.
COMMON STOCK
On March 4, 1993 the Company issued 12,500,000 shares of its common stock
through a public offering. On April 1, 1993, the Company issued an additional
775,000 shares of its common stock pursuant to an over-allotment option granted
to the underwriters in connection with the offering. The Company realized net
proceeds of $203.5 million on these issues which were used initially to repay
amounts outstanding under the Working Capital Facility, and thereafter the
Company used amounts available under the Working Capital Facility to purchase
or redeem outstanding indebtedness of the Company.
REPURCHASE AND REDEMPTION OF SUBORDINATED DEBT
During 1993 the Company repurchased $300.6 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $285.1 million,
$71.2 million Senior Subordinated Debentures, $111.6 million Senior Notes, and
$33.5 million Senior Subordinated Reset Notes. Additionally, the Company
redeemed the remaining $498.2 million Junior Subordinated Discount Debentures.
The redemptions were effected using funds from asset sales, the sale of
treasury stock to employee benefit plans, proceeds from the sale of common
stock and new financings, and excess cash from operations. The outstanding
balances of these debt issues at January 1, 1994 were $0 for the Junior
Subordinated Discount Debentures, $0 for the Senior Subordinated Debentures,
$138.4 million for the Senior Notes, and $66.5 million for the Senior
Subordinated Reset Notes. The Company issued a redemption notice for the
remaining Senior Notes on February 13, 1994. The redemption will be effected on
March 15, 1994.
During 1992 the Company repurchased $269.9 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $231.1 million,
$343.9 million Senior Subordinated Debentures and $256.2 million Subordinated
Debentures. Additionally, the Company redeemed $120.5 million Senior
Subordinated Debentures and $304.6 million Subordinated Debentures.
During 1991 the Company repurchased $303.8 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $217.9 million,
$59.3 million Senior Subordinated Debentures and $64.2 million Subordinated
Debentures.
CAPITAL EXPENDITURES
Capital expenditures totaled $376.1 million for 1993, $241.2 million for 1992
and $208.1 million in 1991. During 1993 the Company opened, acquired or
expanded 46 food stores and 10 convenience stores compared to 42 food stores
and 19 convenience stores in 1992 and 42 food stores and 4 convenience stores
in 1991. The Company also completed 70 food store and 21 convenience store
remodels during 1993. During 1993, 32 food stores were closed or sold including
the 15 San Antonio stores sold to Megafood Stores, Inc. in August 1993. 17
convenience stores also were closed. The Company expects capital expenditures
to approximate $1.5 billion over the next three years. In 1994 the Company
plans to increase food store square footage by 4 1/2%-5% by opening, expanding
or acquiring approximately 70 food stores and completing within-the-wall
remodels of 60-70 food stores, including the recently completed purchase of 10
stores in
A-7
<PAGE>
Houston, Texas from AppleTree Markets, Inc. The increased square footage is
planned for existing Company markets where the Company has an established
market position and an existing administrative and logistical network. The
Company's ability to realize its capital expenditure plan will depend, in part,
on its ability to generate sufficient free cash flow. The Company expects to
dedicate one half of its free cash flow in excess of planned expenditures to
its capital program and the remainder to debt reduction.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1993 the Company generated $617.3 million in cash from operating
activities compared to $532.8 million in 1992 and $448.4 million in 1991. The
increase from 1992 is due to an increase in operating net income of $69.6
million. Additionally, the Company experienced an increase in cash from changes
in operating assets and liabilities of $105.5 million. The increase is due to
an increase in accounts payable over and above the increase in inventory values
of $47.7 million, an increase in income taxes payable of $17.5 million, and an
increase in self-insured workers compensation and general liability accruals of
$34.4 million. The increase in 1992 from 1991 is due to an increase in cash of
$45.1 million from changes in operating assets and liabilities and a $56.3
million reduction in interest expense.
Investing activities used $368.3 million compared to $264.3 million of cash
used in 1992 and $187.9 million of cash used in 1991. The increase in the use
of cash in 1993 is due to an increase in the level of capital expenditures over
1992 of $134.9 million and an increased use of cash of $18.2 million for
investments. This was offset by an increase in cash over 1992 from reduced
current year expenditures for additions to property held for sale and increased
proceeds from the sale of property, plant and equipment. The increase in 1992
from 1991 is due to an increase in cash used for capital expenditures and
additions to property held for sale.
Cash used by financing activities totaled $231.7 million compared to $168.4
million and $311.1 million in 1992 and 1991, respectively. The increase in the
use of cash during 1993 is due to a debt reduction, excluding capital leases
and the interest accretion on the Junior Subordinated Discount Debentures, of
$423.0 million versus 1992's debt reduction of $38.8 million. The debt
reduction was offset by proceeds from the sale of stock and lower debt
prepayment and financing costs incurred.
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 110,000 of the Company's employees.
Among the contracts that have expired or will expire in the remainder of 1994
are those covering store employees in Charleston (WV), Nashville, Louisville,
Cincinnati, Phoenix and Tucson as well as warehouse and distribution employees
in a number of the Company's operating divisions. Typical agreements are 3 to 4
years in duration, and as such agreements expire, the Company expects to
negotiate with the unions and to enter into new collective bargaining
agreements. There can be no assurance, however, that such 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 the Company's operations.
As of January 3, 1993 the Company implemented SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" using the immediate
recognition approach. This new standard requires that the expected cost of
retiree health benefits be charged to expense during the years that the
employees render service rather than the Company's past practice of recognizing
these costs on a cash basis. As part of adopting the new standard, the Company
recorded in 1993 a non-cash charge against earnings of $248.7 million before
taxes ($159.2 million after taxes). This cumulative adjustment as of January 3,
1993 represents the discounted present value of expected future retiree health
benefits attributed to employees' service rendered prior to that date.
A-8
<PAGE>
In addition, the new standard results in additional annual expense, which for
the year ended January 1, 1994 totaled $19.5 million before taxes. The increase
in the annual postretirement benefit expense does not affect the Company's
EBITD.
Effective December 29, 1991, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes". The adoption of SFAS No. 109 had a material
effect on the Company's financial statements in the first quarter of 1993 due
to the adoption of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The Company recognized a deferred tax benefit of
$89.5 million in connection with the adoption of SFAS No. 106. A portion of
this tax benefit would not have been recognized under the Company's previous
method of accounting for income taxes.
A-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
We have audited the accompanying consolidated balance sheet of The Kroger Co.
as of January 1, 1994 and January 2, 1993, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended January 1, 1994, January 2, 1993, and December 28, 1991. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Kroger Co. as
of January 1, 1994 and January 2, 1993, and the consolidated results of its
operations and its cash flows for the years ended January 1, 1994, January 2,
1993 and December 28, 1991, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefit costs other than
pensions, as of January 3, 1993.
LOGO
Coopers & Lybrand
Cincinnati, Ohio
February 8, 1994
A-10
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2,
(In thousands of dollars) 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments..................... $ 121,253 $ 103,995
Receivables............................................. 287,925 275,173
Inventories:
FIFO cost.............................................. 2,001,376 1,989,137
Less LIFO reserve...................................... (422,097) (433,694)
---------- ----------
1,579,279 1,555,443
Property held for sale.................................. 37,721 37,080
Prepaid and other current assets........................ 199,652 196,808
---------- ----------
Total current assets.................................. 2,225,830 2,168,499
Property, plant and equipment, net....................... 1,981,308 1,877,172
Investments and other assets............................. 273,326 257,413
---------- ----------
TOTAL ASSETS.......................................... $4,480,464 $4,303,084
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt....................... $ 63,053 $ 73,248
Current portion of obligations under capital leases..... 7,962 7,309
Accounts payable........................................ 1,357,532 1,297,630
Other current liabilities............................... 822,284 795,845
---------- ----------
Total current liabilities............................. 2,250,831 2,174,032
Long-term debt........................................... 3,975,362 4,323,950
Obligations under capital leases......................... 159,651 149,028
Deferred income taxes.................................... 182,891 278,097
Other long-term liabilities.............................. 371,371 78,021
---------- ----------
TOTAL LIABILITIES..................................... 6,940,106 7,003,128
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1993--118,549,173 shares
1992--104,378,000 shares................................. 308,534 104,378
Accumulated deficit...................................... (2,490,932) (2,475,561)
Common stock in treasury, at cost
1993--10,901,846 shares
1992--12,925,729 shares.................................. (277,244) (328,861)
---------- ----------
TOTAL SHAREOWNERS' DEFICIT............................ (2,459,642) (2,700,044)
---------- ----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT............ $4,480,464 $4,303,084
========== ==========
- ---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-11
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Years Ended January 1, 1994, January 2, 1993 and December 28, 1991
<TABLE>
<CAPTION>
1993 1992 1991
(In thousands, except per share amounts) (52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales.................................... $22,384,301 $22,144,588 $21,350,530
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 17,109,060 17,078,839 16,480,580
Operating, general and administrative... 4,024,468 3,877,550 3,661,887
Rent.................................... 290,309 288,113 266,328
Depreciation and amortization........... 263,810 251,822 242,022
Net interest expense.................... 389,991 474,849 531,118
Other charges........................... 22,725
----------- ----------- -----------
Total................................. 22,100,363 21,971,173 21,181,935
----------- ----------- -----------
Earnings before tax expense, extraordi-
nary loss and cumulative effect of
change in accounting.................... 283,938 173,415 168,595
Tax expense.............................. 113,133 72,255 67,901
----------- ----------- -----------
Earnings before extraordinary loss and
cumulative effect of change in account-
ing..................................... 170,805 101,160 100,694
Extraordinary loss, net of income tax
credit.................................. (23,832) (107,103) (20,839)
Cumulative effect of change in account-
ing, net of income tax credit........... (159,193)
----------- ----------- -----------
Net earnings (loss)................... $ (12,220) $ (5,943) $ 79,855
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(2,475,561) $(2,460,725) $(2,540,580)
Net earnings (loss)..................... (12,220) (5,943) 79,855
Sales of treasury stock below average
cost................................... (3,151) (8,893)
----------- ----------- -----------
End of year............................. $(2,490,932) $(2,475,561) $(2,460,725)
=========== =========== ===========
Primary earnings (loss) per Common Share
Earnings before extraordinary loss and
cumulative effect
of change in accounting................ $ 1.60 $ 1.11 $ 1.12
Extraordinary loss...................... (.22) (1.17) (.23)
Cumulative effect of change in account- (1.49)
ing.................................... ------ ------ ------
Net earnings (loss)..................... $ (.11) $ (.06) $ .89
====== ====== ======
Average number of common shares used in
primary
calculation............................. 106,711 91,364 90,218
Fully-diluted earnings (loss) per Common
Share
Earnings before extraordinary loss and
cumulative effect
of change in accounting................ $ 1.50 $ 1.11 $ 1.11
Extraordinary loss...................... (.19) (1.17) (.23)
Cumulative effect of change in account- (1.28)
ing.................................... ------ ------ ------
Net earnings (loss)..................... $ .03 $ (.06) $ .88
====== ====== ======
Average number of common shares used in
fully-diluted
calculation............................. 124,293 91,452 90,461
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
A-12
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended January 1, 1994, January 2, 1993 and December 28, 1991
<TABLE>
<CAPTION>
1993 1992 1991
(In thousands of dollars) (52 WEEKS) (53 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss)....................... $ (12,220) $ (5,943) $ 79,855
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Extraordinary loss....................... 23,832 107,103 20,839
Cumulative effect of change in account-
ing..................................... 159,193
Depreciation and amortization............ 263,810 251,822 242,022
Amortization of discount on Junior Subor-
dinated Debentures...................... 64,198 112,321 115,760
Amortization of deferred financing costs. 15,051 10,660 13,326
Loss on sale of property, plant and
equipment............................... 1,004 3,541 6,485
LIFO charge (credit)..................... (3,172) 8,143 26,244
Other changes, net....................... 140
Net increase (decrease) in cash from
changes in operating assets and liabili-
ties, detailed hereafter................ 105,495 45,127 (56,113)
----------- ----------- ---------
Net cash provided by operating activi-
ties................................... 617,331 532,774 448,418
----------- ----------- ---------
Cash Flows From Investing Activities:
Capital expenditures...................... (376,138) (241,234) (208,076)
Proceeds from sale of property, plant and
equipment................................ 40,296 6,562 8,938
Additions to property held for sale....... (10,900) (26,291) (3,925)
Decrease (increase) in other investments.. (21,602) (3,375) 19,138
Other changes, net........................ (3,926)
----------- ----------- ---------
Net cash used by investing activities... (368,344) (264,338) (187,851)
----------- ----------- ---------
Cash Flows From Financing Activities:
Debt prepayment costs..................... (33,484) (136,613) (28,854)
Financing charges incurred................ (18,159) (39,695) (10,793)
Principal payments under capital lease ob-
ligations................................ (7,557) (6,561) (6,915)
Proceeds from issuance of long-term debt.. 724,826 1,354,666 229,514
Reductions in long-term debt.............. (1,147,807) (1,393,435) (521,537)
Proceeds from issuance of capital stock... 212,015 3,167 13,036
Proceeds from sale of treasury stock...... 36,277 48,843 10,303
Capital stock reacquired.................. (96) (44) (819)
Tax benefit of non-qualified stock op-
tions.................................... 2,256 1,258 4,928
----------- ----------- ---------
Net cash used by financing activities... (231,729) (168,414) (311,137)
----------- ----------- ---------
Net increase (decrease) in cash and tempo-
rary cash investments..................... 17,258 100,022 (50,570)
Cash and Temporary Cash Investments:
Beginning of year......................... 103,995 3,973 54,543
----------- ----------- ---------
End of year............................... $ 121,253 $ 103,995 $ 3,973
=========== =========== =========
</TABLE>
A-13
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
Years Ended January 1, 1994, January 2, 1993 and December 28, 1991
<TABLE>
<CAPTION>
1993 1992 1991
(In thousands of dollars) (52 WEEKS) (53 WEEKS) (52 WEEKS)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) In Cash From Changes In
Operating Assets And Liabilities:
Inventories (FIFO).......................... $(12,239) $(21,328) $(120,872)
Receivables................................. (12,752) (14,092) 15,877
Prepaid and other current assets............ (10,993) (18,186) 356
Accounts payable............................ 59,902 29,935 70,159
Accrued expenses............................ 8,037 53,078 (25,594)
Deferred income taxes....................... 2,175 (34,331) (21,616)
Other liabilities........................... 71,365 50,051 25,577
-------- -------- ---------
$105,495 $ 45,127 $ (56,113)
======== ======== =========
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-14
<PAGE>
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.
Segments of Business
The Company operates primarily in one business segment--retail food and drug
stores. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. The Company also manufactures and
processes food for sale by its supermarkets and operates convenience stores.
Inventories
Inventories are stated at the lower of cost (principally LIFO) or market.
Approximately 89% of inventories for 1993 and 1992 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 are in the process of being sold. 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 10 to 40 years and 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 Hedging Agreements
The Company uses interest rate swaps and caps to hedge a portion of its
variable rate borrowings against increases 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 term of the related agreements.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on future
years 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 restructuring and
other charges and accruals for compensation-related costs. 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.
A-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Cash paid during the year for interest and income taxes was as follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
--------------------------
Interest............................................. $329,495 $367,126 $414,288
Income taxes......................................... 92,745 48,195 56,445
</TABLE>
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
----------------------
Land.................................................... $ 195,469 $ 188,382
Buildings and land improvements......................... 652,411 630,437
Equipment............................................... 2,405,106 2,214,378
Leaseholds and leasehold improvements................... 699,868 675,615
Leased property under capital leases.................... 234,114 217,244
---------- ----------
4,186,968 3,926,056
Accumulated depreciation and amortization............... (2,205,660) (2,048,884)
---------- ----------
$1,981,308 $1,877,172
Substantially all property, plant and equipment collateralizes debt of the
Company. (See Debt Obligations footnote.)
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
<CAPTION>
1993 1992
<S> <C> <C>
----------------------
Deferred financing costs................................ $110,684 $112,278
Goodwill................................................ 51,192 55,287
Other................................................... 111,450 89,848
---------- ----------
$273,326 $257,413
</TABLE>
The Company is amortizing deferred financing costs using the interest method
and the straight-line basis over the life of the related borrowings.
Substantially all goodwill is amortized on the straight-line method over forty
years.
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CHARGES
On June 14, 1993, the Company announced its intention to dispose of 15 San
Antonio, Texas stores. The Company recognized a pre-tax charge of $22,725 in
connection with the disposition. Severance pay, unemployment benefits costs and
loss on sale of assets are included in this charge.
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
-----------------
Salaries and wages............................................ $252,210 $233,060
Taxes, other than income taxes................................ 122,852 138,357
Interest...................................................... 62,494 75,407
Other......................................................... 384,728 349,021
-------- --------
$822,284 $795,845
</TABLE>
TAXES BASED ON INCOME
Effective December 29, 1991 the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
No cumulative effect adjustment was required for the adoption of SFAS No. 109
due to the Company's previous use of the liability method under SFAS No. 96.
Adoption of SFAS No. 109 did not have a material impact on income tax expense
in 1992.
The adoption of SFAS No. 109 had a material impact on the Company's financial
statements in 1993 due to the adoption of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." The Company recognized a
deferred tax benefit of $89,546 in connection with the adoption of SFAS No.
106. A portion of this tax benefit would not have been recognized under SFAS
No. 96.
A-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision for taxes based on income consists of:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
----------------------------
Federal
Current......................................... $ 92,863 $ 80,934 $ 71,101
Deferred........................................ 2,174 (34,331) (21,616)
-------- -------- --------
95,037 46,603 49,485
State and local.................................. 18,096 25,652 18,416
-------- -------- --------
113,133 72,255 67,901
Tax credit from extraordinary loss............... (14,607) (65,644) (12,772)
Tax credit from cumulative effect of change in
accounting...................................... (89,546)
-------- -------- --------
$ 8,980 $ 6,611 $ 55,129
</TABLE>
Tax laws enacted in 1993 increased federal income tax rates retroactive to the
beginning of 1993. Deferred taxes have been adjusted to reflect the increased
federal income tax rates. This adjustment increased the deferred tax provision
by $4,200 in 1993. Targeted job tax credits reduced the tax provision by $2,608
in 1993, $3,378 in 1992 and $4,116 in 1991.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
----------------
Statutory rate................................................ 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit................ 4.1 9.8 7.2
Tax credits................................................... (1.0) (2.1) (2.6)
Tax rate change effect on deferred taxes...................... 1.5
Other, net.................................................... .2 1.7
---- ---- ----
39.8% 41.7% 40.3%
</TABLE>
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences and carryforwards that
comprise deferred tax balances were as follows:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Compensation related costs............................. $ 25,902 $ 24,016
Insurance related costs................................ 34,023 33,185
Inventory related costs................................ 19,523 16,829
Tax credit carryforwards............................... 11,653
Alternative minimum tax credit carryforwards........... 13,971 5,857
Other.................................................. 17,054 15,367
--------- ---------
110,473 106,907
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (26,001) (27,485)
Lease accounting....................................... (5,408) (5,271)
Inventory related costs................................ (17,568) (725)
Other.................................................. (9,331) (13,427)
--------- ---------
(58,308) (46,908)
--------- ---------
Current deferred taxes, net (in prepaid and other cur-
rent assets)........................................... $ 52,165 $ 59,999
========= =========
Long-term deferred tax assets:
Compensation related costs............................. $ 99,170 $ 3,222
Insurance related costs................................ 21,021 9,224
Lease accounting....................................... 22,269 21,150
Alternative minimum tax credit carryforwards........... 13,974
Other.................................................. 6,798 9,326
--------- ---------
149,258 56,896
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (285,104) (293,179)
Compensation related costs............................. (5,267) (4,559)
Insurance related costs................................ (12,726)
Lease accounting....................................... (11,391) (370)
Deferred charges....................................... (9,735) (10,517)
Other.................................................. (20,652) (13,642)
--------- ---------
(332,149) (334,993)
--------- ---------
Long-term deferred taxes, net........................... $(182,891) $(278,097)
========= =========
</TABLE>
As of January 1, 1994, the Company has alternative minimum tax credit
carryforwards of $13,971. This amount will be allowed as a credit against
regular tax in the future to the extent that regular tax expense exceeds the
alternative minimum tax expense. These credits do not have an expiration date.
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
---------------------
Variable rate Senior Term Facility, due in varying
amounts through 1998.................................... $ 386,208 $ 489,197
Variable rate Working Capital Facility, due 1998......... 361,954 361,789
Variable rate Facility D, due 1997 and 1998.............. 98,796
9 1/4% Senior Secured Debentures, due 2005............... 200,000
8 1/2% Senior Secured Debentures, due 2003............... 200,000
11 1/8% Senior Notes, due 1998........................... 138,386 250,000
8 3/4% Senior Subordinated Reset Notes, due 1999......... 66,513 100,000
9% Senior Subordinated Notes, due 1999................... 125,000 125,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 175,000 175,000
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 100,000 100,000
9 7/8% Senior Subordinated Debentures, due 2002.......... 250,000 250,000
6% to 9 5/8% Senior Subordinated Notes, due 1999 to 2008. 238,182 68,470
10% Senior Subordinated Notes, due 1999.................. 250,000 250,000
12 7/8% Senior Subordinated Debentures, due 1999......... 71,157
6 3/8% Convertible Junior Subordinated Notes, due 1999... 200,000 200,000
8 1/4% Convertible Junior Subordinated Debentures, due
2011.................................................... 170,000 170,000
15 1/2% Junior Subordinated Discount Debentures, net of
$80,932 unamortized discount in 1992 due 2008 with an
approximate effective rate of 13.88%.................... 719,485
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 609,223 610,173
3 3/5% to 10 3/8% industrial revenue bonds, due in vary-
ing amounts through 2021................................ 211,270 229,145
7% to 12 7/8% mortgages, due in varying amounts through
2017.................................................... 232,469 204,640
3 1/2% to 12% notes, due in varying amounts through 2011. 25,414 23,142
---------- ----------
Total debt............................................... 4,038,415 4,397,198
Less current portion..................................... 63,053 73,248
---------- ----------
Total long-term debt..................................... $3,975,362 $4,323,950
</TABLE>
The aggregate annual maturities and scheduled payments of long-term debt for
the five years subsequent to 1993 are:
<TABLE>
<CAPTION>
<S> <C>
1994...................................................... $ 63,053
1995...................................................... $111,010
1996...................................................... $117,434
1997...................................................... $146,784
1998...................................................... $609,769
</TABLE>
Credit Agreement
The Company entered into a restated Credit Agreement, dated January 21, 1992
(the "Credit Agreement"). This agreement replaced the credit agreement dated as
of December 20, 1989. The following constitutes a summary of the principal
terms and conditions of the Credit Agreement.
The Credit Agreement provides for: (i) a six-year senior term facility of
$605,817 (the "Term Facility") and (ii) a working capital revolving credit
facility of $850,000, with a $450,000 sublimit for the issuance of standby and
documentary letters of credit (the "Working Capital Facility" and together with
the Term Facility, the "Facilities").
The Term Facility expires in 1998, and is subject to quarterly amortization of
$25,747 on the third day of each January, April, July and October. The January
3, 1994 and April 3, 1994 payments were made during 1993.
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Facility D
The Credit Agreement provides for additional borrowings of up to $500,000 in
the aggregate pursuant to a new term facility and through issuance of senior
secured debt. During 1993 the Company issued $400,000 of senior secured debt
(see description below) and on October 14, 1993 borrowed $100,000 from a
syndicate of banks under Facility D. Facility D is subject to the same
collateral, prepayment and covenant restrictions described below for the
Facilities. The Facility D bank borrowings bear interest at a rate equal to
LIBOR plus 1 1/4% and are subject to quarterly amortization of $8,000 beginning
January 5, 1997 with a final payment of $52,000 due on July 5, 1998. The
January 5, 1997 payment has been reduced to $6,796 due to the application of
mandatory prepayments.
Interest Rates
Loans under the Facilities bear interest at the option of the Company at a rate
equal to either (i) the rate of interest announced from time to time by
Citibank, N.A., as its base rate (the "Base Rate") plus the Applicable Margin
(as defined below) or (ii) an adjusted Eurodollar rate based upon the London
interbank offered rate ("LIBOR") plus the Applicable Margin.
Applicable Margin means a percentage per annum determined by reference to the
Cash Interest Coverage Ratio set forth below:
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
MARGIN FOR MARGIN FOR
BASE RATE EURODOLLAR
CASH INTEREST COVERAGE RATIO ADVANCES RATE ADVANCES
- --------------------------------------------------------------------------------
<S> <C> <C>
less than 1.75 : 1..................................... 3/4% 1 3/4%
1.75 : 1 or greater, but less than 2.10 : 1............ 1/2 1 1/2
2.10 : 1 or greater, but less than 2.50 : 1............ 1/4 1 1/4
2.50 : 1 or greater.................................... 1/4 1
</TABLE>
At January 1, 1994, the Applicable Margin is 1/4% for Base Rate advances and 1%
for Eurodollar Rate Advances. No more than one increase or decrease in the
Applicable Margin shall occur in any six-month period.
Collateral
The Company's obligations under the Facilities are collateralized by a pledge
of the stock of subsidiaries of the Company and substantially all assets, both
real and personal, of the Company and its subsidiaries.
Prepayment
The Company may prepay the Facilities, in whole or in part, at any time,
without a prepayment penalty. Voluntary prepayments will be applied, at the
option of the Company, either (i) to repay the Term Facility in the inverse
order of maturity or (ii) to repay the next two quarterly scheduled Term
Facility payments and then to repay the remaining Term Facility payments pro
rata. The Facilities are subject to certain mandatory prepayments in connection
with asset dispositions, certain stock issuances, certain incurrences of debt
and sale and leaseback transactions and in respect of a percentage of the
Company's excess annual cash as defined in the Credit Agreement.
Certain Covenants
The Credit Agreement contains covenants which, among other things, (i) restrict
investments, capital expenditures, and other material outlays and commitments
relating thereto, (ii) restrict the incurrence of debt, including the
incurrence of debt by subsidiaries, (iii) restrict dividends and payment,
prepayments, and repurchases of subordinated debt, capital stock or other
securities, (iv) restrict mergers and acquisitions and
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
changes of business or conduct of business, (v) restrict transactions with
affiliates, (vi) restrict certain sales of assets, (vii) restrict changes in
accounting treatment and reporting practices except as permitted under
generally accepted accounting principles, (viii) require the maintenance of
certain financial ratios and levels, including interest coverage ratios, fixed
charge coverage ratios and total debt ratios, (ix) require the Company to
provide financial statements and an annual business plan of the Company and its
subsidiaries and (x) require the Company to maintain interest rate protection
providing that at least 70% of the Company's indebtedness for all borrowed
money is maintained at a fixed rate of interest.
Interest Rate Protection Program
The Company currently has in place various interest rate hedging agreements
aggregating $1,400,000. The effect of these agreements is to: (i) fix the rate
on $100,000 floating rate debt for a period of two years (expires July, 1994),
(ii) swap the contractual interest rate on $350,000 of seven and ten year debt
instruments to the rates available on three to five year fixed rate instruments
(upon expiration of the three to five year swap agreements the fixed
contractual rate will become floating for the remainder of the seven and ten
year term of the debt), (iii) swap the contractual interest rate on $600,000 of
seven and ten year fixed rate instruments into floating rate instruments and
(iv) cap six month LIBOR on $350,000 for one to five years at rates of 3.70% to
5.50%. $50,000 of the caps expire in each of July 1994, July 1995, July 1997
and July 1998 and the remaining $150,000 expires in November 1995. The Company
is exposed to credit loss in the event of non-performance by the other parties
to the interest rate hedging agreements. However, the Company does not
anticipate non-performance by the counterparties. Through the interest rate
hedging agreements at January 1, 1994, the Company effectively pays interest at
approximately 3.9% and receives interest at approximately 5.4% on the notional
amount of these agreements.
9 1/4% Senior Secured Debentures
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior Secured
Debentures (the "9 1/4% Senior Secureds"). The 9 1/4% Senior Secureds become
due on January 1, 2005. The 9 1/4% Senior Secureds are redeemable at any time
on or after January 1, 1998 in whole or in part at the option of the Company.
The redemption prices commence at 104.625% and are reduced by 1.156% annually
until January 1, 2002 when the redemption price is 100%.
8 1/2% Senior Secured Debentures
On July 1, 1993, the Company issued $200,000 of 8 1/2% Senior Secured
Debentures (the "8 1/2% Senior Secureds"). The 8 1/2% Senior Secureds become
due on June 15, 2003. The 8 1/2% Senior Secureds are redeemable at any time on
or after June 15, 1998 in whole or in part at the option of the Company. The
redemption prices commence at 104.250% and are reduced by 1.4165% annually
until June 15, 2001 when the redemption price is 100%.
11 1/8% Senior Notes
The Company notified the trustee for the 11 1/8% Senior Notes on February 13,
1994 that it will redeem the remaining outstanding notes on March 15, 1994 at a
redemption price of 105%. The Company expects to record an extraordinary loss
of approximately $4,100 in connection with the redemption.
Senior Subordinated Debentures
In December 1992 $110,506 of Senior Subordinated Debentures were called for
redemption, for which funds were deposited in a trust account in December 1992,
and were redeemed in January 1993. Accordingly, the called debentures were
treated as redeemed for financial reporting purposes in 1992. The remaining
$71,157 Senior Subordinated Debentures were called for redemption on December
29, 1992 and redeemed on January 29, 1993.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Senior Subordinated Indebtedness
During 1993 the Company issued $169,712 of Senior Subordinated Indebtedness.
Senior Subordinated Indebtedness, including that issued during 1993, consists
of the following: (i) $100,000 8 3/4% Senior Subordinated Reset Notes (the
"Reset Notes"), due June 15, 1999. On each of June 15, 1994 and June 15, 1996,
unless previously redeemed, the interest rate on the Reset Notes will, if
necessary, be adjusted from the rate then in effect to a rate to be determined
on the basis of market rates then in effect so that the Reset Notes would have
a market value of 101% of principal amount immediately after the resetting of
the rate except that the rate cannot be reset below 8 3/4%. The Reset Notes are
redeemable at the option of the Company, in whole but not in part, either on
June 15, 1994 or on June 15, 1996, at a redemption price equal to 101% of
principal amount. During 1993, the Company repurchased $33,487 of the Reset
Notes. (ii) $125,000 9% Senior Subordinated Notes due August 15, 1999. This
issue is redeemable at any time on or after August 15, 1996 in whole or in part
at the option of the Company at par. (iii) $175,000 9 3/4% Senior Subordinated
Debentures due February 15, 2004. This issue is redeemable at any time on or
after February 15, 1997 in whole or in part at the option of the Company. The
redemption prices commence at 104.875% in 1997 and are reduced by 1.625%
annually until 2000 when the redemption price is 100%. (iv) $100,000 9 3/4%
Senior Subordinated Debentures due February 15, 2004, Series B. This issue is
redeemable at any time on or after February 15, 1997 in whole or in part at the
option of the Company. The redemption prices commence at 104.875% in 1997 and
are reduced by 1.625% annually until 2000 when the redemption price is 100%.
(v) $250,000 9 7/8% Senior Subordinated Debentures due August 1, 2002. This
issue is redeemable at any time on or after August 1, 1999 in whole or in part
at the option of the Company at par. (vi) $238,182 6% to 9 5/8% Senior
Subordinated Notes due August 15, 1999 to October 15, 2008. Portions of these
issues are subject to early redemption by the Company. (vii) $250,000 10%
Senior Subordinated Notes due May 1, 1999. This issue is not subject to early
redemption by the Company. The proceeds from these offerings, together with
proceeds from the sale of common stock were used to initially repay amounts
outstanding under the Working Capital Facility and, thereafter, the Company
used amounts available under the Working Capital Facility to purchase or redeem
outstanding indebtedness of the Company.
6 3/8% Convertible Junior Subordinated Notes
The $200,000 of 6 3/8% Convertible Junior Subordinated Notes (the "6 3/8%
Convertibles") become due December 1, 1999. The 6 3/8% Convertibles are
convertible into shares of the Company's common stock at a conversion price of
$18.68 at any time at the option of the holder. The 6 3/8% Convertibles are
redeemable, in whole or in part, at the option of the Company at any time after
December 17, 1992 at the scheduled redemption prices. The redemption prices
commence at 106.375% and are reduced by .9105% annually each December 1
thereafter until 1999, when the 6 3/8% Convertibles mature, except that, until
December 8, 1995, the 6 3/8% Convertibles cannot be redeemed by the Company
unless the closing price of the Company's common stock equals or exceeds 150%
of the then effective conversion price per share at least 20 out of 30
consecutive trading days ending within 10 days prior to mailing of the
redemption notice. At January 1, 1994, the Company has reserved 10,706,638
shares of common stock for future conversion of the 6 3/8% Convertibles.
8 1/4% Convertible Junior Subordinated Debentures
The $170,000 of 8 1/4% Convertible Junior Subordinated Debentures (the "8 1/4%
Convertibles") become due on April 15, 2011. The 8 1/4% Convertibles are
convertible into shares of the Company's common stock at a conversion price of
$26.70 at any time at the option of the holder. The 8 1/4% Convertibles are
redeemable at any time on or after April 15, 1994 in whole or in part at the
option of the Company at the scheduled redemption prices plus accrued interest.
The redemption prices commence at 105.775% in 1994 and are reduced by .825%
annually thereafter until 2001 when the redemption price is 100%. At January 1,
1994, the Company had reserved 6,367,041 shares of common stock for future
conversions of the 8 1/4% Convertibles.
Junior Subordinated Discount Debentures
The Junior Subordinated Discount Debentures were redeemed on October 15, 1993.
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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 thirteen 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 have a 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.
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to $850,000 of
unrated commercial paper and borrow up to $850,000 from the lenders under the
Credit Agreement on a competitive bid basis. The total of unrated commercial
paper, $97,954 at January 1, 1994, and competitive bid borrowings, $264,000 at
January 1, 1994, however, may not exceed $850,000. All commercial paper and
competitive bid borrowings must be supported by availability under the Working
Capital Facility portion of the Credit Agreement. These borrowings have been
classified as long-term because the Company expects that during 1994 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
Working Capital Facility which matures January 3, 1998.
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:
Cash And Short-term Investments
The carrying amount approximates fair value because of the short maturity of
those instruments.
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.
Interest Rate Protection Agreements
The fair value of these agreements is based on the net present value of the
future cash flows using interest rates in effect at January 1, 1994 and
represents a net cash inflow for both years.
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and short-term investments... $ 121,253 $ 121,253 $ 103,995 $ 103,995
Long-term investments for which it
is
. Practicable..................... $ 19,734 $ 36,516 $ 20,375 $ 65,344
. Not Practicable................. $ 39,625 $ -- $ 20,922 $ --
Long-term debt for which it is
. Practicable..................... $2,113,081 $2,261,420 $2,479,112 $2,527,127
. Not Practicable................. $1,925,334 $ -- $1,918,086 $ --
Interest Rate Protection Agree-
ments............................ $ -- $ 45,312 $ -- $ 2,587
</TABLE>
The investments for which it was not practicable to estimate fair value relate
to equity investments in unrelated entities for which there is no market and
investments in real estate development partnerships for which there is no
market.
It was not practicable to estimate the fair value of $846,958 of long-term debt
outstanding under the Company's Credit Agreement. There is no market for this
debt. It was not practicable to estimate the fair value of $609,223 of long-
term debt related to a mortgage transaction completed in 1989. This financing
was a credit enhanced 90% loan-to-value package for which there is no market or
current similar transactions. The remaining amount relates to Industrial
Revenue Bonds, various mortgages and other notes for which there is no market.
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 upon a percent of sales.
Rent expense (under operating leases) consists of:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals...................................... $275,336 $270,763 $253,345
Contingent payments.................................. 14,973 17,350 12,983
-------- -------- --------
$290,309 $288,113 $266,328
</TABLE>
Assets recorded under capital leases consists of:
<TABLE>
<CAPTION>
1993 1992
--------- --------
<S> <C> <C>
Distribution and manufacturing facilities.................. $ 38,742 $ 38,742
Store facilities........................................... 195,372 178,502
Less accumulated amortization.............................. (106,273) (98,684)
--------- --------
$ 127,841 $118,560
</TABLE>
Minimum annual rentals for the five years subsequent to 1993 and in the
aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1994...................................................... $ 28,275 $ 267,638
1995...................................................... 27,717 249,911
1996...................................................... 26,921 231,734
1997...................................................... 26,117 213,222
1998...................................................... 25,468 214,442
Thereafter................................................ 229,546 1,573,190
-------- ----------
364,044 $2,750,137
Less estimated executory costs included in capital leases. (27,247)
--------
Net minimum lease payments under capital leases........... 336,797
Less amount representing interest......................... (169,184)
--------
Present value of net minimum lease payments under capital
leases................................................... $167,613
</TABLE>
A-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EXTRAORDINARY LOSS
The extraordinary loss in 1993, 1992 and 1991 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share equals net earnings (loss) divided by
the weighted average number of common shares outstanding, after giving effect
to dilutive stock options. Fully diluted earnings per common share equals net
earnings plus, for 1993, after tax interest incurred on the 8 1/4% Convertibles
and 6 3/8% Convertibles of $16,065 divided by common shares outstanding after
giving effect to dilutive stock options and, for 1993, shares assumed to be
issued on conversion of the Company's convertible securities. The convertible
securities are not included in the fully diluted earnings per share calculation
for 1992 because they are anti-dilutive. They are not included in the fully
diluted earnings per share calculation for 1991 because the 8 1/4% Convertibles
were anti-dilutive and the 6 3/8% Convertibles had not been issued.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at January 1, 1994. The stock has
a par value of $100 and is issuable in series. Under the Credit Agreement, the
Company is prohibited from issuing shares of preferred stock.
COMMON STOCK
The Company has authorized 350,000,000 shares of $1 par common stock. 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 1,
1994, changes in common stock were:
<TABLE>
<CAPTION>
ISSUED IN TREASURY
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
--------------------------------------------
December 30, 1990................ 102,170,937 $ 103,778 16,594,285 $ 423,659
Exercise of stock options includ-
ing restricted stock grants..... 1,586,159 17,543 66,984 1,351
Sale of treasury shares to the
Company's employee benefit
plans........................... (4,279) (571,149) (14,582)
Tax benefit from exercise of non-
qualified stock options......... 4,928
----------- --------- ---------- ---------
December 28, 1991................ 103,757,096 121,970 16,090,120 410,428
Exercise of stock options includ-
ing restricted stock grants..... 620,904 6,233 82,299 1,252
Sale of treasury shares to the
Company's employee benefit
plans........................... (25,082) (3,246,690) (82,819)
Tax benefit from exercise of non-
qualified stock options......... 1,257
----------- --------- ---------- ---------
January 2, 1993.................. 104,378,000 104,378 12,925,729 328,861
Exercise of stock options includ-
ing restricted stock grants..... 896,173 10,658 9,342 62
Sale of treasury shares to the
Company's employee benefit
plans........................... (12,251) (2,033,225) (51,679)
Shares issued through public of-
fering.......................... 13,275,000 203,493
Tax benefit from exercise of non-
qualified stock options......... 2,256
----------- --------- ---------- ---------
January 1, 1994.................. 118,549,173 $ 308,534 10,901,846 $277,244
</TABLE>
STOCK OPTION PLANS
The Company grants options for common stock under various plans 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 1, 1994 and
January 2,
A-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1993, 706,759 and 925,804 shares of common stock, respectively, were available
for future options. Options may be granted under the 1985, 1987, 1988 and 1990
plans until 1995, 1997, 1998 and 2000, respectively, and generally will expire
10 years from the date of grant. Options become exercisable six months from the
date of grant. At January 1, 1994, options for 11,512,159 shares were
exercisable. All grants outstanding become immediately exercisable upon certain
changes of control of the Company.
Changes in options outstanding under the stock option plans, excluding
restricted stock grants, were:
<TABLE>
<CAPTION>
SHARES SUBJECT OPTION PRICE
TO OPTION RANGE PER SHARE
<S> <C> <C>
-----------------------------
Outstanding, December 30, 1990................... 7,053,458 $ 2.88--$18.57
Granted.......................................... 2,186,200 $15.69--$23.44
Exercised........................................ (1,503,603) $ 2.88--$16.19
Cancelled or expired............................. (43,024) $ 9.13--$23.44
----------
Outstanding, December 28, 1991................... 7,693,031 $ 3.24--$23.44
Granted.......................................... 5,172,145 $11.75--$19.69
Exercised........................................ (561,629) $ 3.24--$18.57
Cancelled or expired............................. (101,850) $ 9.13--$23.44
----------
Outstanding, January 2, 1993..................... 12,201,697 $ 4.69--$23.44
Granted.......................................... 314,865 $17.50--$21.13
Exercised........................................ (784,658) $ 4.69--$18.69
Cancelled or expired............................. (123,545) $ 9.13--$23.44
----------
Outstanding, January 1, 1994..................... 11,608,359 $ 4.92--$23.44
</TABLE>
In addition to stock options, the Company may grant stock appreciation rights
(SARs) to certain officers. In general, the eligible optionees are permitted to
surrender the related option and receive shares of the Company's common stock
and/or cash having a value equal to the appreciation on the shares subject to
the options. The appreciation of SARs is charged to earnings in the current
period based upon the market value of common stock. As of January 1, 1994 and
January 2, 1993 there were no SARs outstanding.
The Company also may grant limited stock appreciation rights (LSARs) to
executive officers in tandem with the related options. LSARs operate in the
same manner as SARs but are exercisable only following a change of control of
the Company. As of January 1, 1994 and January 2, 1993, there were no LSARs
outstanding.
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 shall be 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. As of
January 1, 1994 and January 2, 1993, awards related to 101,217 and 184,800
shares, respectively, were outstanding.
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--The Company has settled all tax years through 1983 with the
Internal Revenue Service. The Internal Revenue Service has completed its
examination of the Company's tax returns for 1984 through 1986 and the Company
has made payments based on its proposed settlement. The Company has provided
for this and other tax contingencies.
A-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 premiums.
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. Other levels of general liability risks have been
underwritten by a subsidiary. Operating divisions and subsidiaries have paid
premiums, and the insurance subsidiary has provided loss allowances, based upon
actuarially-determined estimates.
Litigation--Various suits and claims arising in the ordinary course of business
are pending against the Company. In the opinion of management, these suits and
claims will not have a material effect on the financial position or results of
operations of the Company.
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan in which each
holder of common stock is entitled to one common stock purchase right for each
share of common stock owned. When exercisable, the nonvoting rights entitle the
registered holder to purchase one share of common stock at a price of $60 per
share. The rights will become exercisable, and separately tradeable, ten days
after a person or group acquires 20% or more of the Company's common stock. In
the event the rights become exercisable and thereafter the Company is acquired
in a merger or other business combination, each right will entitle the holder
to purchase common stock of the surviving corporation, for the exercise price,
having a market value of twice the exercise price of the right. Under certain
other circumstances, including the acquisition of 25% or more of the Company's
common stock, each right will entitle the holder to receive upon payment of the
exercise price, shares of common stock 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 $.025 per right.
The rights are subject to adjustment and expire March 19, 1996.
PENSION PLANS
The Company administers non-contributory defined benefit retirement plans for
substantially all non-union employees. Funding for the pension plans is based
on a review of the specific requirements and on evaluation of the assets and
liabilities of each plan. 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.
The Company-administered pension benefit obligations and the assets were valued
as of the end of 1993 and 1992. The assets are invested in cash and short-term
investments or listed stocks and bonds, including $85,389 and $61,918 of common
stock of The Kroger Co. at the end of 1993 and 1992, respectively. The status
of the plans at the end of 1993 and 1992 was:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
------------------
Actuarial present value of benefit obligations:
Vested employees........................................... $541,563 $449,406
Non-vested employees....................................... 16,229 14,750
-------- --------
Accumulated benefit obligations............................ 557,792 464,156
Additional amounts related to projected salary increases... 103,301 103,439
-------- --------
Projected benefit obligations.............................. 661,093 567,595
Plan assets at fair value................................... 768,115 661,472
-------- --------
Plan assets in excess of projected benefit obligations...... $107,022 $ 93,877
Consisting of:
Unamortized transitional asset............................. $ 41,790 $ 51,065
Unamortized prior service cost and net gain................ 65,702 52,349
Adjustment required to recognize minimum liability......... 7,966 5,426
Accrued pension cost in Consolidated Balance Sheet......... (8,436) (14,963)
-------- --------
$107,022 $ 93,877
</TABLE>
A-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of net periodic pension income for 1993, 1992 and 1991 are as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
-----------------------------
Service cost.................................... $ 17,752 $ 17,237 $ 13,729
Interest cost................................... 48,601 45,774 42,767
Return on assets................................ (141,143) (35,664) (150,380)
Net amortization and deferral................... 68,041 (40,384) 86,342
-------- -------- ---------
Net periodic pension income for the year........ $ (6,749) $(13,037) $ (7,542)
Assumptions:
Discount rate.................................. 7.25% 8.5% 8.5%
Salary Progression rate........................ 4.25% 5.5% 5.5%
Long-term rate of return on plan assets........ 9.5% 10.0% 10.0%
</TABLE>
1993 assumptions represent the rates in effect at the end of the fiscal year.
These rates were used to calculate the actuarial present value of the benefit
obligations at January 1, 1994. However, for the calculation of periodic
pension income for 1993 the long-term rate of return rate used was 10%, the
discount rate was 8.5% and the salary progression rate was 5 1/2%. The 1994
calculation of periodic pension income will be based on the assumptions in the
table above for 1993.
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1993, 1992 and 1991
was $20,388, $16,371 and $14,617, 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 1993, 1992 and 1991 were $86,377,
$85,010 and $79,735, respectively. Information on the actuarial present value
of accumulated plan benefits and net assets available for benefits relating to
the multi-employer plans is not available.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
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. For 1993,
1992 and 1991, the combined payments for these benefits were $12,266, $9,538
and $9,746, respectively.
As of January 3, 1993 the Company implemented SFAS No. 106 using the immediate
recognition approach. This new standard requires that the expected cost of
retiree benefits be charged to expense during the years that the employees
render service rather than the Company's past practice of recognizing these
costs on a cash basis. As part of adopting the new standard, the Company
recorded in 1993, a one-time, non-cash charge against earnings of $248,739
before taxes ($159,193 after taxes). This cumulative adjustment as of January
3, 1993 represents the discounted present value of expected future retiree
benefits attributed to employees' service rendered prior to that date.
The following table sets forth the postretirement benefit plans combined status
at January 1, 1994:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Accumulated postretirement benefit obligation (APBO)
Retirees............................................................. $ 99,306
Fully eligible active participants................................... 55,095
Other active participants............................................ 113,974
--------
268,375
Less unrecognized net loss........................................... (4,876)
--------
Accrued postretirement benefit cost.................................. $263,499
</TABLE>
A-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
1993
-------
<S> <C>
Service costs (benefits attributed to employee services during the
year)................................................................. $10,261
Interest cost on accumulated postretirement benefit obligations........ 19,607
-------
$29,868
</TABLE>
The significant assumptions used in calculating the APBO are as follows:
<TABLE>
<CAPTION>
HEALTH CARE TREND RATE
-------------------------
DISCOUNT YEARS TO
RATE INITIAL ULTIMATE ULTIMATE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Transition Obligation........................ 8% 15% 6% 15
Year-end 1993................................ 7 1/4% 13% 4.5% 13
</TABLE>
The impact of a one percent increase in the medical trend rate is as follows:
<TABLE>
<CAPTION>
PERIODIC
COST APBO
-----------------------
<S> <C> <C>
Transition..................................................... $2,000 $ 9,800
Year-end 1993.................................................. $2,331 $17,135
</TABLE>
A-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------- TOTAL
FOURTH YEAR
(12 WEEKS (52 WEEKS
1993) 1993)
FIRST SECOND THIRD (13 WEEKS (53 WEEKS
1993 (12 WEEKS) (12 WEEKS) (16 WEEKS) 1992) 1992)
<S> <C> <C> <C> <C> <C>
Sales................... $5,173,926 $5,329,373 $6,478,645 $5,402,358 $22,384,301
Merchandise costs....... 3,964,439 4,074,455 4,968,568 4,101,598 17,109,060
Extraordinary loss...... (9,042) (2,136) (8,834) (3,820) (23,832)
Cumulative effect of
change in accounting... (159,193) (159,193)
Net earnings (loss)..... (138,771) 27,485 16,375 82,691 (12,220)
Primary earnings (loss)
per common share:
Earnings before ex-
traordinary loss and
cumulative effect of
change in accounting. .30 .27 .23 .79 1.60
Extraordinary loss.... (.09) (.02) (.08) (.03) (.22)
Cumulative effect of (1.63) (1.49)
change in accounting. ----- ----- ----- ----- -----
Primary net earnings
(loss) per common
share.................. (1.42) .25 .15 .76 (.11)
Fully-diluted earnings
(loss) per
common share:
Earnings before ex-
traordinary loss and
cumulative effect of
change in accounting. .29 .27 .23 .71 1.50
Extraordinary loss.... (.08) (.02) (.07) (.03) (.19)
Cumulative effect of
change in accounting (1.38) (1.28)
..................... ----- ----- ----- ----- -----
Fully-diluted net earn-
ings per common share.. (1.17) .25 .16 .68 .03
<CAPTION>
1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................... $5,038,493 $5,072,230 $6,333,076 $5,700,789 $22,144,588
Merchandise costs....... 3,883,768 3,925,278 4,905,118 4,364,675 17,078,839
Extraordinary loss...... (30,270) (33,895) (27,292) (15,646) (107,103)
Net earnings (loss)..... (9,293) (29,368) (20,429) 53,147 (5,943)
Primary earnings (loss)
per common share:
Earnings before ex-
traordinary loss..... .23 .05 .08 .74 1.11
Extraordinary loss.... (.34) (.37) (.30) (.17) (1.17)
---- ---- ---- ---- -----
Primary net earnings
(loss) per common
share.................. (.11) (.32) (.22) .57 (.06)
Fully-diluted earnings
(loss) per common
share:
Earnings before ex-
traordinary loss..... .23 .05 .08 .71 1.11
Extraordinary loss.... (.34) (.37) (.30) (.15) (1.17)
---- ---- ---- ---- -----
Fully-diluted net earn-
ings (loss) per common
share.................. (.11) (.32) (.22) .56 (.06)
</TABLE>
A-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
First quarter 1993 reflects an after tax charge of 159,153 for the cumulative
effect of a change in accounting for postretirement health care and life
insurance benefits. Second quarter 1993 includes a $22,725 charge in connection
with the disposition of 15 stores. Third quarter 1993 reflects a LIFO credit of
$4,000 compared with a charge of $4,800 in the third quarter 1992. Second and
third quarters 1992 were negatively affected by a 67 day strike in Michigan.
The extraordinary loss in the four quarters of 1993 and 1992 relates to
expenses associated with the early retirement of debt.
Common Stock Price Range
<TABLE>
<CAPTION>
1993 1992
------------- -------------
QUARTER HIGH LOW HIGH LOW
--------------------------------------
<S> <C> <C> <C> <C>
1st................... 19 1/2 14 21 1/8 16 3/4
2nd................... 19 5/8 16 5/8 19 1/8 15 5/8
3rd................... 21 3/4 16 1/4 16 11 1/4
4th................... 20 7/8 17 1/2 15 7/8 11 3/8
</TABLE>
Under the restated Credit Agreement dated January 21, 1992, the Company is
prohibited from paying cash dividends during the term of the Credit Agreement.
The Company is permitted to pay dividends in the form of stock of the Company.
A-32
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------
JANUARY 1, JANUARY 2, DECEMBER 28, DECEMBER 29, DECEMBER 30,
1994 1993 1991 1990 1989
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales from continuing
operations............. $22,384,301 $22,144,588 $21,350,530 $20,260,974 $19,103,671
Earnings (loss) from
continuing operations
before extraordinary
loss and cumulative ef-
fect of change in
accounting(A).......... 170,805 101,160 100,694 83,290 (16,251)
Extraordinary loss (net
of income tax
credit)(B) ............ (23,832) (107,103) (20,839) (910) (56,471)
Cumulative effect of
change in accounting
(net of income tax
credit)(C)............. (159,193)
Net earnings (loss)(A).. (12,220) (5,943) 79,855 82,380 (72,722)
Earnings (loss) per
share
Earnings (loss) from
continuing operations
before extraordinary
loss(A)............... 1.50 1.11 1.12 .96 (.23)
Extraordinary loss(B).. (.19) (1.17) (.23) (.01) (.69)
Cumulative effect of
change in
accounting(C)......... (1.28)
Net earnings (loss)(A). .03 (.06) .89 .95 (.92)
Total assets............ 4,480,464 4,303,084 4,114,351 4,118,542 4,241,987
Long-term obligations,
including obligations
under capital leases... 4,135,013 4,472,978 4,407,764 4,557,838 4,737,393
Shareowners' deficit.... (2,459,642) (2,700,044) (2,749,183) (2,860,461) (2,965,543)
Cash dividends per com-
mon share.............. (D) (D) (D) (D) (D)
- -------------------------------------------------------------------------------------------
</TABLE>
(A) See Other Charges in the Notes to Consolidated Financial Statements for
information pertaining to 1993. During the year ended December 29, 1990 the
Company recorded a pre-tax gain of $26,754 related to the disposition of an
equity investment in an unaffiliated company. During the year ended
December 30, 1989 the Company recorded a pre-tax gain of $28,405 from the
sale of assets and recorded a $10,362 pre-tax charge to earnings related to
the revaluation of various assets.
(B) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(C) See Postretirement Health Care and Life Insurance Benefits in the Notes to
Consolidated Financial Statements.
(D) The Company is prohibited from paying cash dividends under the terms of its
restated Credit Agreement.
A-33
<PAGE>
EXECUTIVE OFFICERS
RICHARD L. BERE PATRICK J. KENNEY
President and Chief Operating Officer Senior Vice President
DAVID B. DILLON THOMAS E. MURPHY
Group Vice President
Executive Vice President, and President, Dillon Companies, Inc.
DONALD F. DUFEK JACK W. PARTRIDGE, JR.
Senior Vice President Group Vice President
PAUL W. HELDMAN JOSEPH A. PICHLER
Chairman of the Board and Chief
Executive Officer
Vice President, Secretary and General Counsel
MICHAEL S. HESCHEL
RONALD R. RICE
Senior Vice President andChief Information Officer
Group Vice President
LORRENCE T. KELLAR
Group Vice President WILLIAM J. SINKULA
Executive Vice President and Chief
Financial Officer
LAWRENCE M. TURNER
Vice President and Treasurer
- --------------------------------------------------------------------------------
The Company has a variety of plans designed to allow employees to acquire stock
in Kroger. Employees of Kroger and its subsidiaries own shares through a profit
sharing plan, as well as 401(k) plans and a payroll deduction plan called the
Kroger Stock Exchange. If employees have questions concerning their shares in
the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
Star Bank, N.A. Cincinnati
P.O. Box 5277
Cincinnati, Ohio 45201
Toll Free 1-800-872-3307
Questions concerning any of the other plans should be directed to the
employee's local Human Resources Manager.
SHAREOWNERS: First Chicago Trust Company of New York is Registrar and Transfer
Agent for the Company's Common Stock. For questions concerning changes of
address, etc., individual shareowners should contact:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
201-324-0498
SHAREOWNER UPDATES: The Kroger Co. provides a pre-recorded overview of the
Company's most recent quarter. Call 1-800-4STOCKX or, in Cincinnati, 762-4723.
FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial
information, including the Company's most recent report on Form 10-Q or 10-K or
press release. Written inquiries should be addressed to Shareholder Relations,
The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100.
- --------------------------------------------------------------------------------
<PAGE>
THE KROGER CO. . 1014 VINE STREET . CINCINNATI, OHIO 45202 . (513) 762-4000
<PAGE>
DESCRIPTION OF PERFORMANCE GRAPH
Represented in graphical format are the returns on $100 invested in the
Company, the S&P 500 Index, the Peer Group and the S&P Retail Stores-Food Chains
Index.
PROXY CARD
Below the proxy card, separated by perforations, is a coupon redeemable for
one free jar of the Company's Whipped Salad Dressing. On the reverse is a
graphical representation of a flower.
<PAGE>
^ FOLD AND DETACH HERE ^^
DID YOU KNOW???
KROGER MANUFACTURING PROCESSES OR PROCURES OVER 4,500 ITEMS WHICH ARE
OFFERED UNDER THE COMPANY'S VARIOUS RETAIL LABELS. Kroger is proud of
its family of private label products. Our company owned manufacturing
facilities and those of our contract suppliers are state of the art
and produce only the highest quality products, preferred by many
Kroger shoppers over the national brand alternative. We invite you to
enjoy one of our newest private label offerings, WHIPPED SALAD
DRESSING. Redeem the coupon below at any Kroger, Dillon, King Soopers,
Fry's or City Market location near you.
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^
1101
----
PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
X
THE PROXIES ARE DIRECTED TO VOTE AS SPECIFIED BELOW AND IN THEIR DISCRETION ON
ALL OTHER MATTERS COMING BEFORE THE MEETING. EXCEPT AS SPECIFIED TO THE
CONTRARY BELOW, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED BELOW, INCLUDING THE DISCRETION TO CUMULATE VOTES AND FOR
PROPOSALS 2, 3 AND 4.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES AND FOR PROPOSALS 2,
3 AND 4.
- --------------------------------------------------------------------------------
- ---------------------------------------------
----------------------------------
FOR
AGAINST
ABSTAIN
1. ELECTION OF DIRECTORS
FOR all nominees (except as marked to the contrary below)
WITHHOLD authority to vote for all nominees
2. APPROVAL OF COOPERS & LYBRAND AS AUDITORS
Nominees Reuben V. Anderson, Richard L. Bere, Raymond B. Carey, Jr., John D.
Ong, Joseph A. Pichler, Martha Romayne Seger and James D. Woods
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
- ----------------------------------
3. INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
4. ADOPTION OF 1994 LONG-TERM INCENTIVE PLAN
If you wish to vote in accordance with the recommendations of management, all
you need do is sign and return this card. The Proxy Committee cannot vote your
shares unless you sign and return the card.
Please sign exactly as name appears hereon. Joint owners should each sign.
Where applicable, indicate position or representative capacity.
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SIGNATURE(S) DATE
<PAGE>
^ FOLD AND DETACH HERE ^^
DID YOU KNOW???
YOUR COMPANY IS THE WORLD'S LARGEST FLORIST. SEND FLOWERS ANYWHERE IN THE
WORLD BY CALLING
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P R O X Y
THE KROGER CO.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD MAY 19, 1994
The undersigned hereby appoints JOSEPH A. PICHLER, PATRICIA SHONTZ LONGE and T.
BALLARD MORTON, JR. and each of them, or if more than one is present and acting
then a majority thereof, proxies, with full power of substitution and revoca-
tion, to vote the common shares of The Kroger Co. which the undersigned is en-
titled to vote at the annual meeting of shareholders, and at any adjournment
thereof, with all the powers the undersigned would possess if personally pres-
ent, including authority to vote on the matters shown on the reverse in the
manner directed, and upon any other matter which may properly come before the
meeting. The undersigned hereby revokes any proxy previously given to vote such
shares at the meeting or at any adjournment.
PLEASE MARK, SIGN,
DATE AND RETURN THE
PROXY CARD PROMPTLY,
USING THE ENCLOSED
ENVELOPE.
(CONTINUED, AND TO BE SIGNED, ON OTHER SIDE)
