<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NO. 333-06763
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 15, 1996
$240,000,000
THE KROGER CO.
8.15% SENIOR NOTES DUE 2006
----------------
Interest on the Notes is payable on January 15 and July 15 of each year,
commencing January 15, 1997. The Notes are not redeemable prior to maturity.
The Notes will be represented by one or more global Notes registered in the
name of The Depository Trust Company. Beneficial interests in the global Notes
will be shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. The Notes will be issued only in
denominations of $1,000 and integral multiples thereof. See "Description of
the Notes".
SEE "RISK FACTORS" AT PAGE 3 OF THE PROSPECTUS FOR CERTAIN RISK FACTORS
RELEVANT TO AN INVESTMENT IN THE NOTES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) COMPANY(1)(3)
----------------- ------------ -------------
<S> <C> <C> <C>
Per Note........................... 100% 0.925% 99.075%
Total.............................. $240,000,000 $2,220,000 $237,780,000
</TABLE>
- --------
(1) Plus accrued interest from July 15, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses estimated at $176,600 payable by the Company.
----------------
The Notes are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that the Notes will be ready for
delivery through the facilities of DTC in New York, New York on or about July
29, 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
CHASE SECURITIES INC.
CITICORP SECURITIES, INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
----------------
The date of this Prospectus Supplement is July 24, 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
THE COMPANY
The Company was founded in 1883, incorporated in 1902, and maintains its
principal executive offices in Cincinnati, Ohio. The Company is the nation's
largest supermarket operator measured by total sales for 1995. At December 30,
1995, the Company operated 1,325 supermarkets in 24 states and 694 convenience
stores in 15 states. Additionally the Company had 125 franchised convenience
stores in 4 states. The Company also operates food processing facilities which
enable the Company's stores to offer quality, low-cost private label
perishable and non-perishable products, and an efficient warehouse and
distribution system which supplies products to its stores.
RECENT DEVELOPMENTS
Earnings before an extraordinary charge in the 1996 second quarter declined
to $78.4 million, or 60 cents per share, compared to $82.5 million, or 67
cents per fully diluted share, in the 1995 second quarter. The decline was
attributable to the effect of a 44-day strike during the quarter at the
Company's King Soopers division in Colorado. The strike reduced second quarter
earnings by approximately 13 cents per share before the extraordinary charge.
Sales and operations at King Soopers are returning to normal. The strike will
reduce third quarter earnings by a substantially smaller amount than in the
second quarter.
Operating cash flow--earnings before interest, taxes, depreciation, and
LIFO--totaled $285.8 million in the 1996 second quarter, compared to $292.1
million for the same period in 1995. Excluding the effects of the King Soopers
strike, operating cash flow would have been approximately $314.5 million.
After the extraordinary charge from the early retirement of debt, net earnings
in the second quarter were $77.6 million, or 59 cents per share, versus $77
million, or 63 cents per fully diluted share, in the 1995 second quarter.
Total sales in the quarter increased 3.4% to $5.84 billion from $5.65
billion. Identical store sales, excluding King Soopers, increased 0.6% over
the prior year's second quarter, reflecting the impact of the Company's
aggressive storing program and increased competition in some markets.
Comparable store sales, excluding King Soopers, which include results from
expanded and relocated stores, increased 3.2%. During the quarter, the Company
opened or expanded 21 stores, compared with 15 openings and expansions in the
1995 second quarter.
The King Soopers strike ended when employees of the 68-store division
ratified in June 1996 a new three-year contract. The new contract, which
contains important improvements in work rules and health care costs, moves
King Soopers toward greater competitive parity in the Denver and Colorado
Springs markets.
Net interest expense declined in the 1996 second quarter to $70.5 million
from $74.6 million in the 1995 second quarter.
On April 29, 1996, the Company notified its lenders under the Credit
Agreement (as defined in the accompanying Prospectus under the caption "Risk
Factors--Substantial Indebtedness") of the Company's election to release the
collateral securing the Company's obligations under the Credit Agreement. The
collateral also secured the Company's obligations under its two issues of
Senior Secured Debentures. This election was permitted because the Company's
consolidated ratio of net total debt to EBITD for the most recently ended
fiscal quarter was 3.15 to 1 or lower. The Company's ratio at March 23, 1996
was 3.05 to 1. Upon release of the collateral, the Credit Agreement and the
Senior Secured Debentures became unsecured.
S-2
<PAGE>
USE OF PROCEEDS
The Company will apply the net proceeds from the sale of the Notes,
estimated to be approximately $237.6 million, to repay amounts outstanding
under the Facility (as defined under "Description of the Credit Agreement--
General" in the accompanying Prospectus). From time to time, the Company
expects to use Facility borrowings to repurchase or redeem outstanding
indebtedness of the Company, or for other general corporate purposes. Amounts
borrowed under the Facility bear interest as described under "Description of
the Credit Agreement--Interest Rates" in the accompanying Prospectus.
Borrowings under the Facility were used for general corporate purposes,
including the repurchase of outstanding indebtedness. See "Underwriting".
S-3
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of March 23, 1996, as adjusted to give effect to the issuance of the Notes
offered hereby and the use of the gross proceeds thereof to repay amounts
under the Facility pending reborrowings, from time to time, to repurchase
outstanding indebtedness or to utilize for general corporate purposes. The
table and the related footnotes should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto, which are set
forth in the Company's Annual Report on Form 10-K and Quarterly Report on Form
10-Q which are incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
MARCH 23, 1996
-----------------------------
ACTUAL AS ADJUSTED
------------ ---------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Total current portion of long-term debt and capital
leases............................................ $ 34,242 $ 34,242
============ ============
LONG TERM DEBT:
Industrial revenue bonds........................... $ 203,785 $ 203,785
Other notes........................................ 326,948 326,948
Variable Rate Revolving Credit Facility due 2002... 1,117,373 877,373
8 1/2% Senior Secured Debentures due 2003 (1)...... 200,000 200,000
9 1/4% Senior Secured Debentures due 2005 (1)...... 130,261 130,261
Notes offered hereby............................... 240,000
10% Mortgage Loans................................. 605,665 605,665
9 3/4% Senior Subordinated Debentures due 2004 .... 100,063 100,063
9 3/4% Senior Subordinated Debentures due 2004--Se-
ries B............................................ 46,720 46,720
10% Senior Subordinated Notes due 1999............. 128,509 128,509
9 7/8% Senior Subordinated Debentures due 2002..... 85,017 85,017
9% Senior Subordinated Notes due 1999.............. 125,000 125,000
6 3/4% to 9 5/8% Senior Subordinated Notes, due
1999 to 2009 (2).................................. 355,774 355,774
------------ ------------
Total long-term debt........................... 3,425,115 3,425,115
------------ ------------
Obligations under capital leases................... 173,378 173,378
------------ ------------
SHAREOWNERS' DEFICIT:
Common capital stock, $1 par, 350,000,000 shares
authorized; 134,180,739 shares issued............. 594,499 594,499
Accumulated deficit................................ (1,870,517) (1,870,517)
Less: common stock in treasury at cost: 9,576,723
shares............................................ (243,654) (243,654)
------------ ------------
Total shareowners' deficit..................... (1,519,672) (1,519,672)
------------ ------------
Total capitalization........................... $ 2,078,821 $ 2,078,821
============ ============
</TABLE>
- --------
(1) These debentures became unsecured obligations when the collateral, which
secured the Facility and these debentures, was released on April 29, 1996.
See "Recent Developments".
(2) $18,455 of these notes are variable rate instruments.
S-4
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below is certain selected financial information of the Company.
The statement of operations data, balance sheet data and other data as of and
for the fiscal years ended December 30, 1995, December 31, 1994, January 1,
1994, January 2, 1993, and December 28, 1991 have been derived from
Consolidated Financial Statements of the Company which have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants. The
statement of operations data, balance sheet data and other data as of and for
the quarters ended March 23, 1996 and March 25, 1995 have been derived from
the unaudited financial statements of the Company. In the opinion of
management, such financial statements contain all adjustments necessary to
present fairly the financial position and the results of operations as of such
dates and for such periods. The following data should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto and the
unaudited financial statements for the quarter ended March 23, 1996, which are
incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEARS ENDED(1)
------------------------ ------------------------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28,
MARCH 23, MARCH 25, 1995 1994 1994 1993 1991
1996 1995 (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
----------- ----------- ------------ ------------ ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $ 5,784,254 $ 5,464,954 $23,937,795 $22,959,122 $22,384,301 $22,144,588 $21,350,530
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost and expenses:
Merchandise costs, in-
cluding warehousing
and transportation.... 4,367,967 4,129,439 18,098,027 17,404,940 17,109,060 17,078,839 16,480,580
Operating, general and
administrative........ 1,075,915 1,015,665 4,406,445 4,228,046 4,024,468 3,877,550 3,661,887
Rent................... 69,729 69,934 299,828 299,473 290,309 288,113 266,328
Depreciation and amor-
tization.............. 75,643 68,841 311,272 277,750 263,810 251,822 242,022
Interest expense, net.. 70,626 75,324 312,685 327,550 389,991 474,849 531,118
Restructuring and
other charges(2)...... 22,725
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ 5,659,880 5,359,203 23,428,257 22,537,759 22,100,363 21,971,173 21,181,935
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings before income
tax expense,
cumulative effect of
change in
accounting, and ex-
traordinary loss....... 124,374 105,751 509,538 421,363 283,938 173,415 168,595
Income tax expense...... 47,884 41,275 190,672 152,460 113,133 72,255 67,901
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings before
cumulative effect of
change in accounting,
and extraordinary loss. 76,490 64,476 318,866 268,903 170,805 101,160 100,694
Extraordinary loss(3)... (1,084) (5,336) (16,053) (26,707) (23,832) (107,103) (20,839)
Cumulative effect of
change in
accounting(4).......... (159,193)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)..... $ 75,406 $ 59,140 $ 302,813 $ 242,196 $ (12,220) $ (5,943) $ 79,855
=========== =========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital deficit. $ (361,076) $ (226,087) $ (458,453) $ (242,843) $ (25,001) $ (5,533) $ (94,992)
Property, plant and
equipment, net......... 2,764,729 2,266,663 2,662,338 2,252,663 1,981,308 1,877,172 1,856,748
Total assets............ 5,093,057 4,633,188 5,044,717 4,707,674 4,480,464 4,303,084 4,114,351
Long-term debt(5)....... 3,425,115 3,679,760 3,318,499 3,726,343 3,975,362 4,323,950 4,250,066
Obligations under capi-
tal leases(6).......... 173,378 160,703 171,229 162,851 159,651 149,028 157,698
Shareowners' deficit.... (1,519,672) (2,089,077) (1,603,013) (2,153,684) (2,459,642) (2,700,044) (2,749,183)
OTHER DATA:
EBITD(7)............... $ 278,143 $ 256,877 $ 1,162,824 $ 1,064,858 $ 976,792 $ 908,228 $ 967,979
Capital expenditures... 173,649 93,858 726,142 533,965 376,138 241,234 208,076
Non-cash interest...... 3,445 3,297 13,123 15,305 79,248 122,981 129,086
Ratio of earnings to
fixed charges(8)...... 2.1 1.9 2.0 1.8 1.5 1.3 1.2
Additional data--super-
markets................
Number of stores....... 1,328 1,306 1,325 1,301 1,277 1,274 1,263
Average sales per
store................. $ 4,091 $ 3,943 $ 16,972 $ 16,481 $ 16,009 $ 15,855 $ 15,465
Average square foot-
age................... 57,323 54,731 52,118 41,692 40,581 39,919 39,270
Additional data--conve-
nience stores..........
Number of stores(9).... 693 699 694 789 931 940 940
Average sales per
store................. $ 293 $ 272 $ 1,225 $ 1,139 $ 1,021 $ 974 $ 919
Average square foot-
age................... 2,600 2,582 2,602 2,560 2,514 2,506 2,500
</TABLE>
See the Notes to Summary Historical Consolidated Financial Data on the
following page.
S-5
<PAGE>
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) The Company operates with a fiscal year of 52 or 53 weeks.
(2) See Other Charges and Credits in the Notes to Consolidated Financial
Statements for information pertaining to 1994, and Other Charges in the
Notes to Consolidated Financial Statements for information pertaining to
1993.
(3) Extraordinary loss is net of income tax credit of $10,263, $17,075,
$14,607, $65,644 and $12,772, for the years ended December 30, 1995,
December 31, 1994, January 1, 1994, January 2, 1993 and December 28, 1991,
respectively.
(4) As of January 3, 1993 the Company implemented Statement of Financial
Accounting Standards ("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 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 the first quarter 1993, a one-time, non-cash charge
against earnings of $248.7 million before taxes ($159.2 million after
taxes) or $1.28 per share on a fully diluted basis. 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.
(5) Excludes current and long-term portion of obligations under capital leases
and current portion of long-term debt.
(6) Excludes current portion of obligations under capital leases.
(7) EBITD represents earnings before interest, depreciation and amortization,
restructuring and other charges, LIFO charge (credit), extraordinary
items, cumulative effect of accounting changes, and income tax expense.
This information is presented to facilitate an understanding of the Credit
Agreement covenants presented elsewhere in the accompanying Prospectus.
See "Description of the Credit Agreement--Certain Covenants."
(8) For purposes of determining the ratio of earnings to fixed charges,
"earnings" includes earnings before income tax expense, cumulative effect
of change in accounting for postretirement benefits, and extraordinary
loss, plus fixed charges (excluding capitalized interest), and "fixed
charges" consists of interest (including capitalized interest) on all
indebtedness, amortization of deferred financing costs and that portion of
rental expense which the Company believes to be representative of
interest.
(9) Decline in number of convenience stores in 1994 is related to a change in
accounting for certain franchised convenience stores. The decline in 1995
is due to the sale of Time Savers Stores, Inc.
S-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FISCAL QUARTER ENDED MARCH 23, 1996
SALES
Total sales for the first quarter of 1996 increased 5.8% from the first
quarter 1995 to a record $5.78 billion. Food store sales increased 5.5% over
the 1995 first quarter. Solid sales in the Company's existing units were
coupled with sales from 89 stores opened or expanded subsequent to the first
quarter of 1995. Square footage increased 4.8% during this same time period.
Sales in identical food stores, units that have been in operation for one full
year and have not been expanded during that period, increased 2.0% versus a
1.1% increase in 1995. These results were achieved despite increased
competitive openings in several major markets such as Phoenix, Atlanta,
Colorado Springs, and Raleigh/Durham. Identical store sales are in line with
the 1% to 2% increase expected by the Company for the entire year.
A review of sales trends by lines of business includes:
<TABLE>
<CAPTION>
% OF 1ST QUARTER
1996 ---------------------
LINES OF BUSINESS SALES 1996 1995 CHANGE
----------------- ------ ---------- ---------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Food Stores.............................. 93.9% $5,432,754 $5,149,145 +5.5%
Convenience Stores....................... 3.5% 203,275 187,053 +8.7%
Other sales.............................. 2.6% 148,225 128,756 +15.1%
------ ---------- ----------
Total sales............................ 100.0% $5,784,254 $5,464,954 +5.8%
</TABLE>
Convenience stores' identical grocery sales increased 1.5%, identical
gasoline sales increased 4.3%, and identical gas gallons increased 1.8%. Sales
for the six company convenience store group were strengthened by strong in-
store sales and gasoline gallons sold, combined with a 2.5% increase in the
average retail price per gallon of gasoline as compared to the first quarter
of 1995.
Other sales primarily consist of outside sales by the Company's
manufacturing divisions.
The Company's strategy in an environment of low food price inflation
continues to be to obtain sales growth from new square footage, as well as
increased productivity from existing locations. The Company currently expects
to increase square footage by 6% to 7% in 1996. The Company expects to
continue to realize savings from technology and logistics improvements, some
of which may be reinvested in retail price reductions to increase sales.
EBITD
The Company's Credit Agreement and the indentures underlying approximately
$1.2 billion of publicly issued debt contain various restrictive covenants,
many of which are based on earnings before interest, taxes, depreciation, LIFO
charge, and unusual and extraordinary items ("EBITD"). All EBITD based
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 March 23, 1996, 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.
S-7
<PAGE>
During the first quarter 1996, EBITD, which does not include the effect of
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", increased 8.3% to
$278.1 million from $256.9 million. The increase in EBITD was the result of
many factors, including increases in food store sales from existing and new
stores, improvements in gross profit rates from productivity gains and cost
reductions, and the controlling of operating, general and administrative
costs.
MERCHANDISE COSTS
Merchandise costs, including warehousing and transportation expense and LIFO
charges, for the first quarter 1996 declined to 75.5% of sales compared to
75.6% in the first quarter 1995. Merchandise costs were once again positively
affected by the Company's efforts in consolidated distribution and coordinated
purchasing. The decrease in merchandise costs was achieved in spite of some
logistics and manufacturing projects being in the start-up phase and producing
temporary increased costs. There has been virtually no net inflation in the
cost of product. Inflation in some commodities such as milk, wheat and corn
are being offset by cost reductions in other items, such as coffee, paper and
plastics.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in the
first quarter 1996 remained at the 1995 level of 18.6%. Operating, general and
administrative expenses were adversely affected by store opening costs from
the opening of 25 new or expanded stores in 1996 as compared to 15 in 1995's
first quarter. Operating, general and administrative costs improved from
declines in total employee costs, including health benefits and incentive pay
for both store and management employees, as well as decreases in utility
costs.
NET INTEREST EXPENSE
Net interest expense declined to $70.6 million in the first quarter 1996 as
compared to $75.3 million in last year's first quarter. The decline was due in
large part to the conversion into common stock of the Company's $200 million 6
3/8% Convertible Junior Subordinated Notes in the third quarter of 1995. The
Company expects 1996 net interest expense to total approximately $300 million.
In an effort to effectively further reduce the Company's interest expense,
the Company has purchased a portion of the debt issued by the lenders of
certain of its structured financings, which cannot be retired early. Excluding
the debt incurred to make these purchases, which are classified as
investments, the Company's long-term debt at the end of the first quarter was
$3.57 billion, down from $3.79 billion at the end of the 1995 first quarter.
The Company does not expect a material change in its debt balance during 1996
from the year end 1995 balance.
NET EARNINGS
The Company's net earnings in the first quarter 1996 were $75.4 million or
$.58 per share on a fully diluted basis as compared to net earnings in the
first quarter 1995 of $59.1 million or $.49 per share. Net earnings in 1996
were negatively affected by an extraordinary loss of $1.1 million or $.01 per
share as compared to an extraordinary loss of $5.3 million or $0.04 per share
in 1995. The extraordinary loss in both years resulted from the early
retirement of long term debt. The Company expects to incur an extraordinary
loss in each quarter of 1996 as it continues to retire high-cost debt.
Earnings before the extraordinary loss totalled $76.5 million or $.59 per
share fully diluted in 1996 as compared to $64.5 million in 1995 or $.53 per
fully diluted share.
S-8
<PAGE>
FISCAL YEAR ENDED DECEMBER 30, 1995
SALES
Total sales for the fourth quarter of 1995 were $5.9 billion compared to
$5.6 billion in the fourth quarter of 1994, a 4.9% increase. Sales for the
full year increased 4.3%. Food stores sales for the fourth quarter 1995 were
5.3% ahead of the fourth quarter 1994 and 4.9% ahead for the year. A review of
sales by lines of business for the three years ended December 30, 1995, is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
% OF 1995 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Food Stores.............. 93.9% $22,488 +4.9% $21,442 +4.9% $20,443 +1.1%
Convenience Stores....... 3.6% 850 -5.4% 898 -5.6% 951 +3.9%
Other sales.............. 2.5% 600 -3.1% 619 -37.5% 990 -3.9%
------ ------- ------- -------
Total sales.............. 100.0% $23,938 +4.3% $22,959 +2.6% $22,384 +1.1%
</TABLE>
Sales in identical food stores, stores that have been in operation and have
not been expanded or relocated for one full year, increased 1.6% in the fourth
quarter and 1.4% for the full year. The increase in food stores' sales can be
attributed primarily to inflation of less than 1%, the opening or expansion of
83 food stores, and higher average sales per customer. Higher sales per
customer are the result of the Company's focus on the combination food and
drug store, combining a food store with a pharmacy and numerous specialty
departments such as floral, video rental, book stores, etc. The emphasis and
on-going development of this "one-stop shopping" convenience format tailored
to each market is where the Company's emphasis will be placed for future sales
growth.
Convenience stores' sales decreased 5.4% for the year and 7.1% during the
fourth quarter. The decline was a result of the January 1995 sale of the
Company's Time Savers Stores, Inc. subsidiary which operated 116 stores.
Adjusting 1994 convenience store sales to exclude Time Savers sales would
result in a 5.3% increase for the quarter and a 7.6% increase for the year.
The full year 1995 sales for the remaining six company convenience store group
were enhanced by strong identical in-store sales and an increase in gasoline
retail prices. In-store sales in identical convenience stores increased 1.6%
in the fourth quarter 1995 and 2.6% for the full year. Gasoline sales at
identical convenience stores decreased 1.4% in the fourth quarter 1995 on a
.8% increase in gallons sold, and gasoline sales increased 3.2% for the year
on a .4% increase in gallons sold.
Other sales primarily consist of outside sales by the Company's
manufacturing divisions. In the first quarter of 1994, sales of general
merchandise to Hook-Superx, Inc. ("HSI") were $48.4 million and were included
in other sales. Purchases were discontinued by HSI in the first quarter of
1994. Adjusting other sales to eliminate sales to HSI would produce an
increase of 5.1% for the full year. The fourth quarter increase in other sales
as compared to 1994's fourth quarter was 12.4%.
Total sales for the fourth quarter and year-to-date increased 5.4% and 5.0%,
respectively, after adjusting for the other sales to HSI, and the exclusion of
sales from Time Savers Stores, Inc.
Total food store square footage increased 4.6%, 4.7% and 3.2% in 1995, 1994,
and 1993, respectively. The Company expects to increase retail food store
square footage by approximately 6-7% in both 1996 and 1997. Convenience store
square footage decreased 10.6% in 1995, increased .4% in 1994, and declined
.7% in 1993. Convenience store square footage increased 1.7% in 1995 after
adjusting for the disposition of Time Savers Stores, Inc.
S-9
<PAGE>
Sales per average square foot for the last three years were:
<TABLE>
<CAPTION>
TOTAL SALES
PER
AVERAGE SQUARE
FOOT
--------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Food Stores................................................. $405 $402 $398
Convenience Stores.......................................... $444 $412 $405
</TABLE>
Sales per average square foot for convenience stores for 1994 and 1995
exclude stores that are operated by franchisees.
The Company produced record sales in 1995 despite increased competition from
other food retailers, supercenters, mass merchandisers, and restaurants.
Markets that experienced strong competitive pressures in the recent past, such
as Detroit and other Michigan cities; Columbus, Ohio; and Indianapolis,
Indiana; produced outstanding comparable results. Other markets faced new
competitive challenges in 1995, such as Denver, Colorado; Phoenix, Arizona;
and Atlanta, Georgia. The Company's wide regional diversity allowed it to
withstand these challenges and to produce record results.
The sales improvement in 1994 was the result of new square footage combined
with the increased productivity of existing stores. Factors that affected 1994
sales had already begun to affect sales in 1993. Sales in 1993 showed an
improvement over 1992 in part due to the rebounding of the Michigan market
that sustained a prolonged labor strike in 1992, increased price
competitiveness of the Company, and private label popularity.
The Company's future food store strategy is to invest in existing Kroger
markets or adjacent geographic regions where the Company has a strong
franchise and can leverage marketing, distribution, and overhead dollars. It
is anticipated that this strategy will produce a negative effect on identical
sales but will create another year of improved total sales in 1996. Consistent
increases from the Company's existing store base combined with incremental
contributions from the capital spending program are expected.
EBITD
The Credit Agreement and the indentures underlying approximately $1.2
billion of publicly issued debt contain various restrictive covenants, many of
which are based on EBITD. These covenants are based, among other things, upon
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 December 30, 1995 the Company was in compliance with
all covenants of its Credit Agreement. The Company believes it has adequate
coverage of its debt covenants to continue to respond effectively to
competitive conditions.
EBITD, which does not include the effect of Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions", the Company's 1994 special
contribution to The Kroger Co. Foundation, or the 1994 charge related to the
disposition of the San Antonio stores, increased 9.2% in 1995 to $1.163
billion compared to $1.065 billion in 1994 and $977 million in 1993. EBITD
growth was generated by identical stores' sales gains, higher gross profit
margins generated by improved procurement costs, and reduced operating,
general
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and administrative expenses as a percent of sales. The Company's strong
storing program continued to produce incremental EBITD increases as well.
EBITD increases in 1994 and 1993 were due in large part to 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 the relative effect that LIFO
charges have had on merchandising costs as a percent of sales:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Merchandise costs as reported........................ 75.60% 75.81% 76.43%
LIFO charge (credit)................................. .05% .07% (.02%)
------ ------ ------
Merchandise costs as adjusted........................ 75.55% 75.74% 76.45%
</TABLE>
The Company's FIFO merchandise costs decreased for the third consecutive
year. The Company reduced the cost of products during 1995 through its
investment in technology focusing on improved store operation, procurement,
and distribution practices. Transportation and warehousing costs as a percent
of sales declined from 1994's rates. These cost reductions have allowed the
Company to pass on some of these lower costs to the customer and to make the
Company's merchandise more price competitive and attractive to customers. The
gross profit rate was favorably influenced by the Company's advances in
consolidated distribution and coordinated purchasing, reduced transportation
costs, and strong private label sales. Merchandise costs were unfavorably
affected by the increase in the LIFO charge in 1994 as compared to 1993.
Merchandise costs also were favorably affected by the discontinuance of low-
margin sales to HSI in the first quarter of 1994. Merchandise costs as a
percent of sales adjusted for these sales declined to 75.76% in 1994 from
75.97% in 1993.
The Company expects the cost of product to improve in the future as the
Company continues to use technology, outsourcing, and a variety of store level
efficiency enhancements to drive down costs.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in
1995, 1994 and 1993 were 18.41%, 18.42% and 17.98%, respectively. Excluding
the effect of sales to HSI from 1994 and 1993, operating, general and
administrative costs were 18.41%, 18.45% and 18.37% in 1995, 1994 and 1993,
respectively.
The decline in the operating, general and administrative expense rate was
the result of decreases in incentive pay, utility expense, and total employee
costs as a percent of sales. Operating, general and administrative expenses
were adversely affected by increases in credit card fees and store supplies,
reflecting increased prices for paper and plastic commodities.
The Company's goal for 1996 is to reduce operating, general and
administrative expense rates. Increased sales volume combined with investments
in new technologies and logistics programs to improve efficiencies and lower
costs while maintaining customer service, should help achieve this goal. In
1996, the Company plans on opening or expanding 115 to 120 stores compared to
83 in 1995. This expansion program will adversely affect operating, general
and administrative rates as upfront costs associated with the opening of new
stores are incurred.
INCOME TAXES
The effective income tax rates were 37.4%, 36.2% and 39.8% for 1995, 1994
and 1993, respectively. The income tax rate in 1995 was favorably affected by
state income tax refunds. Income
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tax expense for 1994 includes a $5.9 million benefit from the donation to The
Kroger Co. Foundation of an asset that had a market value above the book
value. Income tax expense for 1993 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 $302.8 million in 1995 compared to $242.2
million in 1994 and $(12.2) million in 1993. Earnings in 1995 compared to 1994
and 1993 were affected by: (i) a 1994 pre-tax charge of $4.4 million offset by
a $5.9 million tax credit in connection with the Company's contribution to The
Kroger Co. Foundation, (ii) a $25.1 million pre-tax charge in 1994 to
recognize future lease commitments and losses on equipment related to certain
San Antonio stores sold to Megafoods, Inc., which declared bankruptcy during
1994, (iii) a $25.1 million 1994 pre-tax gain on the disposition of the
Company's investment in HSI after providing for certain tax indemnities
related to HSI, (iv) a 1993 charge against earnings of $248.7 million before
taxes, $159.2 million after tax, for the cumulative effect, along with an
additional $15.2 million, $17.7 million and $19.5 million in 1995, 1994 and
1993, respectively, for the current year's effect of a change in accounting
for retiree health benefits, (v) an after tax extraordinary loss from the
early retirement of debt in 1995 of $16.1 million compared to $26.7 million in
1994 and $23.8 million in 1993, (vi) a pre-tax LIFO charge in 1995 of $14.1
million versus a charge of $16.2 million in 1994 and a credit of $3.2 million
in 1993, (vii) a $22.7 million charge ($15 million after tax) during 1993 in
connection with the disposition of the San Antonio stores, (viii) net interest
expense in 1995 of $312.7 million versus $327.6 million in 1994 and $390.0
million in 1993, and (ix) depreciation expense of $311.3 million, $277.8
million and $263.8 million in 1995, 1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net interest expense declined to $70.6 million in the first quarter 1996 as
compared to $75.3 million in last year's first quarter. Net interest expense
declined to $312.7 million in 1995 as compared to $327.6 million in 1994 and
$390.0 million in 1993.
Reduced borrowing requirements in 1995 caused by strong cash flow and lower
working capital needs combined with the September 1995 conversion of the
remaining outstanding principal balance of the Company's $200 million 6 3/8%
Convertible Junior Subordinated Notes led to a reduction in interest expense
and debt balances. Additionally, the Company repurchased and retired $283.0
million of high yield senior and subordinated debt which was financed by cash
generated from operations and lower cost bank debt. Interest expense was
adversely affected in 1995 by an increase in market rates. In 1994, the
Company repurchased or redeemed $559.5 million of high rate senior and
subordinated debt; a portion of these retirements were financed by $111.4
million of new subordinated debt and $132.3 million in additional bank
borrowings. In 1993, the proceeds from $569.7 million of new senior and
subordinated debt issues and from the issuance of 13,275,000 shares of common
stock which netted $203.5 million, were used in combination with other sources
of cash to repurchase or redeem $1.0 billion of high cost subordinated debt.
See "--Repurchase and Redemption of Debt".
The Company's Credit Agreement provides a $1.75 billion revolving credit
facility through July 20, 2002. The average interest rate on the Company's
bank debt, which totaled $1,008.2 million at year-end 1995 versus $979.3
million at year-end 1994 was 6.84% compared to 5.57% in 1994 and 4.57% in
1993. The increase is due to higher market interest rates that were not
entirely offset by lower borrowing spreads on the Company's Credit Agreement.
The Company's rate on the bank debt is variable.
The Company currently expects 1996 net interest expense, estimated using
year-end 1995 rates, to total approximately $300 million. A 1% change upward
in market rates would increase this estimated
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<PAGE>
expense by approximately $4.6 million. A 1% decrease in market rates would
reduce the estimated expense by approximately $8.9 million.
Long-term debt, including capital leases and current portion thereof,
decreased $382 million to $3.524 billion at year-end 1995 from $3.906 billion
at year-end 1994. The Company purchased a portion of the debt issued by the
lenders of certain of its structured financings, which cannot be retired
early, in an effort to effectively further reduce the Company's interest
expense. Excluding the debt incurred to make these purchases, which are
classified as investments, the Company's long-term debt would be $59.0 million
less or $3.465 billion at year-end 1995 compared to $3.837 billion at year-end
1994.
Required principal repayments over the next five years decreased to $429.2
million at year-end 1995 versus $670.7 million and $1.048 billion at year-end
1994 and 1993, respectively. Scheduled debt maturities for the five years
subsequent to 1995, 1994 and 1993 were:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year 1.......................................... $ 24,939 $ 7,926 $ 63,053
Year 2.......................................... 11,838 14,341 111,010
Year 3.......................................... 16,839 12,875 117,434
Year 4.......................................... 337,419 15,507 146,784
Year 5.......................................... 38,212 620,012 609,769
</TABLE>
In 1995, Year 4 maturities include the remaining $139.2 million of 10%
Senior Subordinated Notes, and $125.0 million of 9% Senior Subordinated Notes.
In 1994, Year 5 maturities include $125 million of 9% Senior Subordinated
Notes, $200 million of 6 3/8% Convertible Junior Subordinated Notes, and
$222.6 million of 10% Senior Subordinated Notes. In 1995 the Company issued a
redemption notice to the holders of the remaining outstanding balance of the 6
3/8% Convertible Junior Subordinated Notes. All of the holders elected to
convert the notes into approximately 10.7 million shares of common stock.
Year 5 maturities for 1993 include the entire $362.0 million outstanding
under the Company's Working Capital Facility under the predecessor to the
Company's current Credit Agreement, $68.0 million of Facility D under its
predecessor Credit Agreement, and the remaining 11 1/8% Senior Notes
outstanding at January 1, 1994 of $138.4 million, which were redeemed on March
15, 1994.
The Company currently has in place various interest rate hedging agreements
with notional amounts aggregating $3.165 billion. The effect of these
agreements is to: (i) fix the rate on $425 million floating rate debt, with
$200 million of swaps expiring in May 1996, $100 million expiring in December
1998, and the remaining $125 million expiring in January 1999, for which the
Company pays an average rate of 6.34% and receives 6 month LIBOR; (ii) fix the
rate on $530 million floating rate debt incurred to purchase the Company's
high-rate public bonds in the open market to match the original maturity of
the debt purchased, borrowing at an effective rate that is lower than the
yield to maturity of the repurchased debt and paying an average rate of 7.52%
on these agreements which will expire $75 million in 2000, $395 million in
2001, and $60 million in 2002; (iii) swap the contractual interest rate on
$350 million of seven and ten year debt instruments into floating-rate
instruments, for which the Company pays 6 month LIBOR and receives an average
rate of 7.04%, with $100 million of these contracts expiring in May 1999 and
the remaining $250 million expiring in August 2002, and concurrently, fixing
the rate on $300 million of floating rate debt, with $100 million of swaps
expiring in August 1996, $100 million in May 1997, and $100 million in August
1998, for which the Company pays an average rate of 6.38%; effectively
changing a portion of the Company's interest rate exposure from seven to ten
years to three to five years; (iv) swap the contractual interest rate on $735
million of four,
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<PAGE>
seven and ten year fixed-rate instruments into floating-rate instruments, for
which the Company pays 6 month LIBOR and receives an average rate of 5.99%,
with $75 million of these swaps expiring in February 1998, $75 million
expiring in March 1998, $50 million expiring in October 1999, $100 million
expiring in November 1999, $50 million expiring in July 2000, $110 million
expiring in November 2000, $125 million expiring in January 2001, and $150
million expiring in July 2003; and (v) cap six month LIBOR on $825 million for
an original term of one to five years at rates between 5.0% and 6.0%, with
$275 million expiring in the first quarter of 1996, $50 million of the caps
expiring in each of July 1997 and July 1998, $100 million expiring in December
1997, $100 million expiring in each of January 1997 and January 1998, and the
remaining $150 million expiring in January 1999. Interest expense was
increased $2.7 million in 1995 and reduced $13.4 million and $11.9 million in
1994 and 1993, respectively, as a result of the Company's hedging program.
To meet any short-term liquidity needs, the Company's Credit Agreement
provides for borrowings of up to $1.75 billion. The Company's borrowings under
the Credit Agreement are permitted to be in the form of commercial paper. At
March 23, 1996, the Company had $107.9 million of commercial paper outstanding
of the $1.117 billion in total bank borrowings. After deducting amounts set
aside as backup for the Company's unrated commercial paper program, $438.1
million was available under the Company's Credit Agreement to meet short-term
liquidity needs. There are no principal payments required under the Credit
Agreement until its expiration on July 20, 2002.
COMMON STOCK
On September 5, 1995 the Company issued approximately 10.7 million shares of
common stock in connection with the redemption of its 6 3/8% Convertible
Junior Subordinated Notes and the election by holders to convert their Notes
to stock.
REPURCHASE AND REDEMPTION OF DEBT
During the first quarter 1996 the Company purchased $16.8 million of its
various long-term debt issues.
During 1995 the Company issued a notice in which it elected to redeem the
remaining outstanding amount of its 6 3/8% Convertible Junior Subordinated
Notes. The holders elected thereupon to convert their Notes into 10.7 million
shares of common stock. The Company also repurchased, on the open market,
$29.1 million of its 9 1/4% Senior Secured Debentures and $253.9 million of
its various senior subordinated debt issues. The repurchases were effected
using additional bank borrowings, cash from operations, proceeds from the sale
of assets, and working capital improvements. The outstanding balances of these
debt issues at December 30, 1995, were $857.1 million for the Senior
Subordinated Debt issues and $131.0 million for the 9 1/4% Senior Secured
Debentures.
During 1994 the Company redeemed the remaining outstanding amounts of its 11
1/8% Senior Notes, its 8 3/4% Senior Subordinated Reset Notes, and its 8 1/4%
Convertible Junior Subordinated Debentures. The Company also repurchased
$144.8 million of its various senior subordinated debt issues and $39.9
million of its 9 1/4% Senior Secured Debentures. The redemptions and
repurchases were affected using funds from asset sales, the sale of treasury
stock to employee benefit plans, proceeds from new financings, excess cash
from operations and additional bank borrowings. The outstanding balances of
these debt issues at December 31, 1994, were $1.105 billion for the Senior
Subordinated Debt issues and $160.2 million for the 9 1/4% Senior Secured
Debentures.
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.
S-14
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures for the first quarter 1996 totaled $173.6 million as
compared to $93.9 million for the first quarter 1995. Capital expenditures for
the year are expected to total approximately $850 million as compared to
$726.1 million during all of 1995. The increase reflects the Company's
strategy of growth through expansion as well as the Company's emphasis,
whenever possible, on self-development and ownership of store real estate.
Capital expenditures totaled $726.1 million for 1995, a 36% increase over
1994's total of $534.0 million. Capital outlays in 1993 were $376.1 million.
During 1995 the Company opened, acquired or expanded 83 food stores and 19
convenience stores compared to 82 food stores and 17 convenience stores in
1994 and 46 food stores and 10 convenience stores in 1993. The Company also
completed 62 food store and 12 convenience store remodels during 1995. During
1995, 32 food stores were closed or sold. The Company closed 13 convenience
stores during 1995 and completed the sale of its 116 store Time Savers
convenience store subsidiary.
Capital expenditures in 1995 include $492.7 million of construction-in-
progress at year-end compared to $284.9 million at year-end 1994; a 73%
increase. This increase reflects the Company's strategy of growth through
expansion as well as the Company's emphasis, whenever possible, on self-
development of store projects, which take many months to complete. The Company
prefers self-development rather than build-to-suit leases because of the
Company's favorable borrowing rates. The annual occupancy cost for a company-
owned store is approximately $1 per square foot less expensive than for a
leased store. In 1995 the Company opened or expanded 23 more Company owned
stores and properties than in 1994.
The Company expects 1996 capital expenditures, including additional Company
owned real estate, logistics projects, and continuing technology investments,
to total approximately $850 million. Food store square footage is expected to
increase 6-7% by the opening, expansion or acquisition of approximately 115
food stores. The Company also expects to complete within-the-wall remodels of
50-60 food stores. 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
execute its capital expenditure plan will depend, in part, on its ability to
generate continued EBITD growth.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company generated $35.0 million of cash from operating activities during
the first quarter 1996 compared to $135.6 million in last year's first
quarter. The decrease was due primarily to an investment in working capital
during the first quarter of 1996, partially offset by higher net earnings.
During 1995 the Company generated $798.5 million in cash from operating
activities compared to $750.3 million in 1994 and $617.3 million in 1993. The
increase from 1994 is primarily due to an increase in net earnings before
extraordinary losses of $50.0 million. Additionally, non-cash charges against
operating income for depreciation and amortization increased $31.4 million and
non-operating gains included in net earnings decreased $21.8 million.
Offsetting these net increases in cash from operating activities was a
decrease of $52.9 million in cash from changes in operating assets and
liabilities. This decrease was primarily the result of a net increase in long-
term liabilities of only $12.6 million as compared to $58.0 million in 1994.
The increase in 1994 from 1993 is due to an increase in net earnings before
extraordinary loss of $98.1 million and an increase in cash from changes in
operating assets and liabilities of $195.9 million as compared to $105.5
million in 1993.
Investing activities used $171.0 million in cash during the first quarter of
1996 as compared to $62.1 million last year. Cash generated by operating and
financing activities is being used for additional capital expenditures. The
Company's capital investment in the first quarter of 1996 increased
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<PAGE>
$79.8 million from the first quarter of 1995. Also contributing to the net
increase in the use of cash for investment activities was the decline of $34.3
million in the cash proceeds from the sale of assets.
Investing activities in 1995 used $665.6 million compared to $546.5 million
of cash used in 1994 and $368.3 million of cash used in 1993. The increase in
the use of cash in 1995 is due to an expansion in the level of capital
expenditures over 1994 of $192.2 million, and a decline of $22.8 million in
the source of cash from sales of assets. Offsetting these uses of cash was a
$73.2 million net decrease in the use of cash for the purchase of investments
and a $22.6 million reduction in additions to property held for sale. The
increase in 1994 from 1993 was due to additional capital expenditures of
$157.8 million, an increase of $43.5 million in the use of cash for
investments and $8.8 million for 1994 additions to property held for sale,
offset by a net increase of $32.0 million in the source of cash from sales of
assets. The increase in investments in 1994 was primarily due to the purchase
of debt issued by a lender of certain of the Company's structured financings.
See "--Liquidity and Capital Resources".
Financing activities provided $135.9 million in cash during the first
quarter of 1996 as compared to a use of cash of $52.4 million during the first
quarter of 1995. The Company borrowed an additional $109.2 million under its
bank Credit Agreement during the first quarter of 1996 and obtained an
additional $18.3 million from other debt issues and commercial paper offerings
while repurchasing only $20.6 million of other long term debt. This compared
to a net debt reduction in the first quarter of 1995 of $46.3 million.
Additionally, cash used for debt prepayment costs and new financing charges
used only $1.7 million as compared to $9.1 million in 1995 and book overdrafts
provided an additional $25.5 million in 1996.
Cash used by financing activities in 1995 totaled $160.2 million compared to
$297.8 million and $231.7 million in 1994 and 1993, respectively. The decrease
in the use of cash during 1995 as compared to 1994 is due to a 1995 net debt
reduction of $191.0 million versus 1994's net debt reduction of $304.1
million. Additionally, $18.6 million less cash was needed for debt prepayments
and finance charges and an additional $18.6 million was provided by book
overdrafts. Offsetting these items was a $12.3 million reduction in cash
provided from the sale of stock and related transactions. The increase in 1994
from 1993 is due to a net reduction in proceeds from the sale of stock offset
by a lower level of debt reduction.
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 160,000 of the Company's employees.
During 1995 the Company negotiated over 50 labor contracts, all of which were
settled with no work stoppages. Typical agreements are 3 to 5 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. Major union contracts that will be negotiated in 1996 include
Denver, Dallas and Toledo store employees.
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company
will implement the statement in the first quarter 1996, the effect of which
will not be significant to the financial statements.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company expects to elect to continue to measure
compensation cost for stock compensation plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The 1996 adoption of FASB No. 123,
therefore, will have no effect on reported earnings.
S-16
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby (referred to in the accompanying Prospectus as the "Offered Debt
Securities") supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the Debt Securities set
forth in the Prospectus, to which description reference is hereby made. The
Notes will be issued under a Senior Indenture dated as of July 15, 1996 (as
amended and supplemented from time to time, the "Senior Indenture"), between
the Company and Comerica Bank, as Trustee (the "Senior Trustee"). Certain
defined terms in the Indenture are capitalized herein. Whenever a defined term
is referred to and not herein defined, the definition thereof is contained in
the Indenture.
GENERAL
The Notes offered hereby will be limited to $240,000,000 aggregate principal
amount and will mature on July 15, 2006. The Notes will bear interest from
July 15, 1996 at the rate per annum shown on the front cover of this
Prospectus Supplement payable semiannually on January 15 and July 15 of each
year and at maturity (each such date is herein called an "Interest Payment
Date"), commencing January 15, 1997, to the person in whose name the Note (or
one or more predecessor Notes) is registered at the close of business on the
January 1 or July 1, as the case may be, next preceding such Interest Payment
Date.
The Notes rank pari passu in right of payment with any existing and future
unsecured senior indebtedness of the Company and senior to all existing and
future subordinated indebtedness of the Company.
The Notes are unsecured and not entitled to any sinking fund.
The Notes will be issued only in registered, book-entry form, in
denominations of $1,000 and any integral multiple thereof.
In the case where any Interest Payment Date or the maturity date of the
Notes does not fall on a Business Day, payment of interest or principal
otherwise payable on such day need not be made on such day, but may be made on
the next succeeding Business Day with the same force and effect as if made on
such interest Payment Date or the maturity date of the Notes, as the case may
be, and no interest shall accrue for the period from and after such Interest
Payment Date or maturity date. The term "Business Day" shall mean any day
other than a Saturday or Sunday or a day on which banking institutions in New
York City or Detroit, Michigan are authorized or obligated by law or executive
order to close.
OPTIONAL REDEMPTION
The Notes are not subject to redemption prior to maturity.
COVENANTS
The Senior Indenture provides that the following covenants will be
applicable to the Company:
Limitations on Liens. The Company covenants that, so long as any Notes
remain outstanding, it will not, and will not permit any Restricted Subsidiary
(as defined below) to issue, assume or guarantee any Indebtedness which is
secured by a mortgage, pledge, security interest, lien or encumbrance of any
kind (including any conditional sale or other title retention agreement, any
lease in the nature thereof, and any agreement to give any of the foregoing)
(each a "lien") upon any Operating Property or Operating Asset, whether now
owned or hereafter acquired, of the Company or any Restricted Subsidiary
without effectively providing that the Notes (together with, if the Company
shall so
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<PAGE>
determine, any other Indebtedness of the Company ranking equally with the
Notes) shall be equally and ratably secured by a lien on such assets ranking
ratably with or equal to (or at the Company's option prior to) such secured
Indebtedness, except that the foregoing restriction shall not apply to (a)
liens on any property or assets of any corporation existing at the same time
such corporation becomes a Restricted Subsidiary provided that such lien does
not extend to any other property of the Company or any of its Restricted
Subsidiaries; (b) liens on any property or assets (including stock) existing
at the time of acquisition thereof, or to secure the payment of the purchase
price of such property or assets, or to secure indebtedness incurred, assumed
or guaranteed by the Company or a Restricted Subsidiary for the purpose of
financing the purchase price of such property or of improvements or
construction thereon or attaching to property substituted by the Company to
obtain the release of a lien on other property of the Company on which a lien
then exists, which indebtedness is incurred, assumed or guaranteed prior to,
at the time of, or within 18 months after such acquisition (or in the case of
real property, completion of such improvement or construction or commencement
of full operations at such property, whichever is later (which in the case of
a retail store is the opening of the store for business to the public))
provided that such lien does not extend to any other property of the Company
or any of its Restricted Subsidiaries; (c) liens securing indebtedness owing
by any Restricted Subsidiary to the Company or another Restricted Subsidiary;
(d) liens on any property or assets of a corporation existing at the time such
corporation is merged into or consolidated with the Company or a Restricted
Subsidiary or at the time of a purchase, lease or other acquisition of the
assets of a corporation or firm as an entirety or substantially as an entirety
by the Company or a Restricted Subsidiary provided that such lien does not
extend to any other property of the Company or any of its Restricted
Subsidiaries; (e) liens on any property or assets of the Company or a
Restricted Subsidiary in favor of the United States of America or any State
thereof, or in favor of any other country or political subdivision thereof, to
secure certain payments pursuant to any contract or statute or to secure any
indebtedness incurred or guaranteed for the purpose of financing all or any
part of the purchase price (or, in the case of real property, the cost of
construction) of the property or assets subject to such liens (including but
not limited to, liens incurred in connection with pollution control,
industrial revenue or similar financing); (f) liens existing on properties or
assets of the Company or any Restricted Subsidiary existing on the date
hereof; provided that such liens shall secure only those obligations which
they secure on the date hereof or any extension, renewal or replacement
thereof; (g) any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part, of any lien referred to in the
foregoing clauses (a) to (f), inclusive; (h) certain statutory liens or other
similar liens arising in the ordinary course of business of the Company or a
Restricted Subsidiary, or certain liens arising out of governmental contracts;
(i) certain pledges, deposits or liens made or arising under worker's
compensation or similar legislation or in certain other circumstances; (j)
certain liens in connection with legal proceedings, including certain liens
arising out of judgments or awards; (k) liens for certain taxes or
assessments, landlord's liens, mechanic's liens and liens and charges
incidental to the conduct of the business, or the ownership of the property or
assets of the Company or of a Restricted Subsidiary, which were not incurred
in connection with the borrowing of money and which do not in the opinion of
the Company, materially impair the use of such property or assets in the
operation of the business of the Company or such Restricted Subsidiary or the
value of such property or assets for the purposes thereof; or (l) liens not
permitted by the foregoing clauses (a) to (k), inclusive, if at the time of
and after giving effect to, the creation or assumption of such liens, the
aggregate amount of all Indebtedness of the Company and its Restricted
Subsidiaries secured by all liens not so permitted by the foregoing clauses
(a) through (k), inclusive, together with the Attributable Debt (as defined
below) in respect of Sale and Lease-Back Transactions permitted by clause (a)
under "Limitation on Sale and Lease-Back Transactions" below, does not exceed
10% of Consolidated Net Tangible Assets (as defined below).
Limitation on Sale and Lease-Back Transactions. So long as any Notes under
the Senior Indenture are outstanding, the Company will not, and will not
permit any Restricted Subsidiary to, enter into any arrangement with any
person providing for the leasing by the Company or a Restricted
S-18
<PAGE>
Subsidiary of any Operating Property or Operating Asset (other than any such
arrangement involving a lease for a term, including renewal rights, for not
more than three years and leases between the Company and a Subsidiary or
between Subsidiaries), whereby such Operating Property or Operating Asset has
been or is to be sold or transferred by the Company or a Restricted Subsidiary
to such person (a "Sale and Lease-Back Transaction") unless (a) the Company or
such Restricted Subsidiary would, at the time of entering into a Sale and
Lease-Back Transaction, be entitled to incur Indebtedness secured by a lien on
the Operating Property or Operating Asset to be leased in an amount at least
equal to the Attributable Debt in respect of such transaction without equally
and ratably securing the Notes pursuant to the provisions described under
"Limitations on Liens" above, or (b) the proceeds of the sale of the Operating
Property or Operating Assets to be leased are at least equal to their fair
market value and an amount in cash equal to the net proceeds is applied,
within 180 days of the effective date of such transactions to the purchase or
acquisition (or, in the case of Operating Property, the construction) of
Operating Property or Operating Assets or to the retirement, repurchase,
redemption or repayment (other than at maturity or pursuant to a mandatory
sinking fund or redemption provision and other than Indebtedness owned by the
Company or any Restricted Subsidiary) of Notes or of Funded Indebtedness (as
defined below) of the Company ranking on a parity with or senior to the Notes,
or in the case of a Sale and Lease-Back Transaction by a Restricted
Subsidiary, of Funded Indebtedness of such Restricted Subsidiary, provided
that in connection with any such retirement, any related loan commitment or
the like shall be reduced in an amount equal to the principal amount so
retired. The foregoing restriction shall not apply to, in the case of any
Operating Property or Operating Assets acquired or constructed subsequent to
the date eighteen months prior to the date of the Indenture, any Sale and
Lease-Back Transaction with respect to such Operating Asset or Operating
Property (including presently owned real property upon which such Operating
Property is to be constructed) if a binding commitment is entered into with
respect to such Sale and Lease-Back Transaction within 18 months after the
later of the acquisition of the Operating Property or Operating Asset or the
completion of improvements or construction thereon or commencement of full
operations at such Operating Property (which in the case of a retail store is
the opening of the store for business to the public).
DEFINITIONS
"Attributable Debt" means in connection with a Sale and Lease-Back
Transaction the total net amount of rent required to be paid during the
remaining primary term of such lease, discounted at a rate per annum equal to
the interest rate on the Notes, calculated in accordance with generally
accepted accounting principles. The net amount of rent required to be paid
under any such lease for any such period shall be the aggregate amount of rent
payable by the lessee with respect to such period after excluding amounts
required to be paid on account of maintenance, repairs, insurance, taxes,
assessments, utility, operating and labor costs and similar charges.
"Capital Lease" means any lease of property which, in accordance with
generally accepted accounting principles, should be capitalized on the
lessee's balance sheet or for which the amount of the asset and liability
thereunder as if so capitalized should be disclosed in a note to such balance
sheet; and "Capitalized Lease Obligation" means the amount of the liability
which should be so capitalized or disclosed.
"Consolidated Net Tangible Assets" means, for the Company and its
Subsidiaries on a consolidated basis determined in accordance with generally
accepted accounting principles, the aggregate amounts of assets (less
depreciation and valuation reserves and other reserves and items deductible
from gross book value of specific asset accounts under generally accepted
accounting principles) which under generally accepted accounting principles
would be included on a balance sheet after deducting therefrom (a) all
liability items except deferred income taxes, commercial paper, short-term
bank Indebtedness, Funded Indebtedness, other long-term liabilities and
shareholders' equity and (b) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles.
S-19
<PAGE>
"Funded Indebtedness" means any Indebtedness maturing by its terms more than
one year from the date as of which the determination is made, including (i)
any Indebtedness having a maturity of 12 months or less but by its terms being
renewable or extendible at the option of the borrower beyond 12 months from
such date of determination and (ii) rental obligations payable more than 12
months from such date under Capital Leases (such rental obligations to be
included as Funded Indebtedness at the amount so capitalized at the date of
such computation and to be included for the purposes of the definition of
Consolidated Net Tangible Assets both as an asset and as Funded Indebtedness
at the amount so capitalized).
"Operating Assets" means all merchandise inventories, furniture, fixtures
and equipment (including all transportation and warehousing equipment but
excluding office equipment and data processing equipment) owned or leased
pursuant to Capital Leases by the Company or a Restricted Subsidiary.
"Operating Property" means all real property and improvements thereon owned
or leased pursuant to Capital Leases by the Company or a Restricted Subsidiary
and constituting, without limitation, any store, warehouse, service center or
distribution center wherever located, provided that such term shall not
include any store, warehouse, service center or distribution center which the
Company's Board of Directors declares by written resolution not to be of
material importance to the business of the Company and its Restricted
Subsidiaries.
"Restricted Subsidiaries" means all Subsidiaries other than Non-Restricted
Subsidiaries. "Non-Restricted Subsidiary" means any Subsidiary that the
Company's Board of Directors has in good faith declared pursuant to a written
resolution not to be of material importance, either singly or together with
all other Non-Restricted Subsidiaries, to the business of the Company and its
consolidated Subsidiaries taken as a whole.
"Subsidiary" means (i) any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions are at
the time directly or indirectly owned by the Company and/or one or more
Subsidiaries or (ii) any partnership of which more than 50% of the partnership
interest is owned by the Company or any Subsidiary.
The covenants applicable to the Notes would not necessarily afford holders
protection in the event of a highly leveraged or other transaction involving
the Company or in the event of a material adverse change in the Company's
financial condition or results of operation, and the Notes do not contain any
other provisions that are designed to afford protection in the event of a
highly leveraged transaction involving the Company.
MERGER AND CONSOLIDATION
The Senior Indenture provides that the Company will not merge or consolidate
with any corporation, partnership or other entity and will not sell, lease or
convey all or substantially all its assets to any entity, unless the Company
shall be the surviving entity, or the surviving entity or the successor entity
that acquires all or substantially all the assets of the Company shall be a
corporation or partnership organized under the laws of the United States or a
State thereof or the District of Columbia and shall expressly assume all
obligations of the Company under the Senior Indenture and the Notes issued
thereunder, and immediately after such merger, consolidation, sale, lease or
conveyance, the Company or such successor entity shall not be in default in
the performance of the covenants and conditions of the Senior Indenture to be
performed or observed by the Company.
EVENTS OF DEFAULT
The "Events of Default" with respect to the Notes will consist of the events
set forth in clauses (a) through (e) as described in the first paragraph under
"Description of Debt Securities--Events of Default and Notice Thereof" in the
Prospectus.
S-20
<PAGE>
BOOK-ENTRY SYSTEM
Upon issuance, the Notes will be represented by one or more global
securities (the "Book-Entry Notes"). Each global security representing the
Book-Entry Notes will be deposited with, or on behalf of, The Depository Trust
Company, as Depositary (the "Depositary"), and registered in the name of a
nominee of the Depositary. Book-Entry Notes will not be exchangeable at the
option of the Holder for certificated Notes and, except under the
circumstances described below, will not otherwise be issuable in definitive
form.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, a "clearing corporation,"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions among its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly.
Upon issuance of the Book-Entry Notes, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Notes represented by such Book-Entry Notes to the accounts of
institutions that have accounts with the Depositary or its nominee
("participants"). The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in the Book-Entry Notes will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in such Book-Entry Notes will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to
participants' interests) for such Book-Entry Notes or by participants or
persons that hold through participants. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability to transfer
beneficial interests in the Book-Entry Notes.
So long as the Depositary or its nominee, is the registered owner of the
Book-Entry Notes, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Book-Entry Notes for all purposes
under the Senior Indenture. Except as set forth below, owners of beneficial
interests in such Book-Entry Notes will not be entitled to have the Notes
represented by such Book-Entry Notes registered in their names, will not
receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or holders thereof under the Senior
Indenture.
Principal and interest payments on Book-Entry Notes registered in the name
of or held by the Depositary or its nominee will be made to the Depositary or
its nominee, as the case may be, as the registered owner or holder of the
Book-Entry Notes. Neither the Company, the Trustee nor any paying agent for
such Book-Entry Notes will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in Book-Entry Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payments of
principal or interest in respect of the Book-Entry Notes, will credit
immediately the accounts of the related participants with
S-21
<PAGE>
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Book-Entry Notes as shown on the records of the
Depositary. The Company also expects that payments by participants to owners
of beneficial interests in such Book-Entry Notes held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such participants.
Unless and until it is exchanged, in whole or in part, for Notes in
definitive form in accordance with the terms of the Notes, the Book-Entry
Notes may not be transferred except as a whole by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to
a successor of the Depositary or a nominee of such successor. If the
Depositary is at any time unwilling or unable to continue as depository or if
at any time the Depositary ceases to be a clearing agency registered under the
Securities Exchange Act of 1934, as amended, and a successor Depositary is not
appointed by the Company within 90 days, the Company will issue Notes in
definitive registered form in exchange for the Book-Entry Notes. In addition,
the Company may at any time and in its sole discretion determine not to have
any Notes represented by one or more Book-Entry Notes. Further, if an event of
default, or an event which, with the giving of notice or lapse of time, or
both, would constitute an event of default under the Senior Indenture occurs
and is continuing with respect to the Notes, or if the Company so specifies
with respect to the Notes, the Depositary may exchange the Book-Entry Notes
for Notes in definitive registered form. In any such instance, an owner of a
beneficial interest in a Book-Entry Note will be entitled to physical delivery
in definitive form of Notes represented by such Book-Entry Note in principal
amount equal to such beneficial interest and to have such Notes registered in
its name.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under terms satisfactory to the Senior Trustee, the Company may discharge
certain obligations to holders of the Notes which have not already been
delivered to the Senior Trustee for cancellation and which have either become
due and payable or are by their terms due and payable within one year (or
scheduled for redemption within one year) by irrevocably depositing with the
Senior Trustee cash or U.S. Government Obligations (as defined in the Senior
Indenture) as trust funds in an amount certified to be sufficient to pay at
maturity (or upon redemption) the principal of and interest on the Notes.
The Company may also discharge any and all of its obligations to holders of
the Notes at any time ("defeasance"), but may not thereby avoid its duty to
register the transfer or exchange of the Notes, to replace any temporary,
mutilated, destroyed, lost, or stolen Notes or to maintain an office or agency
in respect of such series of the Notes. Defeasance may be effected only if,
among other things: (i) the Company irrevocably deposits with the Trustee cash
or U.S. Government Obligations as trust funds in an amount certified to be
sufficient to pay at maturity the principal of and interest on all outstanding
Notes; and (ii) the Company delivers to the Senior Trustee an opinion of
counsel to the effect that the holders of the Notes will not recognize income,
gain or loss for United States federal income tax purposes as a result of such
defeasance and that defeasance will not otherwise alter such holders' United
States federal income tax treatment of principal and interest payments on the
Notes (such opinion must be based on a ruling of the Internal Revenue Service
or a change in United States federal income tax law occurring after the date
of the Senior Indenture, since such a result would not occur under current tax
law).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds.
S-22
<PAGE>
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
will trade in the Depositary's same-day funds settlement system until
maturity, and secondary market trading activity in the Notes will therefore be
required by the Depositary to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.
THE TRUSTEE
Comerica Bank, a Michigan banking corporation with its principal offices at
411 West Lafayette, 4th Floor, Detroit, Michigan 48226, will act as Trustee
for the benefit of the Holders of the Notes under the Senior Indenture.
Comerica Bank is a Lender under the Facility, and the Company may maintain
other banking relationships with the Trustee in the ordinary course of
business.
S-23
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Pricing Agreement, the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has severally agreed to
purchase, the principal amount of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------- ------------
<S> <C>
Goldman, Sachs & Co. ........................................ $ 96,000,000
J.P. Morgan Securities Inc. ................................. 72,000,000
Chase Securities Inc. ....................................... 24,000,000
Citicorp Securities, Inc. ................................... 24,000,000
First Chicago Capital Markets, Inc. ......................... 24,000,000
------------
Total.................................................... $240,000,000
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement and the Pricing
Agreement, the Underwriters are committed to take and pay for all of the
Notes, if any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession of 0.50% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a concession not to
exceed 0.25% of the principal amount of the Notes to certain brokers and
dealers. After the Notes are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
From time to time, certain of the Underwriters or their affiliates have
provided various commercial or investment banking services and other services
to the Company and its affiliates. In addition, Citicorp Securities, Inc. is
an affiliate of Citibank, N.A., which is an Administrative Agent, Paying Agent
and Lender under the Facility. Chase Securities Inc. is an affiliate of The
Chase Manhattan Bank (formerly Chemical Bank), which is an Administrative
Agent, Collateral Agent and Lender under the Facility. J.P. Morgan Securities
Inc. and First Chicago Capital Markets, Inc. are affiliates of Lenders under
the Facility. The proceeds of the offering of the Notes will be used to repay
borrowings under the Facility.
Affiliates of the Underwriters will in aggregate receive more than 10% of
the proceeds of this offering as a result of the repayment of borrowings under
the Facility. Accordingly, this offering is being conducted in accordance with
Rule 2710(c)(8) of the National Association of Securities Dealers, Inc.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
S-24
<PAGE>
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for the Company by Paul W.
Heldman, Esq., Vice President, Secretary and General Counsel of the Company,
and for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Mr.
Heldman may rely as to matters of New York law upon the opinion of Fried,
Frank, Harris, Shriver & Jacobson, and Fried, Frank, Harris, Shriver &
Jacobson may rely as to matters of Ohio law upon the opinion of Mr. Heldman.
In rendering their opinions on the validity of the Notes, Paul W. Heldman and
Fried, Frank, Harris, Shriver & Jacobson will express no opinion as to the
applicability of any federal or state law relating to fraudulent transfers or
as to any state law relating to the payment of dividends. As of March 31,
1996, Mr. Heldman owned approximately 10,550 shares of the Company's Common
Stock and had options to acquire an additional 113,352 shares. Fried, Frank,
Harris, Shriver & Jacobson from time to time perform legal services for the
Company.
S-25
<PAGE>
THE KROGER CO.
DEBT SECURITIES
----------------
The Kroger Co. (together with its consolidated subsidiaries, the "Company")
may offer for sale from time to time, in one or more series up to $744,226,000
aggregate principal amount of its debt securities (the "Debt Securities") on
terms determined at the time of sale. The specific designation, aggregate
principal amount, authorized denominations, purchase price, initial public
offering price, maturity, rate (which may be fixed or variable) and time of
payment of any interest, any redemption terms or other specific terms and any
listing on a securities exchange of any Debt Securities offered, in respect of
which this Prospectus is being delivered, will be set forth in the
accompanying Prospectus Supplement (the "Prospectus Supplement"), together
with the terms for the offering of the Debt Securities. At the option of the
Company, Debt Securities may be issued as Senior Debt Securities or as
Subordinated Debt Securities. This Prospectus may not be used to consummate
the sale of Debt Securities unless accompanied by a Prospectus Supplement.
The Debt Securities may be sold in one or more transactions directly,
through agents designated from time to time, or through underwriters or
dealers, which may be a group of underwriters represented by underwriters'
representatives. If any agents of the Company or any underwriters are involved
in the sale of the Debt Securities, the names of such agents or underwriters,
the principal amount, if any, to be purchased by the underwriters and any
applicable commissions or discounts will be set forth in the Prospectus
Supplement. The net proceeds to the Company from each sale will also be set
forth in the Prospectus Supplement. As used herein, Debt Securities shall
include securities denominated in United States dollars or, at the option of
the Company if so specified in the Prospectus Supplement, in any other
currency or in composite currencies or in amounts determined by reference to
an index.
SEE "RISK FACTORS" AT PAGE 3 HEREIN FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE DEBT SECURITIES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS JULY 15, 1996
<PAGE>
AVAILABLE INFORMATION
The Kroger Co. (together with its consolidated subsidiaries, the "Company")
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed with the Commission can be inspected and copied at the
Commission's public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies
of such material can be obtained by mail from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such reports, proxy statements and other information also
can be inspected at the offices of the New York Stock Exchange, Inc. ("NYSE"),
20 Broad Street, New York, New York 10005.
The Company has filed a registration statement on Form S-3 (herein, together
with all amendments and exhibits, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits filed as a part thereof. Statements contained
herein concerning any document filed as an exhibit are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such references.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 30, 1995,
as amended.
2. Quarterly Report on Form 10-Q for the quarter ended March 23, 1996.
3. Reports on Form 8-K dated January 25, 1996 and April 17, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Debt Securities shall be deemed to be
incorporated herein by reference and to be a part hereof from the respective
dates of filing of such documents.
Any statement contained in a document incorporated or deemed incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus and the Registration Statement of which it is a part to the
extent that a statement contained herein or in any other subsequently filed
document which is also incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or such Registration Statement.
The Company will provide without charge to each person, including a
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to The Kroger Co.,
1014 Vine Street, Cincinnati, Ohio 45202, Attention: Paul W. Heldman, (513)
762-4000.
2
<PAGE>
RISK FACTORS
The following factors, in addition to other information set forth in this
Prospectus, should be considered carefully in evaluating the Company and its
business before acquiring any Debt Securities offered by this Prospectus.
The Indentures, as hereinafter defined, will not provide any protection to
the Holders of the Debt Securities in the event of a decline in credit quality
resulting from takeovers, recapitalizations or similar restructurings.
SUBSTANTIAL INDEBTEDNESS
At March 23, 1996, the Company had $3.6 billion of indebtedness outstanding,
including $1,117.4 million outstanding under the Senior Competitive Advance
and Revolving Credit Facility Agreement (the "Credit Agreement"), dated as of
July 19, 1994, as amended, among the Company and Chemical Bank and Citibank,
N.A., as administrative agents, and the lenders named therein (collectively,
the "Senior Lenders") (with an additional $438.1 million available for
borrowing under the Working Capital Facility thereof). This degree of leverage
has important consequences to investors in the Debt Securities. The Company
has significant interest payment and principal repayment obligations and the
ability of the Company to satisfy such interest and principal obligations is
subject to prevailing economic, financial and business conditions and to other
factors beyond the Company's control. A significant portion of the Company's
indebtedness bears interest at floating rates causing the Company's results of
operations to be sensitive to prevailing interest rates.
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT AND OTHER AGREEMENTS
The Credit Agreement contains numerous restrictive covenants which, among
other things, restrict the ability of the Company to dispose of assets, incur
debt, pay dividends, make capital expenditures and make certain investments or
acquisitions and which otherwise restrict corporate activities. In addition,
the Company is required to maintain specified financial ratios and levels,
including fixed charge coverage, total debt and senior debt ratios. The
ability of the Company to comply with such provisions depends on its future
performance, which is subject to prevailing economic, financial and business
conditions and to other factors beyond the Company's control.
The indentures relating to the Company's outstanding public debt securities
place limitations on, among other things, the Company's ability to incur
indebtedness, pay dividends, acquire assets and enter into leases and sale and
leaseback transactions. The indentures, however, do not contain any covenant
requiring the Company to meet or maintain on a day-to-day basis any specific
financial test or ratio.
LABOR AGREEMENTS
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 150,000 of the Company's employees.
Among the contracts that have expired or will expire in 1996 are those
covering food clerks in Dallas, Toledo and Denver. Typical agreements are 3 to
5 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
Company's results of operations or financial position.
LEGAL PROCEEDINGS
There are pending against the Company various claims and lawsuits arising in
the normal course of business, including suits charging violations of certain
antitrust and civil rights laws. Some of these suits purport or have been
determined to be class actions and/or seek substantial damages. Any damages
that may be awarded in antitrust cases will be automatically trebled. Although
it is not
3
<PAGE>
possible at this time to evaluate the merits of these claims and lawsuits, nor
their likelihood of success, the Company is of the opinion that any resulting
liability will not have a material adverse effect on the Company's results of
operations or financial position.
Fry's Food Stores of Arizona, Inc. ("Fry's"), a subsidiary of the Company,
is currently a defendant and cross-defendant in actions pending in the U.S.
District Court for the Southern District of Florida (the "Court") entitled
Harley S. Tropin v. Kenneth Thenen, et. al., No. 93-2502-CIV-MORENO and Walco
Investments, Inc., et. al. v. Kenneth Thenen, et. al., No. 93-2534-CIV-MORENO.
The plaintiff and cross-claimants in these actions seek unspecified damages
against numerous defendants and cross-defendants, including Fry's. Plaintiffs
and cross-claimants allege that a former employee of Fry's supplied false
information to third parties in connection with purported sales transactions
between Fry's and affiliates of Premium Sales Corporation or certain limited
partnerships. Claims have been alleged against Fry's for breach of implied
contract, aiding and abetting conspiracy, conversion and civil theft,
negligent supervision, fraud, and violations of 18 U.S.C. (S)(S) 1961 and
1962(d) and Chapter 895, Florida Statutes. Fry's has entered into an agreement
with Harley S. Tropin as trustee and receiver for the Premium Sales
Corporation and certain affiliates to settle all claims against Fry's. That
agreement is subject to the execution of a definitive settlement agreement and
the approval of the Court.
THE COMPANY
The Company was founded in 1883, incorporated in 1902, and maintains its
principal executive offices in Cincinnati, Ohio. The Company is the nation's
largest supermarket operator measured by total sales for 1995. At December 30,
1995, the Company operated 1,325 supermarkets in 24 states and 694 convenience
stores in 15 states. Additionally the Company had 125 franchised convenience
stores in 4 states. The Company also operates food processing facilities which
enable the Company's stores to offer quality, low-cost private label
perishable and non-perishable products, and an efficient warehouse and
distribution system which supplies products to its stores.
The Company's principal executive offices are located at 1014 Vine Street,
Cincinnati, Ohio 45202, and its telephone number at that address is (513) 762-
4000.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table presents the consolidated ratio of earnings to fixed
charges for the Company. For purposes of determining the ratio of earnings to
fixed charges, "earnings" includes earnings before tax expense, cumulative
effect of change in accounting for income taxes and extraordinary loss, plus
fixed charges (excluding capitalized interest) and "fixed charges" consists of
interest (including capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense which the Company
believes to be representative of interest.
<TABLE>
<CAPTION>
QUARTERS ENDED FISCAL YEARS ENDED
------------------------------------------------------------------------------------
MARCH 23, MARCH 25, DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28,
1996 1995 1995 1994 1994 1993 1991
(12 WEEKS) (12 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
---------- ---------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
2.1 1.9 2.0 1.8 1.5 1.3 1.2
</TABLE>
USE OF PROCEEDS
The Company will apply the net proceeds from the sale of the Debt Securities
initially to repay amounts outstanding under the Facility (as hereafter
defined) and thereafter, from time to time will use Facility borrowings to
repurchase or redeem outstanding indebtedness of the Company, or for other
general corporate purposes.
4
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
GENERAL
The following constitutes only a summary of the principal terms and
conditions of the Credit Agreement, and is qualified in its entirety by the
actual terms of the Credit Agreement, which was filed as an exhibit to the
Company's Form 8-K, dated July 20, 1994 and thereafter was amended on July 20,
1995, on November 17, 1995, on April 16, 1996 and on June 14, 1996. Whenever
particular provisions or defined terms of the Credit Agreement are referred
to, such provisions or defined terms are incorporated herein by reference as
part of the statements made herein. For purposes of this description of the
Credit Agreement, the term "Company" refers only to The Kroger Co. and does
not include The Kroger Co.'s consolidated subsidiaries.
The Credit Agreement provides for a $1.750 billion Senior Competitive
Advance and Revolving Credit Facility Agreement (the "Facility").
COMMITMENT REDUCTIONS
The Credit Agreement expires on July 20, 2002 and is not otherwise subject
to amortization.
INTEREST RATES
Borrowings under the Facility bear interest at the option of the Company at
a rate equal to either (i) the highest, from time to time, of (A) the average
of the publicly announced prime rate of Chemical Bank and Citibank, N.A., (B)
1/2% over a moving average of secondary market morning offering rates for 3
month certificates of deposit adjusted for reserve requirements, and (C) 1/2%
over the federal funds rate (the "Base Rate") plus the Applicable Percentage
or (ii) an adjusted Eurodollar rate based upon the London Interbank Offered
Rate ("Eurodollar Rate") plus the Applicable Percentage. The Applicable
Percentage is zero for the Base Rate. The Applicable Percentage for Eurodollar
Rate advances is 0.3125% as of March 23, 1996.
COLLATERAL
The Company's obligations under the Facility originally were collateralized
by a pledge of a substantial portion of the Company's and certain of its
Subsidiaries' assets, including substantially all of the Company's and such
Subsidiaries' inventory and equipment and the stock of all Subsidiaries, which
collateral also secured the Company's obligations under its Secured
Debentures. On April 29, 1996, pursuant to the terms of the Credit Agreement,
the Company elected to release all Collateral.
PREPAYMENT
The Company may prepay the Facility, in whole or in part, at any time,
without a prepayment penalty.
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 payments,
prepayments, and repurchases of capital stock, (iv) restrict mergers and
acquisitions and 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 fixed charge
coverage ratios, total debt ratios and senior debt ratios and (ix) require the
Company to maintain interest rate protection providing that at least 50% of
the Company's indebtedness for borrowed money is maintained at a fixed rate of
interest. See "Risk Factors -- Restrictions Imposed by the Credit Agreement
and Other Agreements."
The following is a summary of certain of the covenants contained in the
Credit Agreement.
5
<PAGE>
Maintenance of Fixed Charge Coverage Ratio. The Company is required to
maintain a ratio, for the Rolling Period in respect of each Fiscal Quarter,
determined as of the last day of each Fiscal Quarter of (i) the sum of (a)
Consolidated EBITDA for such Rolling Period and (b) Consolidated Rental
Expense for such Rolling Period to (ii) the sum of (a) Consolidated Cash
Interest Expense for such Rolling Period and (b) Consolidated Rental Expense
for such Rolling Period of not less than 1.7:1.
The Company's ratio of Consolidated EBITDA Available for Fixed Charges to
Consolidated Fixed Charges for the Rolling Period ended March 23, 1996 was
2.46:1.
Maintenance of Net Total Debt/Consolidated EBITDA Ratio. Following the
release of the security interest in all the Collateral the Company is required
to maintain a ratio, determined as of the last day of each Fiscal Quarter for
the Rolling Period ending on such day, of (i) Net Total Debt on such day to
(ii) the sum of (a) Consolidated EBITDA for such Rolling Period and (b) from
and after the making of certain investments or acquisitions, the Acquired
EBITDA for any Acquired Entity so invested in or acquired with respect to any
Acquired Entity Fiscal Quarter ending during such Rolling Period of no greater
than 3.65 to 1.
The Ratio at March 23, 1996 was 3.05:1.
Maintenance of Net Senior Debt/Consolidated EBITDA Ratio. Following the
release of the security interest in all the Collateral the Company is required
to maintain a ratio, determined as of the last day of each Fiscal Quarter for
the Rolling Period ending on such day, of (i) Net Senior Debt to (ii) the sum
of (a) Consolidated EBITDA for such Rolling Period and (b) from and after the
making of certain investments or acquisitions, the Acquired EBITDA for any
Acquired Entity so invested in or acquired with respect to any Acquired Entity
Fixed Quarter ending during such Rolling Period of no greater than 3.0 to 1.
This covenant shall cease to be applicable upon achievement of the Investment
Grade Rating Condition.
The Ratio at March 23, 1996 was 2.19:1.
Interest Rate Protection. The Company is required to obtain interest rate
protection providing that at least 50% of the Company's indebtedness for
borrowed money is maintained at a fixed rate of interest.
Debt. The Company may not create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist any Debt except, among other things,
(i) Debt under the Credit Agreement; (ii) certain designated Debt existing on
July 19, 1994; (iii) Debt secured by permitted liens; (iv) trade accounts
payable in the ordinary course of business and accounted for as current
accounts payable; (v) Commercial Paper issued by the Parent Borrower; (vi)
Debt of the Parent Borrower incurred to prepay, redeem, defease or repurchase
existing Debt of the Parent Borrower or any of the Subsidiaries so long as (a)
such Debt so incurred is subordinated in right of payment to, or pari passu in
right of payment with, the Debt being prepaid, redeemed, defeased or
repurchased and (b) the average life to maturity of such Debt so incurred is
no earlier than the date that is three months following the Termination Date;
provided, however, that up to $625,000,000 of such Debt so incurred may have
an average life to maturity shorter than the date that is three months
following the Termination Date so long as (A) such Debt does not mature before
June 15, 1999, and (B) such Debt is incurred to prepay, redeem, defease or
repurchase Debt that matures earlier than the date that is three months
following the Termination Date and of the $625,000,000 of such Debt, up to
$150,000,000 (or $300,000,000 at any time following the occurrence of an
Investment Grade Rating Condition) may be senior in right of payment to the
Debt being prepaid, redeemed, defeased or repurchased provided that such Debt
is unsecured; (vii) Capital Lease Obligations; (viii) Debt incurred in
connection with the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; (ix)
Debt incurred or assumed in connection with any investment or acquisition
permitted by the Credit Agreement; (x) certain debt owed to the Parent
Borrower by Subsidiaries; (xi) Debt secured by mortgages on (a) any
6
<PAGE>
property purchased, acquired or developed between January 21, 1992, and the
Closing Date or (b) any property purchased, acquired or developed with Real
Estate Capital Expenditures, in each case so long as the aggregate amount of
the Debt secured by such mortgages does not exceed 100% of the Fair Market
Value (determined at the time of such transaction) of such property; (xii)
Debt incurred by the Parent Borrower or any of its Subsidiaries in connection
with any Receivables Securitization; (xiii) Debt incurred by the Parent
Borrower in connection with Interest Rate Agreements; (xiv) Debt of the Parent
Borrower not referred to in paragraphs (i) through (xiii) above or in
paragraph (xv) below so long as the average life to maturity of such Debt is
no earlier than the date that is three months following the Termination Date;
and (xv) Debt of the Parent Borrower or any Subsidiary not referred to in
paragraphs (i) through (xiv) above in an aggregate amount outstanding at any
time not in excess of $100,000,000.
Capital Expenditures. Prior to the occurrence of the Investment Grade Rating
Condition the Company may not make, and will not permit any of its
Subsidiaries to make, any Capital Expenditures in excess of $650,000,000 (the
"Base Capital Expenditure Amount") for each Fiscal Year; provided, however,
that if in any Fiscal Year the amount specified exceeds the amount of Base
Capital Expenditures actually made by the Company and its Subsidiaries in such
Fiscal Year, the Company and its Subsidiaries shall be entitled to make
additional Capital Expenditures in the next succeeding Fiscal Year equal to
the amount of such excess not to exceed 45% of the Base Capital Expenditure
Amount; provided further, however, that the Company and its Subsidiaries shall
be permitted to make additional Capital Expenditures in any Fiscal Year
("Additional Capital Expenditures") in an aggregate amount with respect to the
Parent Borrower and its Subsidiaries equal to a percentage of Consolidated
Free Cash Flow for the immediately preceding Fiscal Year, such percentage with
respect to any Fiscal Year to be equal to (a) 100% in the event that the
Parent Borrower's Consolidated Ratio of Net Total Debt to Consolidated EBITDA
for the immediately preceding Fiscal Year is 3.0 to 1 or lower; (b) 75% in the
event that the Parent Borrower's Consolidated Ratio of Net Total Debt to
Consolidated EBITDA for the immediately preceding Fiscal Year is 3.5 to 1 or
lower; and (c) 50% in the event that the Parent Borrower's Consolidated Ratio
of Net Total Debt to Consolidated EBITDA for the immediately preceding Fiscal
Year is lower than the amount set forth below with respect to such preceding
Fiscal Year:
<TABLE>
<CAPTION>
PRECEDING
FISCAL RATIO OF NET TOTAL DEBT TO CONSOLIDATED
YEAR EBITDA FOR IMMEDIATELY PRECEDING FISCAL YEAR
---------- --------------------------------------------
<S> <C>
1995...................... 4.20 to 1.00
1996...................... 4.10 to 1.00
1997...................... 4.00 to 1.00
1998...................... 3.90 to 1.00
1999...................... 3.80 to 1.00
2000...................... 3.80 to 1.00
</TABLE>
The entire amount of Additional Capital Expenditures that are permitted to
be made in any Fiscal Year but are not made in such Fiscal Year may be carried
forward to, and made in the two succeeding Fiscal Years.
Dividends. Under the Credit Agreement, the Company is restricted from making
or declaring cash dividends on the Common Stock.
CERTAIN DEFINITIONS
"Applicable Percentage" means at any time, with respect to Adjusted
Eurodollar Rate Advances, the Facility Fees, Standby Letters of Credit and
Documentary Letters of Credit, the applicable
7
<PAGE>
percentage set forth below based upon (a) the Senior Debt Ratings at such time
or (b) the Applicable Percentage Ratio at such time:
<TABLE>
<CAPTION>
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Moody's/S&P or.......... Baa1 or Baa2 and Baa2 or BBB Baa3 and Baa3 or Lower than
better or BBB BBB- BBB- or equal to
BBB+ or Ba1 and
better lower than
or equal to
BB+
Applicable Percentage 5.25 to 1.0 4.75 to 1.0 4.0 to 1.0 3.5 to 1.0 3.0 to 1.0 Lower than
Ratio.................. or greater or greater or greater or greater or greater 3.0 to 1.0
(spreads expressed in basis points per annum)
Adjusted Eurodollar Rate
Advances............... 12.5 20.0 22.5 31.25 40.0 50.0
</TABLE>
The Applicable Percentage for Base Rate Advances is zero.
The Applicable Percentage as of March 23, 1996 is determined in accordance
with Level 4.
"Applicable Percentage Ratio" means the ratio (determined as of the last day
of each Fiscal Quarter for the Rolling Period ending on such day) of (i)
Consolidated EBITDA for such Rolling Period to (ii) Consolidated Total
Interest Expense for such Rolling Period.
"Capital Expenditures" of any Person means, for any period, all expenditures
of such Person during such period (whether paid in cash or accrued as
liabilities during such period) which, in conformity with generally accepted
accounting principles, are required to be included in or reflected by the
property, plant or equipment or similar fixed asset accounts on the balance
sheet of such Person and certain investments permitted under the Credit
Agreement, including equipment which is purchased simultaneously with the
trade-in of existing equipment owned by such Person to the extent of the gross
amount of the purchase price of such purchased equipment less the book value
of the equipment being traded in at such time, but excluding, among other
things, (i) expenditures made in connection with the replacement or
restoration of assets, to the extent such replacement or restoration is
financed out of (a) insurance proceeds paid on account of the loss of or
damage to the assets so replaced or restored or (b) awards of compensation
arising from the taking by condemnation or eminent domain of the assets so
replaced, (ii) any portion of Capital Lease Obligations which is capitalized
on such person's balance sheet and (iii) interest capitalized during
construction.
"Consolidated Cash Interest Expense" means, for any period, interest expense
net of interest income, whether paid or accrued (including the interest
component of Capital Lease Obligations) on all debt of the Company and its
Subsidiaries on a Consolidated basis for such period, including, without
limitation (i) cash dividends paid in respect of preferred stock issued by the
Company, (ii) commissions and other fees and charges payable in connection
with Letters of Credit, (iii) net payments payable in connection with certain
interest rate protection contracts and (iv) interest capitalized during
construction, but excluding, however, (v) interest expense not payable in cash
(including amortization of discount and deferred debt expenses), all as
determined in conformity with GAAP.
"Consolidated EBITDA" means, for any period, on a Consolidated basis for the
Company and its Subsidiaries, the sum for such period of (i) Consolidated Net
Income, plus (ii) depreciation and amortization expense, plus (iii) interest
expense net of interest income, plus (iv) federal and state income taxes as
determined in accordance with GAAP, plus (v) extraordinary losses (and any
unusual losses in excess of $1,000,000 arising in or outside of the ordinary
course of business not included in
8
<PAGE>
extraordinary losses determined in accordance with GAAP which have been
included in the determination of Consolidated Net Income), plus (vi) LIFO
charges included in the calculation of Consolidated Net Income, minus (vii)
extraordinary gains (and any unusual gains in excess of $1,000,000 arising in
or outside of the ordinary course of business not included in extraordinary
losses determined in accordance with GAAP which have been included in the
determination of Consolidated Net Income), and minus (viii) LIFO credits that
have been included in the calculation of Consolidated Net Income.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period, before the payments
of dividends on all capital stock, determined in accordance with GAAP.
"Consolidated Rental Expense" means, for any period, the aggregate rental
expense (including any contingent or percentage rental expense) of the Parent
Borrower and its Subsidiaries on a Consolidated basis for such period
(excluding real estate taxes and common area maintenance charges) in respect
of all rent obligations under all operating leases for real or personal
property minus any rental income of the Parent Borrower and its Subsidiaries
on a Consolidated basis for such period, all as determined in conformity with
GAAP.
"Consolidated Total Interest Expense" means, for any period, interest
expense net of interest income, whether paid or accrued (including the
interest component of Capital Lease Obligations) on all Debt of the Parent
Borrower and its Subsidiaries on a Consolidated basis for such period,
including (i) commissions and other fees and charges payable in connection
with Letters of Credit, (ii) net payments payable in connection with all
Interest Rate Agreements, (iii) interest capitalized during construction and
(iv) cash dividends paid in respect of any preferred stock issued by the
Parent Borrower, but excluding, however, amortization of deferred debt
expense, all as determined in conformity with GAAP.
"Debt" of any Person means, without duplication, (i) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property
or services (including all obligations, contingent or otherwise, of such
Person in connection with the Letters of Credit, Auction Bid LOCs, letter of
credit facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange into debt
securities, convert into debt securities or otherwise acquire for value (a)
any capital stock of such Person or (b) any warrants, rights or options to
acquire such capital stock, now or hereafter outstanding), (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), (iv) all Capital Lease Obligations of
such Person, (v) all Debt referred to in clause (i), (ii), (iii) or (iv) above
secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any lien, security interest or
other charge or encumbrance upon or in property (including accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Debt, (vi) all Guaranteed Debt of
such Person and (vii) any preferred stock of such Person that is classified as
a liability on such Person's Consolidated balance sheet.
"Funded Debt" means the Debt resulting from the Advances under the Credit
Agreement and all other Debt of the Parent Borrower or its Subsidiaries that
(on the date of its incurrence or issuance) matures more than one year from
the date of determination or matures within one year from such date but is
renewable or extendible, at the option of the debtor, to a date more than one
year from such date or arises under a revolving credit or similar agreement
that obligates the lender or lenders to extend credit during a period of more
than one year from such date (in each case including amounts of Funded Debt
required to be paid or prepaid within one year from the date of calculation).
9
<PAGE>
"Guaranteed Debt" of any Person means all Debt referred to in clause (i),
(ii), (iii), (iv) or (v) of the definition of the term "Debt" in this Section
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement (i) to
pay or purchase such Debt or to advance or supply funds for the payment or
purchase of such Debt, (ii) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Debt or to assure the holder of
such Debt against loss, (iii) to supply funds to, or in any other manner
invest in, the debtor (including any agreement to pay for property or services
irrespective of whether such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss, but excluding
leases at a rental at least as favorable to the Parent Borrower as could be
obtained in an arm's-length transaction with a party that is not an Affiliate.
"Investment Grade Rating Condition" means that the Senior Debt Ratings of
the Company's Debt are BBB- or better in the case of Standard & Poor's
Corporation or Baa3 or better in the case of Moody's Investors Service, Inc.
"Net Senior Debt" means, on a Consolidated basis for the Company and its
Subsidiaries as of any date, Net Total Debt as of such date minus the sum as
of such date of (i) the aggregate outstanding amount of any Subordinated Debt
of the Company or any of the Subsidiary Guarantors, (ii) the capitalized
amount of any Capitalized Lease Obligations of the Company or any of its
Subsidiaries and (iii) the aggregate outstanding face amount of any preferred
stock of the Company that is classified as a liability on the Company's
Consolidated balance sheet.
"Net Total Debt" means, on a Consolidated basis for the Company and its
Subsidiaries as of any date, (i) the sum as of such date of (a) the aggregate
outstanding amount of Funded Debt including current maturities thereof, (b)
the aggregate outstanding amount of Commercial Paper and (c) the aggregate
outstanding amount of Subsidiary Commercial Paper minus (ii) the sum as of
such date of (a) the aggregate outstanding face amount of letters of credit
included in Funded Debt, (b) the aggregate outstanding amount of Debt
represented by certain investments made by the Parent Borrower and (c) the
aggregate amount of Permitted Investments in excess of $100 million.
"Rolling Period" means, in respect of any Fiscal Quarter, such Fiscal
Quarter and the three preceding Fiscal Quarters.
"Subordinated Debt" means any Indebtedness which is subordinate to the
Obligations under the Credit Agreement.
EVENTS OF DEFAULT
The Credit Agreement provides that various events shall be "Events of
Default," upon the occurrence of which the Senior Lenders may suspend or cease
making loans or terminate the Facility and declare all amounts outstanding
under the Credit Agreement immediately due and payable, as described below.
Events of Default include, among other things, (i) failure to pay, when due,
any principal payable under the Credit Agreement or the failure to pay any
interest or other amount under
the Credit Agreement after the same becomes due and such default continues
unremedied for three business days after written notice from either
Administrative Agent, (ii) material breach of any representation or warranty
in the Credit Agreement or related documents, (iii) failure to comply with any
of the covenants of the Credit Agreement or related documents after specified
grace periods, (iv) failure to pay, or default in performance permitting
acceleration under, certain of the Company's other indebtedness, (v)
bankruptcy or insolvency of the Company or a Subsidiary or failure to
discharge certain judgments of the Company or any Subsidiary, (vi) the Credit
Agreement or security interests thereunder in Collateral with a value in
excess, individually or in the aggregate, of $30,000,000 ceasing to be in full
force and effect, (vii) certain events occurring with respect to the Company's
pension plans potentially giving rise to liability under ERISA, and (viii) the
occurrence of a "Change of Control" of the Company. A "Change of Control" is
defined in the Credit Agreement as (A) the acquisition by any Person or group
(other than the trusts for the Company's employee benefit plans) of securities
representing 20% or more of the voting Power of the Company or (B) during any
24-month period,
10
<PAGE>
individuals who were directors of the Company at the beginning of such period
(together with new directors approved by such directors) ceasing to constitute
at least 75% of the Board of Directors of the Company.
The Credit Agreement provides that upon the occurrence of an Event of
Default, the Administrative Agents (i) shall at the request, or may with the
consent, of the Majority Lenders by notice to the Company declare the
obligations of each Lender to make Advances to be terminated, whereupon the
same shall forthwith terminate, (ii) shall at the request, or may with the
consent, of any Issuing Bank or of the Majority Lenders by notice to the
Company declare the obligation of any Issuing Bank to issue Letters of Credit
to be terminated, whereupon the same shall forthwith terminate, and (iii)
shall at the request, or may with the consent, of the Majority Lenders declare
the Advances, all interest thereon and all other amounts payable under the
Credit Agreement to be forthwith due and payable, whereupon the Advances, all
such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest, prior notice of intention to
accelerate or any other notice, all of which are expressly waived by the
Company.
DESCRIPTION OF DEBT SECURITIES
Offered Debt Securities (as defined below) will constitute either senior or
subordinated debt of the Company and will be issued, in the case of Offered
Debt Securities that will be senior debt ("Senior Debt Securities"), under an
Indenture (the "Senior Indenture"), between the Company and a trustee to be
selected by the Company (the "Senior Trustee"), and, in the case of Offered
Debt Securities that will be subordinated debt ("Subordinated Debt
Securities"), under an Indenture (the "Subordinated Indenture"), between the
Company and a trustee to be selected by the Company (the "Subordinated
Trustee"). The Senior Indenture and the Subordinated Indenture are sometimes
hereinafter referred to individually as an "Indenture" and collectively as the
"Indentures", and the Senior Trustee and the Subordinated Trustee are
hereinafter referred to as the "Trustee". The statements under this caption
relating to the Debt Securities and the Indentures are summaries and do not
purport to be complete. Such summaries make use of terms defined in the
Indentures and are qualified in their entirety by express reference to the
Indentures and the cited provisions thereof, the forms of which are filed as
exhibits to the Registration Statement. For purposes of this description of
the Debt Securities the term "Company" refers only to The Kroger Co. and does
not include The Kroger Co.'s consolidated subsidiaries.
The particular terms of each issue of Debt Securities (the "Offered Debt
Securities"), as well as any modifications or additions to the following
general terms which may be applicable in the case of such Offered Debt
Securities, will be described in the Prospectus Supplement relating to such
Offered Debt Securities. Accordingly, for a description of the terms of a
particular issue of Offered Debt Securities, reference must be made both to
the Prospectus Supplement relating thereto and the following description.
GENERAL
The Debt Securities will represent general unsecured senior or subordinated
obligations of the Company. The Debt Securities may be issued in one or more
series with the same or various maturities. Capitalized terms used herein
shall have the meanings established in the Indenture unless otherwise defined
herein.
The Debt Securities relating to this Prospectus will be issued from time to
time up to an aggregate principal amount of $500,000,000 or the equivalent
thereof. Reference is made to the Prospectus Supplement for the following
terms of the Offered Debt Securities: (i) the title, aggregate principal
amount and authorized denominations of the Offered Debt Securities; (ii) the
percentage of their
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principal amount at which such Offered Debt Securities will be issued; (iii)
the date or dates on which the Offered Debt Securities will mature; (iv) the
rate or rates (which may be fixed or variable) per annum, if any, at which the
Offered Debt Securities will bear interest and the date from which such
interest may accrue; (v) the times and places at which principal and any such
interest will be payable; (vi) any redemption or sinking fund provisions;
(vii) the currency of payment of principal of, premium, if any, and interest
on the Offered Debt Securities; (viii) any index or other basis used to
determine the amount of payments of principal of and interest on the Offered
Debt Securities; (ix) whether the Offered Debt Securities of any series will
be represented by a single global note registered in the name of a
depositary's nominee and, if so, the depositary for and the method of
transferring beneficial interests in the global note; (x) whether the Offered
Debt Securities will be issuable in registered form or bearer form or both
and, if Offered Debt Securities in bearer form are issuable, restrictions
applicable to the exchange of one form for another and to the offer, sale and
delivery of Offered Debt Securities in bearer form; (xi) ranking as
Subordinated Debt Securities, if applicable, and the terms of any such
subordination; and (xii) any other terms relating to the Offered Debt
Securities not inconsistent with the Indentures, including any terms which may
be required by or advisable under United States laws or regulations or
advisable in connection with the marketing of Offered Debt Securities.
Offered Debt Securities may be presented for transfer in the manner, at the
places and subject to the restrictions set forth in the Offered Debt
Securities and the Prospectus Supplement. Such services will be provided
without charge, other than any tax or other governmental charge payable in
connection therewith, but subject to the limitations provided in the
Indentures. Offered Debt Securities in bearer form and the coupons, if any,
appertaining thereto will be transferable by delivery.
The Indentures under which certain of the Company's outstanding indebtedness
was issued restrict the Company's ability to redeem, defease or otherwise
acquire the Debt Securities.
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount below their stated
principal amount. Federal income tax consequences and other considerations
applicable thereto will be described in the Prospectus Supplement relating
thereto.
EVENTS OF DEFAULT AND NOTICE THEREOF
The Indentures will define "Events of Default" with respect to any series of
Debt Securities as being any one of the following events and such other events
as may be established for a particular series of Debt Securities: (a) failure
to pay interest on Debt Securities of such series for 30 days after it becomes
due; (b) failure to pay principal (or premium or sinking fund payment, if any)
on Debt Securities of such series when due at maturity, upon redemption, by
declaration or otherwise; (c) failure to perform any other covenants for 60
days after notice (other than a covenant included in the Indentures solely for
the benefit of Debt Securities of any series other than such Debt Securities);
(d) a default under any indebtedness for borrowed money in excess of
$30,000,000 constituting a failure to pay when due or resulting in such
indebtedness becoming due prior to maturity; (e) certain events of bankruptcy,
insolvency or reorganization; and (f) any other Event of Default provided with
respect to Debt Securities of such series. (Section 501.) No Event of Default
(except an Event of Default described in (c), (d) or (e) above) with respect
to a particular series of Debt Securities issued under the Indenture
necessarily constitutes an Event of Default with respect to any other series
of Debt Securities issued thereunder.
Each Indenture will provide that the Trustee shall, within 90 days after the
occurrence of a default with respect to any series of Debt Securities or all
Debt Securities, give to the holders of such series of Debt Securities or all
Debt Securities, as the case may be, notice of all uncured defaults known to
it (the term "default" to include the events specified above without grace
periods); provided, that except in the case of default in the payment of
principal (or premium or sinking fund payment, if any) or
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interest on any series of the Debt Securities, the Trustee shall be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the interest of the holders of the Debt Securities of
such series. (Section 602.)
The Company will be required to furnish to the Trustee annually after the
first issue of the Debt Securities under the Indenture a statement of certain
officers of the Company to the effect that to the best of their knowledge the
Company is not in default in the performance and observance of the terms of
the Indenture or, if they have knowledge that the Company is in default,
specifying such default. (Section 1004.)
If an Event of Default described in clause (a) or (b) above with respect to
Debt Securities of any series at the time Outstanding or an Event of Default
specified pursuant to clause (f) with respect to Debt Securities of a
particular series occurs and is continuing, then in every such case, unless
the principal of all such Debt Securities shall have become due and payable,
the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series may in writing to the Company and the
Administrative Agents declare the principal amount (or, if the Debt Securities
of that series are Original Issue Discount Securities (as defined in the
Indenture), such portion of the principal amount as may be specified in the
terms of that series) of all of the Debt Securities of that series, to be due
and payable five business days after the receipt by the Company and the
Administrative Agents of such written notice. If an Event of Default described
in clause (c), (d) or (e) above occurs and is continuing, then in every such
case the Trustee or the Holders of not less than 25% in principal amount of
all the Debt Securities then Outstanding may in writing to the Company and the
Administrative Agents declare the principal amount (or, if any such Debt
Securities are Original Issue Discount Securities, such portion of the
principal amount as may be specified in the terms of that series) of all of
the Debt Securities to be due and payable five business days after the receipt
by the Company and the Administrative Agents of such written notice; provided,
that each of the two preceding provisions shall not restrict the availability
of other rights or remedies that the Trustee or the holders may have. However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series (or of all Outstanding Securities, as the case may
be) has been made, but before the maturity thereof, the Holders of a majority
in principal amount of Outstanding Securities of such series (or of all
Outstanding Securities, as the case may be) may, subject to certain
conditions, rescind and annul such acceleration if all Events of Default,
other than the non-payment of accelerated principal (or specified portion
thereof) with respect to Debt Securities of such series (or of all Outstanding
Securities, as the case may be) have been cured or waived as provided in the
Indenture. (Section 502.)
Each Indenture also provides that the Holders of not less than a majority in
principal amount of the Debt Securities of a series (or of all Outstanding
Securities, as the case may be) may, subject to certain limitations, waive
certain defaults. Subject to certain limitations, the Holders of not less than
a majority of the principal amount of the Debt Securities of any series may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (Sections 512 and 513.) Each Indenture will provide that in case an
Event of Default shall occur (which shall not have been cured or waived), the
Trustee will be required to exercise such of its rights and powers under the
Indenture and to use the degree of care and skill in their exercise that a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs. (Section 601.) Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the Holders of the Debt Securities unless
they shall have offered to the Trustee reasonable security or indemnity.
(Section 603.)
Reference is made to the Prospectus Supplement relating to any series of
Offered Debt Securities which are Original Issue Discount Securities for the
particular provisions relating to acceleration of a portion of the principal
amount of such Original Issue Discount Securities upon the occurrence of an
Event of Default and the continuation thereof.
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MODIFICATION OF THE INDENTURE
Each Indenture will provide that with certain exceptions, the Indenture, the
rights and obligations of the Company and the rights of the holders of the
Debt Securities may be modified by the Company and the Trustee with the
consent of the holders of not less than 50% in aggregate principal amount of
all series of Debt Securities directly affected by such modification; but no
such modification may be made, without the consent of each holder of such Debt
Securities affected thereby, which would (i) change the stated maturity of any
Debt Security, or any installment of interest, if any, on any such Debt
Security, or reduce the principal amount thereof, or reduce any premium
payable upon the redemption thereof, or reduce the rate of interest thereon,
or reduce the principal amount payable on acceleration with respect to an
Original Issue Discount Security, or change the place or currency of payment
of principal or any premium or interest on any such Debt Security; (ii) reduce
the above-stated percentage of Debt Securities, the consent of the holders of
which is required to modify or alter the Indenture; (iii) impair the right to
institute suit for the enforcement of any payment of the principal of, and
premium, if any, and interest on any such Debt Security; (iv) modify the
foregoing requirements except to increase the percentage of outstanding Debt
Securities or to provide that certain other provisions cannot be modified or
waived without the consent of the holders of all outstanding Debt Securities;
or (v) modify the provisions of the Subordinated Indenture with respect to the
subordination of the Subordinated Debt Securities in a manner adverse to the
holders of such Debt Securities. (Section 902.) The Company may set a record
date for any Act of the holders with respect to consenting to any amendment.
(Section 104.)
THE TRUSTEES
Each Indenture contains limitations on the right of the Trustee, as a
creditor of the Company, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. In addition, the Trustee may be deemed to have a conflicting
interest and may be required to resign as Trustee if at the time of a default
under the Indenture it is a creditor of the Company.
As of the date hereof, the Company has not selected a Trustee for either the
Senior Indenture or the Subordinated Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Prospectus Supplement will contain provisions regarding the ability of
the Company to consolidate or merge with or into, or convey, transfer or lease
its properties or assets to any Person.
CERTAIN DEFINITIONS
"Indebtedness" means (without duplication), with respect to any Person, (i)
every obligation of such Person for money borrowed, (ii) every obligation of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) every obligation of such Person issued or assumed as the
deferred purchase price of property, every conditional sale obligation and
every obligation under any title retention agreement, in each case if on terms
permitting any portion of the purchase price to be paid beyond one year from
the date of purchase (but excluding trade accounts payable arising in the
ordinary course of business which are not overdue by more than 90 days or
which are being contested in good faith), (iv) every obligation of such Person
issued or contracted for as payment in consideration of the purchase by such
Person or an Affiliate of such Person of the stock or substantially all of the
assets of another Person or a merger or consolidation to which such Person or
an Affiliate of such Person was a party, (v) every obligation of the type
referred to in clauses (i) through (iv) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, and (vi) every obligation of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
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amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured. "Indebtedness,"
however, does not include any obligation of any Person under any interest rate
swap, cap, collar or similar arrangement.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
If Subordinated Debt Securities are issued, a Prospectus Supplement relating
thereto will describe the terms whereby such Subordinated Debt Securities will
be made subordinate and subject in right of payment to the prior payment in
full of senior indebtedness of the Company, and such description will include
a definition of what constitutes "senior indebtedness" of the Company.
PLAN OF DISTRIBUTION
The Company may offer the Debt Securities directly to purchasers or to or
through underwriters, dealers or agents. Any such underwriter(s), dealer(s) or
agent(s) involved in the offer and sale of the Debt Securities in respect of
which this Prospectus is delivered will be named in the Prospectus Supplement.
The Prospectus Supplement with respect to such Debt Securities will also set
forth the terms of the offering of such Debt Securities, including the
purchase price of such Debt Securities and the proceeds to the Company from
such sale, any underwriting discounts and other items constituting
underwriters' compensation, any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers and any
securities exchanges on which such Debt Securities may be listed.
The distribution of the Debt Securities may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Prospectus Supplement
will describe the method of distribution of the Debt Securities.
If underwriters are used in an offering of Debt Securities, the name of each
managing underwriter, if any, and any other underwriters and the terms of the
transaction, including any underwriting discounts and other items constituting
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement relating to such offering and the Debt Securities will
be acquired by the underwriters for their own accounts and may be resold from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time
of sale. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time. It
is anticipated that any underwriting agreement pertaining to any Debt
Securities will (1) entitle the underwriters to indemnification by the Company
against certain civil liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters may be required to make in
respect thereof, (2) provide that the obligations of the underwriters will be
subject to certain conditions precedent and (3) provide that the underwriters
will be obligated to purchase all Debt Securities offered in a particular
offering if any such Debt Securities are purchased.
If a dealer is used in an offering of Debt Securities, the Company will sell
such Debt Securities to the dealer, as principal. The dealer may then resell
such Debt Securities to the public at varying prices to be determined by such
dealer at the time of resale. The name of the dealer and the terms of the
transaction will be set forth in the Prospectus Supplement relating thereto.
If any agent is used in an offering of Debt Securities, the agent will be
named, and the terms of the agency will be set forth, in the Prospectus
Supplement relating thereto. Unless otherwise indicated in such Prospectus
Supplement, an agent will act on a best efforts basis for the period of its
appointment.
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<PAGE>
Dealers and agents named in a Prospectus Supplement may be deemed to be
underwriters (within the meaning of the Securities Act) of the Debt Securities
described therein and, under agreements which may be entered into with the
Company, may be entitled to indemnification by the Company against certain
civil liabilities under the Securities Act. Underwriters, dealers and agents
may be customers of, engage in transactions with, or perform services for, the
Company in the ordinary course of business.
Offers to purchase Debt Securities may be solicited, and sales thereof may
be made, by the Company directly to institutional investors or others, who may
be deemed to be underwriters within the meaning of the Securities Act with
respect to any resales thereof. The terms of any such offer will be set forth
in the Prospectus Supplement relating thereto.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other agents of the Company to solicit offers by certain
institutional investors to purchase Debt Securities from the Company pursuant
to contracts providing for payment and delivery at a future date.
Institutional investors with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all
cases such purchasers must be approved by the Company. The obligations of any
person under any such contract will not be subject to any conditions except
that (1) the purchase of the Debt Securities shall not at the time of delivery
be prohibited under the laws of any jurisdiction to which such purchaser is
subject and (2) if the Debt Securities are also being sold to underwriters,
the Company shall have sold to such underwriters the Debt Securities not
subject to delayed delivery. Underwriters and other agents will not have any
responsibility in respect of the validity or performance of such contracts.
The anticipated date of delivery of Debt Securities will be set forth in the
Prospectus Supplement relating to each offering.
VALIDITY OF DEBT SECURITIES
The validity of the Debt Securities will be passed upon for the Company by
Paul W. Heldman, Esq., Vice President, Secretary and General Counsel of the
Company. In rendering his opinions on the validity of the Debt Securities, Mr.
Heldman will express no opinion as to the applicability of any federal or
state law relating to fraudulent transfers. As of March 31, 1996, Mr. Heldman
owned approximately 10,550 shares of the Company's Common Stock and had
options to acquire an additional 113,352 shares.
EXPERTS
The consolidated financial statements and financial statement schedules of
The Kroger Co. as of December 30, 1995 and December 31, 1994 and for each of
the three fiscal years in the period ended December 30, 1995, which appear in
the Company's Annual Report on Form 10-K for the fiscal year ended December
30, 1995, incorporated by reference in this Prospectus, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P. independent
certified public accountants, given on the authority of that firm as experts
in accounting and auditing.
Documents incorporated herein by reference in the future will include
financial statements, related schedules (if required) and auditors' reports
which financial statements and schedules will have been audited to the extent
and for the periods set forth in such reports by the firm or firms rendering
such reports and, to the extent so audited and consent to incorporation by
reference is given, will be incorporated herein by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting
and auditing.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PRO-
SPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CRE-
ATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company................................................................ S-2
Recent Developments........................................................ S-2
Use of Proceeds............................................................ S-3
Capitalization............................................................. S-4
Summary Historical Consolidated
Financial Data............................................................ S-5
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................................ S-7
Description of the Notes................................................... S-17
Underwriting............................................................... S-24
Validity of the Notes...................................................... S-25
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Risk Factors............................................................... 3
The Company................................................................ 4
Consolidated Ratio of Earnings to Fixed Charges............................ 4
Use of Proceeds............................................................ 4
Description of the Credit Agreement........................................ 5
Description of Debt Securities............................................. 11
Plan of Distribution....................................................... 15
Validity of Debt Securities................................................ 16
Experts.................................................................... 16
</TABLE>
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$240,000,000
THE KROGER CO.
8.15% SENIOR NOTES DUE 2006
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KROGER
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GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
CHASE SECURITIES INC.
CITICORP SECURITIES, INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
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