<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
THE KROGER CO.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
AND
1995 ANNUAL REPORT
----------
[KROGER LOGO]
<PAGE>
COVER PRINTED ON RECYCLED PAPER
LOGO
<PAGE>
TO OUR FELLOW SHAREHOLDERS:
The Kroger Co. produced strong results in Fiscal Year 1995. Major achievements
included:
.record sales, cash flow, and earnings;
.the largest number of new store openings and expansions since Kroger's
restructuring in 1988;
.substantial debt reduction, bringing the Company closer to the
"investment grade" rating for debt;
.an increase of 54.9% in the market value of each Kroger share.
1995 IN REVIEW
Earnings before a charge for early debt retirement were $318.9 million, or
$2.50 per share, compared to $268.9 million, or $2.19 per fully diluted share,
in 1994. After the extraordinary charge, Kroger's net earnings totaled $302.8
million, or $2.38 per share. Operating cash flow rose 9.2% to $1.163 billion.
Sales in 1995 reached $23.9 billion, a 4.3% increase over 1994. Supermarket
sales increased 4.9%, while identical food store sales increased 1.4%.
Capital expenditures in 1995 totaled $726 million, an increase of 36% over the
previous year. A significant portion of this increase was attributable to
Kroger's success in retaining ownership of new stores, rather than leasing
them. During the year, Kroger completed 83 stores or expansions for a 4.6% gain
in net square footage. At the end of 1995, Kroger operated 1,325 supermarkets
under seven names in 24 states and 819 convenience stores under six different
banners. Retail operations were supported by 35 manufacturing plants which
produce Kroger-label products and custom products for outside customers.
Kroger continued to benefit from capital investments in technology and
logistics. These investments improved customer service, reduced working capital
needs and product costs, and lowered distribution and operating expenses.
FINANCIAL REVIEW AND DEBT REDUCTION
Kroger's financial structure continued to improve in 1995. Net long-term debt
declined by $372 million to $3.46 billion. Net interest expense declined by
4.5% to $312.7 million. These improvements were attributable to strong working
capital management, the conversion of approximately $200 million of Convertible
Notes to equity, and increased cash flow from operations. Net operating working
capital--dollars required to run day-to-day operations--reached a negative
$10.5 million at year end, down from $171 million in 1994. The working capital
savings were used to reduce debt and fund capital investments.
Kroger's strong financial performance in 1995 moved the Company closer to
achieving an investment grade rating in the financial markets. Investment grade
status should reduce Kroger's borrowing costs and attract a broader range of
individual and institutional investors.
OPERATING STRATEGY, 1996-1998
Since 1993, Kroger has followed a three-part growth strategy that has produced
consecutive years of record-breaking results. We intend to stay on that course.
The components of our strategy are:
. Higher returns from existing assets. Kroger's combination food and drug
stores continue to evolve in order to meet the needs of shoppers in each
neighborhood. Many changes improve customer service while reducing operating
costs. For example, sophisticated labor scheduling software insures maximum
customer service during peak shopping times without raising overhead expense.
Similarly, automated time and attendance systems create payroll information
faster, more accurately, and less expensively than manual methods.
1
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Food store profits are also being improved by the rapidly expanding sales of
Kroger-label products and by innovations like ready-to-eat meals which offer
busy customers take-home dinners--fully cooked and ready to heat and serve.
Kroger's home meals are designed to recapture food sales that have been lost to
restaurants and fast food outlets.
. Increased square footage. In 1996, Kroger plans to invest more than $800
million in retail stores, distribution facilities and technology. About $520
million will be devoted to 115 to 120 supermarket projects, which will increase
food store square footage by 6-7%. Every division will build new stores, with
particular emphasis on Denver, Phoenix, Atlanta, Louisville, and Nashville. The
Company also will consider selective acquisitions that would fit our current
operating territories and help us achieve further market penetration.
. Implementation of technology and logistics. During 1995, Kroger invested $90
million in management information and distribution systems. About half of this
investment was earmarked to expand three existing consolidation centers, and to
build a fourth center in Colorado. These facilities ship health and beauty care
items and slow-moving grocery products to every retail division. We anticipate
that this consolidation will earn significant financial returns by reducing
product costs, transportation expenses, and inventory levels.
Kroger is field testing several promising new technologies. For example, a
computer-assisted ordering system is expected to improve store stocking
conditions and increase sales while reducing inventory levels. A second
generation on-line warehouse management information system will increase the
speed, accuracy, and volume of product movement to our stores.
LABOR RELATIONS
Kroger successfully negotiated more than 50 collective bargaining agreements in
1995. We are especially pleased with our progress in the area of health care,
and continue to work with union representatives to identify managed care
alternatives that will reduce costs without diluting the quality of health care
service.
COMMUNITY ACTIVITIES
Throughout 1995, The Company's community relations activities enhanced Kroger's
corporate reputation among customers, civic and charitable organizations, and
public officials. The Kroger Co. Foundation contributed $2.5 million to a wide
variety of community projects. In addition, retail divisions and manufacturing
plants donated more than $2.4 million from operating income and $2.3 million in
products to charitable and other non-profit organizations.
Kroger's community involvement extended beyond donations of money and products.
Thousands of Kroger employees volunteered to raise charitable funds through
bake sales, car washes, and Habitat for Humanity projects. This involvement was
recognized by Second Harvest, the national food bank organization, which named
Kroger as its Grocery Distributor of the Year. Community activities also
prompted the Atlanta Journal/Constitution to write: ". . . Kroger is known as a
top corporate citizen in communities across much of the country, and is much
more active than its competitors."
DIRECTOR AND EXECUTIVE CHANGES
David B. Dillon, Executive Vice President, was promoted to President and Chief
Operating Officer and was elected to the Board of Directors. He replaced
Richard L. Bere, who retired after a distinguished 38-year career.
Michael S. Heschel and Patrick J. Kenney, Senior Vice Presidents, were promoted
to Executive Vice Presidents. James R. Thorne, President of the Mid-Atlantic
Marketing Area, was promoted to Senior Vice President. He was replaced in
Roanoke by David G. Osborne, formerly Vice President--Operations in the
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Columbus Marketing Area. W. Rodney McMullen was promoted to Group Vice
President and Chief Financial Officer, replacing William J. Sinkula, who
retired after 16 years of invaluable service. J. Michael Schlotman was promoted
to Vice President and Corporate Controller. Keith L. Neer was promoted to Vice
President, Corporate Research and Regulatory Compliance.
Warren F. Bryant, Senior Vice President of Dillon Companies, Inc., was promoted
to President and Chief Operating Officer of Dillon Companies, Inc. Frank J.
Remar, Senior Vice President, Secretary & Treasurer, was promoted to Executive
Vice President of Dillon Companies. E. John Burgon, Executive Vice President of
Fry's Food Stores, was promoted to Vice President of Dillon Companies, and
Robert Moeder was promoted to Vice President--Convenience Stores.
THE YEAR AHEAD
Kroger management is enthusiastic about the Company's prospects for continued
growth. We are focused upon enhancing shareholder value through improved
returns from existing assets, increased food store square footage, and
improvements in technology and logistics. The Company's strongest assets are,
of course, the 205,000 Kroger associates who provide exceptional service to our
customers and communities. We are proud to be their colleagues.
/s/ Joseph A. Pichler /s/ David B. Dillon
Joseph A. Pichler Chairman David B. Dillon President and Chief
and Chief Executive Officer Operating Officer
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 5, 1996
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the REGAL
HOTEL, 150 WEST FIFTH STREET, Cincinnati, Ohio, on May 16, 1996, at 10 A.M.,
for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 1999 and to elect one director to serve until the
annual meeting of shareholders in 1998 or until their successors have
been elected and qualified;
2. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1996; and
3. To transact such other business as may properly be brought before the
meeting; all as set forth in the Proxy Statement accompanying this
Notice.
Holders of common shares of record at the close of business on March 19, 1996,
will be entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT
THE MEETING, IN PERSON OR BY PROXY. PLEASE SIGN AND DATE THE ENCLOSED PROXY AND
MAIL IT AT ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED
IF MAILED WITHIN THE UNITED STATES.
By order of the Board of
Directors,
Paul W. Heldman, Secretary
PROXY STATEMENT
Cincinnati, Ohio, April 5, 1996
The accompanying proxy is solicited by the Board of Directors of The Kroger
Co., and the cost of solicitation will be borne by the Company. The Company
will reimburse banks, brokers, nominees, and other fiduciaries for postage and
reasonable expenses incurred by them in forwarding the proxy material to their
principals. The Company has retained Hill & Knowlton, Inc., 420 Lexington
Avenue, New York, New York to assist in the solicitation of proxies and will
pay such firm a fee estimated at present not to exceed $15,000. Proxies may be
solicited personally, or by telephone, as well as by use of the mails.
Joseph A. Pichler, Patricia Shontz Longe and T. Ballard Morton, Jr., all of
whom are directors of the Company, have been named members of the Proxy
Committee.
The principal executive offices of The Kroger Co. are located at 1014 Vine
Street, Cincinnati, Ohio 45202-1100. Its telephone number is 513-762-4000. This
Proxy Statement and Annual Report, and the accompanying proxy, were first sent
or given to shareholders on April 5, 1996.
As of the close of business on March 19, 1996, the Company's outstanding voting
securities consisted of 124,634,336 shares of Common Stock, the holders of
which will be entitled to one vote per share at the annual meeting. The shares
represented by each proxy will be voted unless the proxy is revoked before it
is exercised. Revocation may be in writing to the Secretary of the Company or
in person at the meeting or by appointment of a subsequent proxy. The laws of
Ohio, under which the Company is organized, provide for cumulative voting for
the election of directors. If notice in writing is given by any shareholder to
the President, a Vice President, or the Secretary of the Company not less than
48 hours before the time fixed for holding the meeting that the shareholder
intends to cumulate votes for the election of directors and, if an announcement
of the giving of such notice is made by or on behalf of any such shareholder or
by the Chairman or Secretary upon the convening of the meeting, each
shareholder shall have the right to cumulate votes at such election.
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If cumulative voting is in effect, a shareholder voting for the election of
directors may cast a number of votes equal to five times the number of shares
held on the record date for a single nominee whose term of office is to
continue until 1999 or divide them among nominees for such term in full votes
in any manner and further may cast a number of votes equal to the number of
shares held on the record date for a nominee whose term is to continue until
1998. Any vote "FOR" the election of directors will constitute discretionary
authority to the Proxy Committee to cumulate votes to which such proxies relate
as it, in its discretion, shall determine, if cumulative voting is requested.
The effect of broker non-votes and abstentions on matters presented for
shareholder vote is as follows. The election of directors is, pursuant to Ohio
law, determined by plurality; broker non-votes and abstentions, therefore, will
have no effect on such proposal. Ratification by shareholders of the selection
of auditors requires the affirmative vote of the majority of common shares
represented. Accordingly, broker non-votes will have no effect and abstentions
will have the effect of a vote against the proposal.
5
<PAGE>
PROPOSALS TO SHAREHOLDERS
ELECTION OF DIRECTORS
(ITEM NO. 1)
The Board of Directors, as now authorized, consists of 16 members divided into
three classes. Five directors are to be elected at the annual meeting to serve
until the annual meeting in 1999 and one director is to be elected to serve
until the annual meeting in 1998 or until their successors have been elected by
the shareholders, or by the Board of Directors pursuant to the Company's
Regulations, and qualified. Candidates for director receiving the greatest
number of votes cast by holders of shares entitled to vote at a meeting at
which a quorum is present are elected, up to the maximum number of directors to
be chosen at the meeting. The committee memberships stated below are those in
effect as of the date hereof. Mr. Lyle Everingham, a member of the Board of
Directors, will reach retirement age and will retire from the Board prior to
the annual meeting. The authorized size of the Board thereafter will be reduced
to 15 members. It is intended that, except to the extent that authority is
withheld, the accompanying proxy will be voted for the election of the
following six persons:
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE CONTINUING UNTIL 1999
<S> <C> <C> <C>
RICHARD W. DILLON Mr. Dillon is Chairman Emeritus of the Board of Dillon 68 1983
Companies, Inc., a wholly-owned subsidiary of Kroger. Mr.
Dillon is a member of the Financial Policy Committee.
JOHN T. LAMACCHIA Mr. LaMacchia is President, Chief Executive Officer, and a 54 1990
director of Cincinnati Bell Inc., a telecommunications
holding company. He is chair of the Audit Committee and a
member of the Compensation and Executive Committees.
EDWARD M. LIDDY Mr. Liddy is President and Chief Operating Officer of the 50 1996
Allstate Corporation, the largest publicly held personal
lines insurance company in the United States. Prior to
this he was Senior Vice President and Chief Financial Of-
ficer of Sears, Roebuck and Co., where he held a variety
of senior operating and financial positions since 1988.
Mr. Liddy also serves as a non-executive Chairman of the
Board of The PMI Group, Inc., the third largest private
mortgage insurer in the United States.
T. BALLARD MORTON, Mr. Morton is Executive in Residence of the College of 63 1968
JR. Business & Public Administration of the University of Lou-
isville. He is a director of PNC Bank, Kentucky, Inc. and
LG&E Energy Corp. Mr. Morton is chair of the Financial
Policy Committee and a member of the Audit and Executive
Committees.
KATHERINE D. ORTEGA Ms. Ortega served as an Alternate Representative of the 61 1992
United States to the 45th General Assembly of the United
Nations in 1990-1991. Prior to that, she served as Trea-
surer of the United States. Ms. Ortega is a director of
Diamond Shamrock, Inc.; Ralston Purina Co.; Long Island
Lighting Company; The Paul Revere Corporation; and Rayonier
Inc. She is vice chair of the Audit Committee and a member
of the Social Responsibility Committee.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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NOMINEE FOR DIRECTOR FOR TERM OF OFFICE CONTINUING UNTIL 1998
<S> <C> <C> <C>
DAVID B. DILLON Mr. Dillon was elected President and Chief Operating Offi- 45 1995
cer of Kroger in 1995. Prior to this he was elected Execu-
tive Vice President in 1990; Chairman of the Board of Dil-
lon Companies, Inc., a wholly-owned subsidiary of Kroger,
in 1992; and President of Dillon Companies, Inc., in 1986.
He is a director of the First National Bank of Hutchinson,
Kansas. Mr. Dillon is vice chair of the Executive Commit-
tee.
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1998
JOHN L. CLENDENIN Mr. Clendenin is Chairman of the Board and Chief Executive 61 1986
Officer of BellSouth Corporation, a holding company with
subsidiaries in the telecommunications business. He is a
director of Wachovia Corp.; Equifax Incorporated;
Providian Corporation; RJR Nabisco Holdings Corp.; Springs
Industries, Inc.; Coca Cola Enterprises, Inc.; and New
York Stock Exchange, Inc. Mr. Clendenin is chair of the
Social Responsibility Committee and vice chair of the Cor-
porate Governance Committee.
PATRICIA SHONTZ Dr. Longe is an Economist and a Senior Partner of The 62 1977
LONGE Longe Company, an economic consulting and investment firm.
She is a director of The Detroit Edison Company; DTE En-
ergy Company; Jacobson Stores, Inc.; Comerica, Inc.;
Comerica Bank & Trust, FSB; and Warner-Lambert Company.
Dr. Longe is a member of the Compensation and Corporate
Governance Committees.
THOMAS H. O'LEARY Mr. O'Leary is Chairman of Burlington Resources Inc., a 62 1977
natural resources business. He is a director of The
BFGoodrich Company. Mr. O'Leary is chair of the Compensa-
tion Committee and a member of the Corporate Governance
Committee.
JAMES D. WOODS Mr. Woods is Chairman of the Board and Chief Executive Of- 64 1994
ficer of Baker Hughes Incorporated, a company that pro-
vides equipment and services to the petroleum and process
industries. He is a director of Varco International and
Wynn's International Inc. Mr. Woods is a member of the Au-
dit and Social Responsibility Committees.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1997
<C> <S> <C> <C>
REUBEN V. ANDERSON Mr. Anderson is a member, in the Jackson, Mississippi of- 53 1991
fice, of Phelps Dunbar, a New Orleans law firm. Prior to
joining this law firm, he was a justice of the Supreme
Court of Mississippi. Mr. Anderson is a director of
Trustmark National Bank and BellSouth Corporation. He is
vice chair of the Social Responsibility Committee and a
member of the Audit Committee.
RAYMOND B. CAREY, Mr. Carey is a retired Chairman of the Board and Chief 69 1977
JR. Executive Officer of ADT, Inc., an electronic protection
company. He is a director of Thomas & Betts Corporation
and C.R. Bard. Mr. Carey is chair of the Corporate Gover-
nance Committee, vice chair of the Compensation Committee
and a member of the Executive Committee.
JOHN D. ONG Mr. Ong is Chairman and Chief Executive Officer of The 62 1975
BFGoodrich Company, a chemical and aerospace company. He
is a director of Cooper Industries, Inc.; Ameritech Cor-
poration; The Geon Company; ASARCO Inc.; and TRW Inc. Mr.
Ong is vice chair of the Financial Policy Committee and a
member of the Corporate Governance Committee.
JOSEPH A. PICHLER Mr. Pichler is Chairman of the Board and Chief Executive 56 1983
Officer of Kroger. He is a director of The BFGoodrich
Company. Mr. Pichler is chair of the Executive Committee
and a member of the Financial Policy Committee.
MARTHA ROMAYNE SEGER Dr. Seger is a Financial Economist and currently is a 64 1991
Distinguished Visiting Professor at Central Michigan Uni-
versity. From 1991-1993 she was the John M. Olin Distin-
guished Fellow at The Karl Eller Center of the University
of Arizona. She was a member of the Board of Governors of
the Federal Reserve System from 1984-1991. She is a di-
rector of Amerisure Companies; Amoco Corporation;
Providian Corporation; Fluor Corporation; Johnson Con-
trols, Inc.; Tucson Electric Power Company; and Xerox
Corporation. Dr. Seger is a member of the Financial Policy
and Corporate Governance Committees.
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</TABLE>
(1) Except as noted, each of the directors has been employed by his or her
present employer (or a subsidiary) in an executive capacity for at least
five years.
8
<PAGE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS
DIRECTORS' COMPENSATION
Each non-employee director is currently paid an annual retainer of $25,000 plus
fees of $1,500 for each board meeting and $1,000 for each committee meeting
attended. Committee chairs receive an additional annual retainer of $4,000.
Directors who are employees of the Company receive no compensation for service
as directors. The Company provides accidental death and disability insurance
for directors at a cost to the Company in 1995 of $176 per director. The
Company also provides a major medical plan for directors.
The Company grants to each of its non-employee directors owning a minimum of
1,000 shares of Company common stock as of the date of each annual meeting of
shareholders, options to purchase 2,000 shares of common stock at an option
price equal to the fair market value of the stock at the date of the grant, and
each non-employee director received a grant on that date. The options vest in
666, 667 and 667 share amounts on the first, second, and third annual
anniversary of the date of grant. Based on the closing price of Kroger stock on
the New York Stock Exchange, as of December 30, 1995, the value of each grant
of options made in 1995, none of which were exercisable, was $22,490.
The Company has an unfunded retirement program for outside directors. The
retirement benefit is the average compensation for the five calendar years
preceding retirement. Directors who retire from the Board prior to age 70 will
be credited with 50% vesting after five years of service and an additional 10%
for each year served thereafter. Benefits for directors who retire prior to age
70 will commence at the time of retirement from the Board or age 65, whichever
comes later.
COMMITTEES OF THE BOARD
The Board of Directors has a number of standing committees including Audit,
Corporate Governance, and Compensation Committees. During 1995, the Audit
Committee met three times, the Corporate Governance Committee met two times,
and the Compensation Committee met five times. Committee memberships are shown
on pages 6 through 8 of this Proxy Statement. The Audit Committee reviews
external and internal auditing matters and recommends the selection of the
Company's independent auditors for approval by the Board and ratification by
shareholders. The Compensation Committee determines the compensation of the
Company's senior management and administers its stock option and benefit
programs. The Corporate Governance Committee is responsible for developing
criteria for selecting and retaining members of the Board; seeks out qualified
candidates for the Board; and reviews the performance of the Company, the Chief
Executive Officer, and the Board. The Board of Directors met seven times in
1995. During 1995, all directors attended at least 75% of the aggregate number
of Board meetings and committee meetings on which such director was a member,
with the exception of Mr. O'Leary.
The Corporate Governance Committee will consider shareholder recommendations
for nominees for membership on the Board of Directors. Recommendations intended
for inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1997, together with a description of the proposed nominee's
qualifications and other relevant information, must be submitted in writing to
Paul W. Heldman, Secretary of the Company, and received at the Company's
executive offices not later than December 7, 1996.
CERTAIN TRANSACTIONS
The Company purchased certain private label products to be sold in Company
stores from suppliers represented by two firms in which Mr. Everingham's son,
Mark Everingham, owned a 33% and 50% interest, respectively. The two firms
earned gross revenues of approximately $8,000,193 in fees paid by the suppliers
for services performed by the firms on behalf of the suppliers. In addition,
the two firms earned gross revenues of approximately $1,282,585 in fees paid by
the Company for services performed by those firms on behalf of the Company's
manufacturing division. The management of the Company views these transactions,
and the amounts paid for the services and goods supplied, as fair and
competitive.
The law firm of Gilliland & Hayes, of which Bradley D. Dillon, son of Richard
W. Dillon, is a partner, rendered legal services to a subsidiary of the Company
which resulted in fees paid to the law firm by the
subsidiary in 1995 of $190,796. The management of the Company has determined
that these amounts paid by the Company for the services are fair and
competitive.
In addition, the law firm of Phelps Dunbar, of which Reuben V. Anderson is a
partner, rendered legal services to the Company which resulted in fees paid to
the law firm by the Company in 1995 of $1,553. The management of the Company
has determined that amounts paid by the Company for the services are fair and
competitive.
9
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COMPENSATION OF EXECUTIVE OFFICERS
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SUMMARY COMPENSATION
The following table shows the compensation for the past three years of the
Chief Executive Officer, each of the Company's four most highly compensated
executive officers, excluding the Chief Executive Officer, and one additional
former executive officer (the "named executive officers"):
SUMMARY COMPENSATION TABLE
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION(1)
------------------------------ -------------------------
AWARDS
----------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(2) (3) (4) (5)
Joseph A. Pichler 1995 $447,046 $614,197 $16,412 30,000 $24,300
Chairman and Chief 1994 $430,385 $684,447 $19,511 27,000 $23,023
Executive Officer 1993 $416,923 $582,343 $ 9,127 25,000 $19,249
David B. Dillon 1995 $305,083 $309,731 $ 4,456 $332,250 25,000 $31,166(6)
President and Chief 1994 $290,000 $281,059 15,000 $ 1,650
Operating Officer 1993 $286,833 $201,416 15,000 $ 1,349
Richard L. Bere 1995 $322,000 $234,175 $16,576 $24,980
Former President and 1994 $318,000 $452,330 $20,642 18,000 $24,770
Chief Operating Officer 1993 $306,231 $349,406 $ 9,590 16,000 $20,819
Patrick J. Kenney 1995 $262,308 $293,688 $12,291 $138,437 20,000 $18,065
Executive Vice President 1994 $250,000 $277,959 $12,840 $205,625 15,000 $17,012
1993 $199,769 $206,415 $ 5,576 15,000 $11,770
Michael S. Heschel 1995 $252,308 $293,688 $ 7,389 $138,437 20,000 $11,633
Executive Vice President 1994 $240,000 $277,959 $ 8,653 $205,625 15,000 $11,093
1993 $214,269 $158,781 $ 3,839 12,500 $28,622(7)
Ronald R. Rice 1995 $215,885 $194,364 $10,984 15,000 $17,130
Senior Vice President 1994 $202,615 $214,049 $11,656 $ 93,500 20,000 $15,374
1993 $184,462 $163,266 $ 5,507 15,000 $11,630
</TABLE>
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(1) During the period presented, the Company has made no long-term incentive
plan payouts other than restricted stock and stock options.
(2) Represents reimbursement for the tax effects of payment for certain
premiums on a policy of life insurance.
(3) Messrs. Pichler, Dillon, Kenney, Heschel, and Rice had 100,000, 12,000,
14,500, 18,500, and 2,667 shares outstanding, respectively, at December 30,
1995, with an aggregate value of $3,737,500, $448,500, $541,937, $691,437,
and $99,679, respectively. The aggregate value is based on the market price
of the Company's Common Stock on December 30, 1995. Restrictions remaining
on outstanding restricted stock awards to Mr. Pichler in 1995 lapse in
January 2000, based on performance goals achieved in 1995 through 1999 and
more particularly described in the Compensation Committee Report which
follows. The shares will vest immediately if Mr. Pichler leaves the Company
due to death or disability or in the event of a change in control of the
Company. The restrictions remaining on Mr. Dillon's 1995 restricted stock
grant lapse in equal amounts over the next five years. The restrictions
remaining on Messrs. Kenney and Heschel's outstanding restricted stock
awards lapse as to 1,500 shares over each of the next three years, 9,000
shares in 1999, and 1,000 shares in 2000, and as to an additional 4,000
shares in 1996 for Mr. Heschel. The restrictions remaining on outstanding
restricted stock awards to Mr. Rice lapse on 1,333 shares in 1996 and on
1,334 shares in 1997. The Company is currently prohibited by contract from
paying dividends on its Common Stock but, should this prohibition be
lifted, dividends, as and when declared, would be payable on these shares.
(4) Represents options granted during the respective fiscal year. Options
granted in 1994 and 1995 vest for equal number of shares in the three
succeeding years excluding 5,000 options granted to Mr. Kenney in January
1994 which vested 6 months from the date of grant. Options granted in 1993
vest 6 months from grant date. Options terminate in 10 years if not earlier
exercised or terminated. No stock appreciation rights ("SARs") were granted
in any of the three years presented.
(5) These amounts include the Company's matching contribution under The Kroger
Co. Savings Plan in the amounts of $1,260, $1,710, $810, $1,260, and
$1,756, respectively, for Messrs. Pichler, Bere, Kenney, Heschel and Rice,
the Company's matching contribution under the Dillon Companies, Inc.
Employees' Stock Ownership and Savings Plan in the amount of $1,710 for Mr.
Dillon and reimbursement of certain premiums for policies of life insurance
in the amounts of $23,040, $6,256, $23,270, $17,255, $10,373 and $15,420,
respectively, for Messrs. Pichler, Dillon, Bere, Kenney, Heschel, and Rice.
(6) $23,154 of this amount represents an additional payment to Mr. Dillon
pursuant to the Company's relocation program.
(7) $19,928 of this amount relates to reimbursement of expenses associated with
Mr. Heschel's relocation.
10
<PAGE>
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which
options to purchase Common Stock of the Company are granted to officers and
other employees of the Company and its subsidiaries. The following table shows
option grants in fiscal year 1995 to the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
- ------------------------------------------------------------------ -----------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Pichler 30,000 1.09% $25.50 4/19/2005 $0 $481,104 $1,219,213
David B. Dillon 16,000 0.58% $25.50 4/19/2005 $0 $256,589 $ 650,247
9,000 0.33% $27.69 6/18/2005 $0 $156,690 $ 397,118
Richard L. Bere 0 0% -- -- $0 $ 0 $ 0
Patrick J. Kenney 15,000 0.55% $25.50 4/19/2005 $0 $240,552 $ 609,606
5,000 0.18% $27.69 6/18/2005 $0 $ 87,050 $ 220,621
Michael S. Heschel 15,000 0.55% $25.50 4/19/2005 $0 $240,552 $ 609,606
5,000 0.18% $27.69 6/18/2005 $0 $ 87,050 $ 220,521
Ronald R. Rice 15,000 0.55% $25.50 4/19/2005 $0 $240,552 $ 609,606
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year. These options
vest in equal number of shares in 1996, 1997 and 1998, and terminate in 10
years if not earlier exercised or terminated.
The assumptions set forth in the chart above are merely examples and do not
represent predictions of future stock prices or a forecast by the Company with
regard to stock prices.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR AND OPTION/SAR VALUES
The following table shows information concerning the exercise of stock
options during fiscal year 1995 by each of the named executive officers and the
fiscal year-end value of unexercised options:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES TABLE
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF
OPTIONS/SARS UNEXERCISED IN-THE-
AT F/Y END (1) MONEY OPTIONS/SARS
(#) AT F/Y END (1) ($)
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph A. Pichler 0 $ 0 223,080/48,000 $5,262,466/$608,160
David B. Dillon 0 $ 0 147,505/35,000 $3,652,020/$417,115
Richard L. Bere 30,000 $783,975 92,777/12,000 $1,928,568/$167,940
Patrick J. Kenney 0 $ 0 143,036/26,667 $3,580,846/$319,855
Michael S. Heschel 25,000 $342,875 28,333/26,667 $ 466,770/$319,855
Ronald R. Rice 0 $ 0 53,666/28,334 $ 975,886/$364,734
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year.
11
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS
During fiscal 1995, the following Long-Term Incentive Plan awards were made:
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK
PERFORMANCE OR PRICE-BASED PLANS
OTHER PERIOD -------------------------
NUMBER OF SHARES, UNTIL TARGET MAXIMUM
UNITS OR OTHER MATURATION OR THRESHOLD ($ OR ($ OR
NAME RIGHTS(#) PAYOUT ($ OR #) #) #)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Joseph A. Pichler 100,000 January 1, 2000 0 100,000 100,000
</TABLE>
The terms of the performance-based restricted stock award to Mr. Pichler are
more particularly set forth in the Compensation Committee Report following this
table.
COMPENSATION COMMITTEE REPORT
The Company's compensation policies are applicable to virtually all levels of
its work force, including its executive officers. These policies require the
Company to be competitive in total compensation; to include, as part of total
compensation, opportunities for equity ownership; to use incentives that offer
more than competitive compensation when the Company achieves superior results;
and to base incentive payments on earnings before interest, taxes, depreciation
and LIFO charges ("EBITD") and on sales results.
Pursuant to these policies, the Company's compensation plans include grants of
stock options for executive, management, and hourly employees. In determining
the size of option grants to the Chief Executive Officer and the other
executive officers, the Compensation Committee considers, without use of a
formula, competitive practices among retailers, the individual executive
officer's level within Kroger and the level of past awards of stock options and
restricted stock to the individual. Grants of options to the Chief Executive
Officer and the other executive officers are generally lower than those of
their counterparts in the retail industry because the Company grants options to
several thousand management and hourly employees instead of, as is common in
the industry, only a small group of executives.
The 1994 Long-Term Incentive Plan, approved by the shareholders at the Annual
Meeting in 1994, authorized the issuance of 8,000,000 shares of common stock.
During 1995, Kroger granted 2,700,000 stock options to over 4,400 employees
throughout the Company. The number of options granted and the number of
employees receiving options was typical of grants made in the past several
years. The Company expects to continue to use a broad-based stock option
program as a means of attracting and retaining employees, due to the direct
relationship between value received by the optionee and shareholder return.
The Compensation Committee establishes the fixed portion of executive officer
cash compensation, or salary, by considering internal equity and competitor
salary data as described below. Additionally, a large percentage of employees
at all levels of the organization, including executive officers, are eligible
to receive a bonus incentive based upon Company or unit performance. Bonus
potentials for executives are established by level within the Company, and
actual payouts are based on achievement of sales and EBITD targets. Actual
payouts can exceed these potentials if results exceed the targets. In the case
of the executive officers, approximately 50% of total potential cash
compensation is based on Company or unit EBITD and sales performance.
Salary and bonus levels are compared to a grouping of food wholesalers and
retailers, the Wholesale/Retail Compensation Survey, from which the peer group
is selected (see Performance Graph, below), to ensure that executive and
management compensation is competitive. The Committee establishes salaries for
executive officers that generally are at the median of compensation paid by
peer group companies for comparable positions (where data for comparable
positions are available) with a bonus potential that, if realized, would cause
their total cash compensation to be in the upper quartile of peer group
compensation. The Company's outstanding performance in 1995 is reflected by
bonuses paid for all executive officers. Bonus payouts for Messrs. Pichler,
Dillon and McMullen are based on combined Kroger and Dillon operations and
12
<PAGE>
represented 106.8% of their potentials. Mr. Rice's bonus payouts are based in
part on the manufacturing group's operations and represented 86.4% of his
potential. All other executive officers received bonus payouts of 116.6%.
The compensation of Kroger's Chief Executive Officer is determined annually
pursuant to the policies described above. Mr. Pichler's variable compensation
or bonus for the last fiscal year, which represented 106.8% of his bonus
potential, reflects the extent to which the Company achieved the EBITD and
sales targets that were established by this Committee at the beginning of the
year. The value of stock options granted to Mr. Pichler in the last fiscal year
fluctuates based on the Company's performance in the stock market.
The Compensation Committee engaged Towers Perrin during the last fiscal year to
compare the Chief Executive Officer's compensation to that of CEOs of other
retailers and found that Mr. Pichler's compensation has not been competitive.
As a result, in 1995, the Board adopted a performance based restricted stock
plan whereby Mr. Pichler can earn as many as 100,000 shares over a five-year
period. The restrictions on these shares lapse on January 1, 2000, but only as
to that number of shares remaining after certain reductions based on a
comparison of the Company's shareholder return to that of a group including the
Peer Group. In general, each fiscal year the Chief Executive Officer can earn
up to 20,000 of the shares depending upon the extent to which the Company's
performance exceeds that of the reference group. On the other hand, up to
10,000 otherwise previously earned shares will be forfeited in those years in
which the Company's performance does not exceed the median compared to that
same group. Mr. Pichler also is party to an employment contract with the
Company which is more particularly described elsewhere in the Proxy statement.
That agreement establishes minimum compensation at levels below his total
compensation determined in consideration of the factors identified above.
The Omnibus Budget Reconciliation Act of 1993 places a $1,000,000 limit on the
amount of certain types of compensation for each of the executive officers that
is tax deductible by the Company. The Company believes that its 1994 Long-Term
Incentive Plan, under which stock option grants and restricted stock awards are
made, complies with the Internal Revenue Service's recently released final
regulations on the deductibility limit. Accordingly, the compensation expense
incurred thereunder should be deductible. The Company will consider
modifications to its other compensation programs based on the final
regulations. The Company's policy is, primarily, to design and administer
compensation plans that support the achievement of long-term strategic
objectives and enhance shareholder value. Where it is material and supports the
Company's compensation philosophy, the Committee will also attempt to maximize
the amount of compensation expense that is tax deductible by the Company.
Compensation Committee:
Thomas H. O'Leary, Chair
Raymond B. Carey, Jr., Vice-Chair
John T. LaMacchia
Patricia Shontz Longe
13
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the five year cumulative total
shareholder return on the Company's Common Stock, based on the market price of
the Common Stock and assuming reinvestment of dividends, with the cumulative
total return of companies on the Standard & Poor's 500 Stock Index and the
largest food companies selected from the Wholesale/Retail Compensation Survey:
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* OF THE KROGER CO., S&P 500 AND
PEER GROUP**
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period S&P
(Fiscal Year Covered) KROGER 500 INDEX PEER GROUP
- ------------------- ---------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-
12/29/90 $100 $100 $100
FY 91 $145 $130 $108
FY 92 $106 $140 $138
FY 93 $146 $155 $137
FY 94 $175 $157 $145
FY 95 $272 $215 $186
</TABLE>
The Company's fiscal year ends on the Saturday closest to December 31.
- ------
*Total assumes $100 invested on December 30, 1990 in The Kroger Co., S&P 500
Index, and the largest food companies selected from the Wholesale/Retail
Compensation Survey (the "Peer Group"), with reinvestment of dividends.
**The Peer Group consists of Albertson's, Inc., American Stores Company,
Fleming Companies, Inc., Giant Food Inc. (Class A), Great Atlantic & Pacific
Tea Company, Inc., Safeway Inc., Supervalu Inc., The Vons Companies, Inc.,
and Winn-Dixie Stores, Inc.
The Company's peer group is composed of the nine largest food companies
measured by total revenue (excluding the Company) within the Wholesale/Retail
Compensation Survey (the "Survey"), which permits a comparison of the return of
the Company's shareholders to that of companies against which executive
compensation levels are measured. The Compensation Committee establishes the
compensation for executives and management by comparison to compensation
reported in the Survey.
Neither the foregoing Compensation Committee Report nor the foregoing
Performance Graph shall be deemed incorporated by reference into any other
filing, absent an express reference thereto.
14
<PAGE>
COMPENSATION PURSUANT TO PLANS
The Company maintains various benefit plans which are available to management
and certain other employees. The Company derives the benefit of certain tax
deductions as a result of its contributions to some of the plans. Each of the
executive officers of the Company was eligible to participate in one or more of
the following plans.
THE KROGER CO. EMPLOYEE PROTECTION PLAN
The Company adopted The Kroger Co. Employee Protection Plan ("KEPP") during
fiscal 1988. All management employees, including the executive officers, and
administrative support personnel of the Company with at least one year of
service are covered. KEPP provides for severance benefits and the extension of
Company paid health care in the event an eligible employee actually or
constructively is terminated from employment without cause within two years
following a change of control of the Company (as defined in the plan). For
persons over 40 years of age with more than six years of service, severance pay
ranges from approximately 9 to 18 months' salary and bonus, depending upon
Company pay level and other benefits. KEPP may be amended or terminated by the
Board of Directors at any time prior to a change of control, and will expire in
1998 unless renewed by the Board of Directors.
PENSION PLANS
The Company maintains the Kroger Retirement Benefit Plan, a defined benefit
plan, to provide pension benefits to retired or disabled management employees
and certain groups of hourly personnel. The Plan generally provides for
benefits at age 62 or later equal to 1 1/2% times the years of service, after
attaining age 21, (or, for participants prior to January 1, 1986, after
attaining age 25) times the highest average earnings for any five years during
the ten calendar years preceding retirement, less an offset tied to Social
Security benefits. The Company also maintains an Excess Benefits Plan under
which the Company pays benefits which exceed the maximum benefit payable under
ERISA by defined benefit plans. The following table gives examples of annual
retirement benefits payable on a straight-life basis under the Company's
retirement program.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FIVE YEAR -----------------------------------------------------------------
AVERAGE REMUNERATION 15 20 25 30 35 40
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
450,000 101,250 135,000 168,750 202,500 236,250 270,000
650,000 146,250 195,000 243,750 292,500 341,250 390,000
850,000 191,250 255,000 318,750 382,500 446,250 510,000
900,000 202,500 270,000 337,500 405,000 472,500 540,000
1,200,000 270,000 360,000 450,000 540,000 630,000 720,000
1,300,000 292,500 390,000 487,500 585,000 682,500 780,000
</TABLE>
No deductions have been made in the above table for offsets tied to Social
Security benefits.
Remuneration earned by Messrs. Pichler, Bere, Kenney, Heschel, and Rice in
1995, which was covered by the Plan, was $1,131,493, $774,330, $540,267,
$530,267, and $429,933, respectively. As of December 30, 1995, they had 8, 38,
34, 4, and 35 years of credited service, respectively. Mr. Dillon had no
credited service under the Plan as of December 30, 1995.
DILLON PLANS
Dillon Companies, Inc. and its subsidiaries maintain pension, profit sharing,
stock ownership, and savings plans that provide benefits at levels comparable
to the plans described above. David B. Dillon has 20 years of credited service
and Joseph A. Pichler has 6 years of credited service under certain of the
pension and profit sharing plans, but no further credited service will be
accrued for either of them under such plans.
15
<PAGE>
Under the Dillon Profit Sharing and Savings Plan, Dillon and each of its
participating subsidiaries contributes a certain percentage of net income,
determined annually, to be allocated among participating employees based on the
percent each such participating employee's total compensation bears to the
total compensation of all participating employees employed by such entity. On
participating employees' termination upon attaining the age 60, death or
disability, they are entitled to their full account balance. In addition to
this plan, Dillon and several of its subsidiaries have adopted the Dillon
Pension Plan, a defined benefit plan, for their eligible employees. Under the
pension plan, the normal retirement benefit for eligible employees is a certain
percentage of average compensation during a certain period of employment
multiplied by the years of credited service (in some of these plans there is a
maximum period of credited service), minus the benefit provided by the Profit
Sharing and Savings Plan (except as may be limited by provisions of ERISA).
The following table shows the estimated annual pension payable upon retirement
to persons covered by Dillon's Pension Plans. Benefits payable under the Profit
Sharing and Savings Plan may exceed the amount payable under the Pension Plan,
and participants are entitled to the greater of the two. The table does not
reflect benefits payable under Dillon's Profit Sharing and Savings Plan, since
benefits under that plan are not determined by years of service, and no
deductions have been made in the table for offsets tied to Social Security
benefits.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -----------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
300,000 67,500 90,000 112,500 135,000 157,500 180,000
400,000 90,000 120,000 150,000 180,000 210,000 240,000
500,000 112,500 150,000 187,500 225,000 262,500 300,000
600,000 135,000 180,000 225,000 270,000 315,000 360,000
700,000 157,500 210,000 262,500 315,000 367,500 420,000
</TABLE>
The amounts contributed by Dillon and its subsidiaries pursuant to these
retirement plans are not readily ascertainable for any individual, and thus are
not set forth above.
EMPLOYMENT CONTRACTS
The Company entered into an amended and restated employment agreement with Mr.
Pichler dated as of July 22, 1993. During his employment, the Company agrees to
pay Mr. Pichler at least $420,000 a year, unless the amount is reduced due to
adverse business conditions. Mr. Pichler's employment may be terminated at the
discretion of the Board of Directors. The contract also provides that the
Company will continue to pay Mr. Pichler's salary to his beneficiary for a
period of five years after a termination of employment resulting from his
death, or will pay to Mr. Pichler his salary for a term equal to the lesser of
five years or until October 4, 2005, if Mr. Pichler's termination of employment
results from his involuntary separation. The Company also has agreed to
reimburse Mr. Pichler for premiums on a policy of life insurance plus the tax
effects of that reimbursement. After his termination of employment for any
reason after age 62, if he is not entitled to receive the salary continuation
described above, Mr. Pichler will, in exchange for his availability to provide
certain consulting services, then receive each year until his death an amount
equal to 25% of the highest salary paid him during the term of this agreement.
16
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of February 9, 1996, the directors of the Company, the named executive
officers and the directors and executive officers as a group, beneficially
owned shares of the Company's Common Stock as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP
- -------------------------------------------------------------------------------
<S> <C>
Reuben V. Anderson................................. 1,666(10)
Richard L. Bere.................................... 165,964(7)(8)
Raymond B. Carey, Jr............................... 5,666(10)
John L. Clendenin.................................. 1,666(10)
David B. Dillon.................................... 268,405(1)(7)(8)
Richard W. Dillon.................................. 194,291(2)(10)
Lyle Everingham.................................... 325,195(3)(7)(10)
Michael S. Heschel................................. 52,329(7)
Patrick J. Kenney.................................. 168,591(7)(8)
John T. LaMacchia.................................. 1,666(10)
Edward M. Liddy.................................... 2,400(9)
Patricia Shontz Longe.............................. 4,666(10)
T. Ballard Morton, Jr.............................. 10,666(10)
Thomas H. O'Leary.................................. 1,666(10)
John D. Ong........................................ 1,666(10)
Katherine D. Ortega................................ 2,005(10)
Joseph A. Pichler.................................. 503,255(4)(7)(8)
Ronald R. Rice..................................... 65,737(7)
Martha Romayne Seger............................... 1,866(10)
James D. Woods..................................... 1,666(10)
Directors and Executive Officers as a group (in-
cluding those named above)........................ 2,430,088(5)(6)(7)(8)
</TABLE>
- --------------------------------------------------------------------------------
(1) This amount does not include 32,330 shares owned by Mr. Dillon's wife,
13,506 shares in his children's trust or 12,084 shares owned by his
children. Mr. Dillon disclaims beneficial ownership of these shares.
(2) This amount does not include 93,116 shares owned by Mr. Richard Dillon's
wife or 481,800 in his father's trust of which he is a co-trustee. Mr.
Dillon disclaims beneficial ownership of these shares.
(3) This amount does not include 56,453 shares owned by Mr. Everingham's wife.
Mr. Everingham disclaims beneficial ownership of these shares.
(4) This amount does not include 705 shares owned by Mr. Pichler's wife or
1,408 shares owned by his children. Mr. Pichler disclaims beneficial
ownership of these shares.
(5) The figure shown does not include an aggregate of 14,412 additional shares
held by, or for the benefit of, the immediate families or other relatives
of all directors and executive officers as a group not previously listed
above. In each case the director or executive officer disclaims beneficial
ownership of such shares.
(6) No director or executive officer owned as much as 1% of Common Stock of the
Company. The directors and executive officers as a group beneficially owned
1.8% of Common Stock of the Company.
(7) This amount includes shares which represent options exercisable on or
before April 9, 1996, in the following amounts: Mr. Bere, 92,777; Mr. David
Dillon, 147,505; Mr. Everingham, 110,666; Mr. Heschel, 28,333; Mr. Kenney,
143,036; Mr. Pichler, 223,080; Mr. Rice, 53,666; and all directors and
executive officers as a group, 1,302,182.
(8) The fractional interest resulting from allocations under Kroger's 401(k)
plan and Dillon's ESOP and 401(k) plan has been rounded to the nearest
whole number.
(9) Mr. Liddy was elected to the Board of Directors on February 9, 1996, and
purchased 2,400 shares on February 23, 1996.
(10) This amount includes 666 shares which represent options exercisable on or
before April 9, 1996.
17
<PAGE>
As of February 9, 1996, the following persons reported beneficial ownership of
the Company's Common Stock based on reports on Schedule 13G filed with the
Securities and Exchange Commission or other reliable information as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE
NAME ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Kroger Co. Savings Plan 1014 Vine Street 14,665,939(1) 10.9%
Cincinnati, OH 45202
The Dillon Cos. Employee Master Trust 700 East 30th Street 8,393,525(1) 6.3%
Hutchinson, KS 67052
</TABLE>
- ------
(1) Shares beneficially owned by plan trustees for the benefit of participants
in employee benefit plans.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Such officers, directors, and shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during fiscal year 1995
all filing requirements applicable to its officers, directors and ten percent
beneficial owners were satisfied except that Mr. Richard W. Dillon
inadvertently filed a Form 5, reporting a gift of 8,000 shares by a trust under
which he is a co-trustee and a beneficiary, 17 days late; Mr. Michael S.
Heschel inadvertently filed a Form 4, reporting the sale of 12,500 shares, four
days late; and Mr. Jack W. Partridge, Jr. inadvertently reported the effect of
the sale by his son of 100 shares without reporting the transaction itself.
Upon discovery of the oversight, Mr. Partridge reported the disposition on an
amended Form 5.
18
<PAGE>
SELECTION OF AUDITORS
(ITEM NO. 2)
The Board of Directors, on February 9, 1996, appointed the firm of Coopers &
Lybrand L.L.P. as Company auditors for 1996, subject to ratification by
shareholders. This appointment was recommended by the Company's Audit
Committee, comprised of directors who are not employees of the Company. If the
firm is unable for any reason to perform these services, or if selection of the
auditors is not ratified, other independent auditors will be selected to serve.
Ratification of this appointment requires the adoption of the following
resolution by the affirmative vote of the holders of a majority of the shares
represented at the meeting:
"RESOLVED, That the appointment by the Board of
Directors of Coopers & Lybrand L.L.P. as Company
auditors for 1996 be, and it hereby is, ratified."
Fees for all audit services provided by Coopers & Lybrand L.L.P. in 1995
totaled $690,604. In addition, fees totaling $142,686 were charged for non-
audit services.
A representative of Coopers & Lybrand L.L.P. is expected to be present at the
meeting to respond to appropriate questions and to make a statement if he or
she desires to do so.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
-------------
SHAREHOLDER PROPOSALS--1997 ANNUAL MEETING. Shareholder proposals intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1997 should be addressed to the Secretary of the Company and
must be received at the Company's executive offices not later than December 7,
1996.
-------------
Attached to this Proxy Statement is the Company's 1995 Annual Report which
includes a brief description of the Company's business indicating the general
scope and nature of such business during 1995, together with the audited
financial information contained in the Company's 1995 report to the Securities
and Exchange Commission on Form 10-K. A COPY OF THAT REPORT IS AVAILABLE TO
SHAREHOLDERS ON REQUEST BY WRITING: LAWRENCE M. TURNER, VICE PRESIDENT AND
TREASURER, THE KROGER CO., 1014 VINE STREET, CINCINNATI, OHIO 45202-1100 OR BY
CALLING 1-513-762-1220.
The management knows of no other matters that are to be presented at the
meeting but, if any should be presented, the Proxy Committee expects to vote
thereon according to its best judgment.
By order of the Board
of Directors,
Paul W. Heldman,
Secretary
19
<PAGE>
FINANCIAL REPORT 1995
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Kroger Co. has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis and are not misstated due to material
error or fraud. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the report and is responsible for its accuracy and consistency
with the financial statements.
The Company's financial statements have been audited by Coopers & Lybrand
L.L.P., independent certified public accountants, approved by the shareholders.
Management has made available to Coopers & Lybrand L.L.P. all of the Company's
financial records and related data, as well as the minutes of shareholders' and
directors' meetings. Furthermore, management believes that all representations
made to Coopers & Lybrand L.L.P. during its audit were valid and appropriate.
Management of the Company has established and maintains a system of internal
control that provides reasonable assurance as to the integrity of the financial
statements, the protection of assets from unauthorized use or disposition, and
the prevention and detection of fraudulent financial reporting. The system of
internal control provides for appropriate division of responsibility and is
documented by written policies and procedures that are communicated to
employees with significant roles in the financial reporting process and updated
as necessary. Management continually monitors the system of internal control
for compliance. The Company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto. In addition, as part of its audit of
the Company's financial statements, Coopers & Lybrand L.L.P. completed a review
of selected internal accounting controls to establish a basis for reliance
thereon in determining the nature, timing and extent of audit tests to be
applied. Management has considered the internal auditor's and Coopers & Lybrand
L.L.P.'s recommendations concerning the Company's system of internal control
and has taken actions that we believe are cost-effective in the circumstances
to respond appropriately to these recommendations. Management believes that, as
of December 30, 1995, the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which
is publicized throughout the Company. The code of conduct addresses, among
other things, the necessity of ensuring open communication within the Company;
potential conflicts of interests; compliance with all domestic and foreign
laws, including those relating to financial disclosure; and the confidentiality
of proprietary information. The Company maintains a systematic program to
assess compliance with these policies.
JOSEPH A. PICHLER W. RODNEY MCMULLEN
Chairman of the Board and Group Vice President and
Chief Executive Officer Chief Financial Officer
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors is composed of five independent
directors. The committee held three meetings during fiscal year 1995. In
addition, members of the committee received and reviewed various reports from
the Company's internal auditor and from Coopers & Lybrand L.L.P. throughout the
year.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareowner
approval, the selection of the Company's independent public accountant, Coopers
& Lybrand L.L.P. The Audit Committee discussed with the Company's internal
auditor and Coopers & Lybrand L.L.P. the overall scope and specific plans for
their respective audits. The committee also discussed the Company's
consolidated financial statements and the adequacy of the Company's internal
controls. At each meeting, the Committee met with the Company's internal
auditor and Coopers & Lybrand L.L.P., in each case without management present,
to discuss the results of their audits, their evaluations of the Company's
internal controls, and the overall quality of the Company's financial
reporting. Those meetings also were designed to facilitate any private
communications with the Committee desired by the Company's internal auditor or
Coopers & Lybrand L.L.P.
JOHN T. LAMACCHIA
Chairman--Audit Committee
A-1
<PAGE>
THE COMPANY
The Kroger Co. (the "Company") was founded in 1883 and incorporated in 1902. As
of December 30, 1995 the Company was the largest grocery retailer in the United
States based on annual sales. The Company also manufactures and processes food
for sale by its supermarkets. The Company's principal executive offices are
located at 1014 Vine Street, Cincinnati, Ohio 45202 and its telephone number is
(513) 762-4000.
As of December 30, 1995, the Company operated 1,325 supermarkets, most of which
are leased. Of this number, 1,080 supermarkets were operated principally under
the Kroger name in the Midwest and South. Dillon Companies, Inc. ("Dillon"), a
wholly-owned subsidiary of the Company, operated 245 supermarkets directly or
through wholly-owned subsidiaries (the "Dillon Supermarkets"). The Dillon
Supermarkets, principally located in Colorado, Kansas, Arizona and Missouri,
operate under the names "King Soopers", "Dillon Food Stores", "Fry's Food
Stores", "City Market", "Gerbes Supermarkets", and "Sav-Mor".
As of December 30, 1995, the Company, through its Dillon subsidiary, operated
819 convenience stores under the trade names of "Kwik Shop", "Quik Stop
Markets", "Tom Thumb Food Stores", "Turkey Hill Minit Markets", "Loaf 'N Jug",
and "Mini-Mart". The Company owned and operated 694 of these stores while 125
were operated through franchise agreements. The convenience stores offer a
limited assortment of staple food items and general merchandise and, in most
cases, sell gasoline.
The Company intends to develop new food and convenience store locations and
will continue to assess existing stores as to possible replacement, remodeling,
enlarging or closing.
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 that 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.
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>
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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 Company's Senior Competitive Advance and Revolving Credit Facility
Agreement, as amended, (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 earnings before interest, taxes,
depreciation, LIFO charge, unusual and extraordinary items ("EBITD"). These
covenants are based, among other things, upon generally accepted accounting
principles ("GAAP") as applied on a date prior to January 3, 1993. The ability
to generate EBITD at levels sufficient to satisfy the requirements of these
agreements is a key measure of the Company's financial strength. The
presentation of EBITD is not intended to be an alternative to any GAAP measure
of performance but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At 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 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.
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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 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.
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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
Debt Management and Interest Expense
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 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
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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, 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,
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
$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
December 30, 1995, the Company had $221.7 million of commercial paper
outstanding of the $1.008 billion in total bank borrowings. At year-end 1995,
after deducting amounts set aside as backup for the Company's unrated
commercial paper program, $552.0 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 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.
CAPITAL EXPENDITURES
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.
A-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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 $800-$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
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 $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)
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
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
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.
A-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
We have audited the accompanying consolidated balance sheet of The Kroger Co.
as of December 30, 1995 and December 31, 1994, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 30, 1995, December 31, 1994, and January 1, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Kroger Co. as
of December 30, 1995 and December 31, 1994, and the consolidated results of its
operations and its cash flows for the years ended December 30, 1995, December
31, 1994, and January 1, 1994, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefit costs other than
pensions, as of January 3, 1993.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 24, 1996
A-11
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
(In thousands of dollars) 1995 1994
- -----------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash
investments.............. $ -- $ 27,223
Receivables............... 288,067 270,811
Inventories:
FIFO cost................ 2,034,880 2,053,207
Less LIFO reserve........ (449,163) (438,184)
---------- ----------
1,585,717 1,615,023
Property held for sale.... 40,527 39,631
Prepaid and other current
assets................... 192,673 199,437
---------- ----------
Total current assets.... 2,106,984 2,152,125
Property, plant and equip-
ment, net................. 2,662,338 2,252,663
Investments and other as-
sets...................... 275,395 302,886
---------- ----------
TOTAL ASSETS............ $5,044,717 $4,707,674
========== ==========
LIABILITIES
Current liabilities
Current portion of long-
term debt................ $ 24,939 $ 7,926
Current portion of obliga-
tions under capital
leases................... 8,975 8,467
Accounts payable.......... 1,540,067 1,425,612
Other current liabilities. 991,456 952,963
---------- ----------
Total current liabili-
ties................... 2,565,437 2,394,968
Long-term debt............. 3,318,499 3,726,343
Obligations under capital
leases.................... 171,229 162,851
Deferred income taxes...... 153,232 172,690
Other long-term liabili-
ties...................... 439,333 404,506
---------- ----------
TOTAL LIABILITIES....... 6,647,730 6,861,358
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par
$1
Authorized: 350,000,000
shares
Issued: 1995--133,777,921
shares
1994--120,573,148 shares... 586,541 338,568
Accumulated deficit........ (1,945,923) (2,248,736)
Common stock in treasury,
at cost
1995--9,575,950 shares.....
1994--9,576,231 shares..... (243,631) (243,516)
---------- ----------
TOTAL SHAREOWNERS' DEFI-
CIT.................... (1,603,013) (2,153,684)
---------- ----------
TOTAL LIABILITIES AND
SHAREOWNERS' DEFICIT... $5,044,717 $4,707,674
========== ==========
- -----------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-12
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Years Ended December 30, 1995, December 31, 1994 and January 1, 1994
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands, except per share amounts) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales.................................... $23,937,795 $22,959,122 $22,384,301
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 18,098,027 17,404,940 17,109,060
Operating, general and administrative... 4,406,445 4,228,046 4,024,468
Rent.................................... 299,828 299,473 290,309
Depreciation and amortization........... 311,272 277,750 263,810
Net interest expense.................... 312,685 327,550 389,991
Other charges........................... 22,725
----------- ----------- -----------
Total................................. 23,428,257 22,537,759 22,100,363
----------- ----------- -----------
Earnings before tax expense, extraordi-
nary loss and cumulative effect of
change in accounting.................... 509,538 421,363 283,938
Tax expense.............................. 190,672 152,460 113,133
----------- ----------- -----------
Earnings before extraordinary loss and
cumulative effect of change in account-
ing..................................... 318,866 268,903 170,805
Extraordinary loss, net of income tax
credit.................................. (16,053) (26,707) (23,832)
Cumulative effect of change in account-
ing, net of income tax credit........... (159,193)
----------- ----------- -----------
Net earnings (loss)................... $ 302,813 $ 242,196 $ (12,220)
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(2,248,736) $(2,490,932) $(2,475,561)
Net earnings (loss)..................... 302,813 242,196 (12,220)
Sales of treasury stock below average
cost................................... (3,151)
----------- ----------- -----------
End of year............................. $(1,945,923) $(2,248,736) $(2,490,932)
=========== =========== ===========
Primary earnings (loss) per Common Share
Earnings before extraordinary loss and
cumulative effect
of change in accounting................ $ 2.65 $ 2.37 $ 1.60
Extraordinary loss...................... (.13) (.24) (.22)
Cumulative effect of change in account- (1.49)
ing.................................... ------ ------ ------
Net earnings (loss)..................... $ 2.52 $ 2.13 $ (.11)
====== ====== ======
Average number of common shares used in
primary
calculation............................. 120,413 113,537 106,711
Fully-diluted earnings (loss) per Common
Share
Earnings before extraordinary loss and
cumulative effect
of change in accounting................ $ 2.50 $ 2.19 $ 1.50
Extraordinary loss...................... (.12) (.21) (.19)
Cumulative effect of change in account- (1.28)
ing.................................... ------ ------ ------
Net earnings............................ $ 2.38 $ 1.98 $ .03
====== ====== ======
Average number of common shares used in
fully-diluted
calculation............................. 129,232 129,714 124,293
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
A-13
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 30, 1995, December 31, 1994, and January 1, 1994
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands of dollars) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss)....................... $ 302,813 $ 242,196 $ (12,220)
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Extraordinary loss....................... 16,053 26,707 23,832
Cumulative effect of change in
accounting.............................. 159,193
Depreciation and amortization............ 311,272 277,750 263,810
Amortization of discount on Junior
Subordinated Debentures................. 64,198
Amortization of deferred financing costs. 13,189 15,305 15,051
Gain on sale of investment............... (25,099)
Loss (gain) on sale of property, plant
and equipment........................... (710) (3,672) 1,004
LIFO charge (credit)..................... 14,103 16,087 (3,172)
Non-cash contribution.................... 4,364
Other changes, net....................... (1,176) 694 140
Net increase in cash from changes in
operating assets and liabilities, net of
effects from sale of subsidiary,
detailed hereafter...................... 143,002 195,931 105,495
--------- ----------- -----------
Net cash provided by operating
activities............................. 798,546 750,263 617,331
--------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures...................... (726,142) (533,965) (376,138)
Proceeds from sale of assets.............. 49,530 21,819 40,296
(Increase) decrease in property held for
sale..................................... 2,942 (19,694) (10,900)
(Increase) decrease in other investments.. 8,106 (65,124) (21,602)
Proceeds from sale of investment.......... 50,469
--------- ----------- -----------
Net cash used by investing activities... (665,564) (546,495) (368,344)
--------- ----------- -----------
Cash Flows From Financing Activities:
Debt prepayment costs..................... (22,244) (24,696) (33,484)
Financing charges incurred................ (6,716) (22,868) (18,159)
Principal payments under capital lease
obligations.............................. (8,780) (8,249) (7,557)
Proceeds from issuance of long-term debt.. 113,246 902,979 724,826
Reductions in long-term debt.............. (304,234) (1,207,125) (1,147,807)
Book overdrafts........................... 18,633
Proceeds from issuance of capital stock... 38,451 24,753 212,015
Proceeds from sale of treasury stock...... 151 30,609 36,277
Capital stock reacquired.................. (217) (257) (96)
Tax benefit of non-qualified stock
options.................................. 11,505 7,056 2,256
--------- ----------- -----------
Net cash used by financing activities... (160,205) (297,798) (231,729)
--------- ----------- -----------
Net increase (decrease) in cash and
temporary cash investments................ (27,223) (94,030) 17,258
Cash and Temporary Cash Investments:
Beginning of year......................... 27,223 121,253 103,995
--------- ----------- -----------
End of year............................... $ -- $ 27,223 $ 121,253
========= =========== ===========
</TABLE>
A-14
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
Years Ended December 30, 1995, December 31, 1994, and January 1, 1994
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands of dollars) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) In Cash From Changes In
Operating Assets And Liabilities:
Inventories (FIFO)........................... $ 10,396 $(51,831) $(12,239)
Receivables.................................. (18,207) 17,114 (12,752)
Prepaid and other current assets............. (3,992) (5,749) (10,993)
Accounts payable............................. 98,681 68,080 59,902
Accrued expenses............................. 43,501 110,290 8,037
Deferred income taxes........................ (10,008) (4,170) 2,175
Other liabilities............................ 22,631 62,197 71,365
-------- -------- --------
$143,002 $195,931 $105,495
======== ======== ========
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries. Certain prior year amounts have been reclassified to conform to
the 1995 presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of consolidated revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segments of Business
The Company operates primarily in one business segment--retail food and drug
stores, predominately in the Midwest and South as well as Colorado, Arizona,
and Kansas. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. The Company also manufactures and
processes food for sale by its supermarkets and operates convenience stores.
Inventories
Inventories are stated at the lower of cost (principally LIFO) or market.
Approximately 87% of inventories for 1995 and 89% of inventories for 1994 were
valued using the LIFO method. Cost for the balance of the inventories is
determined using the FIFO method.
Property Held for Sale
Property held for sale includes the net book value of property, plant and
equipment that the Company plans to sell. The property is valued at the lower
of cost or market on an individual property basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed principally using the straight-line method over the
estimated useful lives of individual assets, composite group lives or the
initial or remaining terms of leases. Buildings and land improvements are
depreciated based on lives varying from ten to 40 years and equipment
depreciation is based on lives varying from three to 15 years. Leasehold
improvements are amortized over their useful lives which vary from four to 25
years.
Interest Rate Protection Agreements
The Company uses interest rate swaps and caps to hedge a portion of its
borrowings against changes in interest rates. The interest differential to be
paid or received is accrued as interest rates change and is recognized over the
life of the agreements currently as a component of interest expense. Gains and
losses from the disposition of hedge agreements are deferred and amortized over
the term of the related agreements.
Advertising Costs
The Company's advertising costs are predominately expensed as incurred and
included in "operating, general and administrative expenses." Advertising
expenses amounted to $281 million, $250 million and $226 million for 1995, 1994
and 1993, respectively.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities and their
financial reporting bases. The types of differences that
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
give rise to significant portions of deferred income tax liabilities or assets
relate to: property, plant and equipment, inventories, accruals for
restructuring and other charges, and accruals for compensation-related costs.
Deferred income taxes are classified as a net current and noncurrent asset or
liability based on the classification of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to
an asset or liability for financial reporting is classified according to the
expected reversal date. (See Taxes Based on Income footnote.)
Consolidated Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be temporary cash investments.
Cash paid during the year for interest and income taxes was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
--------------------------
Interest............................................. $322,411 $329,570 $329,495
Income taxes......................................... 175,151 131,156 92,745
</TABLE>
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
------------------------
Land.................................................. $ 231,624 $ 214,156
Buildings and land improvements....................... 792,089 683,231
Equipment............................................. 2,609,915 2,441,648
Leaseholds and leasehold improvements................. 763,381 733,019
Construction-in-progress.............................. 492,750 284,913
Leased property under capital leases.................. 254,897 241,884
----------- -----------
5,144,656 4,598,851
Accumulated depreciation and amortization............. (2,482,318) (2,346,188)
----------- -----------
$ 2,662,338 $ 2,252,663
</TABLE>
Substantially all property, plant and equipment, with the exception of
leaseholds, collateralizes debt of the Company. (See Debt Obligations
footnote.)
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-----------------
Deferred financing costs...................................... $ 85,417 $ 99,094
Goodwill...................................................... 43,253 47,518
Investments in Debt Securities................................ 58,988 68,752
Other......................................................... 87,737 87,522
-------- --------
$275,395 $302,886
</TABLE>
The Company is amortizing deferred financing costs using the interest method.
Substantially all goodwill is amortized on the straight-line method over 40
years. Investments in Debt Securities are held at their amortized cost and the
Company intends to hold them to maturity.
A-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CHARGES AND CREDITS
During 1994 the Company recorded a $25,100 pre-tax charge to recognize future
lease commitments and losses on equipment in certain San Antonio stores sublet
to Megafoods, Inc. which declared bankruptcy during 1994. The Company had sold
its San Antonio stores to Megafoods in 1993. Also during 1994 the Company
recorded a gain of $25,100 on the disposition of its investment in Hook-SupeRx,
Inc. ("HSI"), as a part of the merger of HSI and a subsidiary of Revco D.S.,
after providing for certain tax indemnities related to HSI.
In 1994 the Company donated a portion of its stock investment in HSI, with a
$4,364 pre-tax book value, to The Kroger Co. Foundation. The donation resulted
in a $2,705 after tax expense ($.02 per fully diluted share) and produced a
$5,942 tax benefit ($.04 per fully diluted share).
On June 14, 1993, the Company announced its intention to dispose of 15 San
Antonio, Texas stores. The Company recognized a pre-tax charge of $22,725 in
connection with the disposition. Severance pay, unemployment benefits costs and
loss on sale of assets are included in this charge.
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-----------------
Salaries and wages............................................ $286,058 $279,100
Taxes, other than income taxes................................ 152,006 138,428
Interest...................................................... 39,993 51,728
Other......................................................... 513,399 483,707
-------- --------
$991,456 $952,963
</TABLE>
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
----------------------------
Federal
Current......................................... $178,936 $127,393 $ 92,863
Deferred........................................ (10,008) 2,184 2,174
-------- -------- --------
168,928 129,577 95,037
State and local.................................. 21,744 22,883 18,096
-------- -------- --------
190,672 152,460 113,133
Tax credit from extraordinary loss............... (10,263) (17,075) (14,607)
Tax credit from cumulative effect of change in
accounting...................................... (89,546)
-------- -------- --------
$180,409 $135,385 $ 8,980
</TABLE>
Tax laws enacted in 1993 increased federal income tax rates retroactive to the
beginning of 1993. Deferred taxes have been adjusted to reflect the increased
federal income tax rates. This adjustment increased the deferred tax provision
by $4,200 in 1993. Targeted job tax credits reduced the tax provision by $1,206
in 1995, $3,240 in 1994, and $2,608 in 1993.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
----------------
Statutory rate................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit................ 2.8 3.5 4.1
Tax credits................................................... (.4) (1.2) (1.0)
Tax rate change effect on deferred taxes...................... 1.5
Other, net.................................................... (1.1) .2
---- ---- ----
37.4% 36.2% 39.8%
</TABLE>
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences and carryforwards that
comprise deferred tax balances were as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Compensation related costs............................. $ 25,983 $ 30,823
Insurance related costs................................ 32,131 26,182
Inventory related costs................................ 19,045 17,474
Other.................................................. 25,076 28,145
--------- ---------
102,235 102,624
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (24,669) (21,818)
Lease accounting....................................... (4,180) (5,145)
Inventory related costs................................ (27,585) (23,053)
Other.................................................. (9,118) (6,475)
--------- ---------
(65,552) (56,491)
--------- ---------
Current deferred taxes, net (in prepaid and other cur-
rent assets)........................................... $ 36,683 $ 46,133
Long-term deferred tax assets:
Compensation related costs............................. $ 118,255 $ 105,208
Insurance related costs................................ 40,956 28,337
Lease accounting....................................... 23,748 22,885
Other.................................................. 8,293 7,134
--------- ---------
191,252 163,564
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (295,303) (284,957)
Compensation related costs............................. (14,100) (11,310)
Lease accounting....................................... (5,845) (9,146)
Deferred charges....................................... (7,979) (8,859)
Other.................................................. (21,257) (21,982)
--------- ---------
(344,484) (336,254)
--------- ---------
Long-term deferred taxes, net........................... $(153,232) $(172,690)
</TABLE>
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Variable rate Revolving Credit Facility, due 2002........ $1,008,128 $ 979,253
9 1/4% Senior Secured Debentures, due 2005............... 131,011 160,150
8 1/2% Senior Secured Debentures, due 2003............... 200,000 200,000
9% Senior Subordinated Notes, due 1999................... 125,000 125,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 102,419 126,550
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 48,051 70,000
9 7/8% Senior Subordinated Debentures, due 2002.......... 86,658 211,150
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009.................................................... 355,774 349,602
10% Senior Subordinated Notes, due 1999.................. 139,244 222,550
6 3/8% Convertible Junior Subordinated Notes, due 1999... 200,000
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 606,982 608,163
5 1/10% to 10 1/4% Industrial Revenue Bonds, due in vary-
ing amounts through 2021................................ 205,035 206,095
7 7/8% to 12 7/8% mortgages, due in varying amounts
through 2017............................................ 297,313 253,301
3 1/2% to 11% notes, due in varying amounts through 2017. 37,823 22,455
---------- ----------
Total debt............................................... 3,343,438 3,734,269
Less current portion..................................... 24,939 7,926
---------- ----------
Total long-term debt..................................... $3,318,499 $3,726,343
</TABLE>
The aggregate annual maturities and scheduled payments of long-term debt for
the five years subsequent to 1995 are:
<TABLE>
<CAPTION>
<S> <C>
1996...................................................... $ 24,939
1997...................................................... $ 11,838
1998...................................................... $ 16,839
1999...................................................... $337,419
2000...................................................... $ 38,212
</TABLE>
The Company has 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 total debt would be $58,988 less or $3,284,450 at year-end 1995
compared to $3,665,517 billion at year-end 1994.
Credit Agreement
The Company has outstanding a Senior Competitive Advance and Revolving Credit
Facility Agreement, dated as of July 19, 1994, as amended, (the "Credit
Agreement"). The following constitutes only a summary of the principal terms
and conditions of the Credit Agreement. Reference is directed to the Credit
Agreement attached as an exhibit to the Company's Current Report on Form 8-K
dated July 20, 1994.
The Credit Agreement provides for a $1,750,000 Senior Competitive Advance and
Revolving Credit Facility (the "Facility"), which 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 three
month certificates of deposit adjusted for reserve requirements, and (C) 1/2%
over the federal funds rate or (ii) an adjusted Eurodollar rate based upon the
London interbank offered rate ("Eurodollar Rate") plus the Applicable
Percentage which varies from .125% to .5% based upon the Company's achievement
of a financial ratio. At
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 30, 1995, the Applicable Percentage was .3125% for Eurodollar Rate
advances. The Company also pays a facility fee ("Facility Fee") based on the
entire $1,750,000 Facility which varies from .125% to .25% based upon the
Company's achievement of a financial ratio. The Facility Fee at December 30,
1995 was .1875%.
Collateral
The Company's obligations under the Facility are 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. Such assets also collateralize
the Company's obligations under its existing or hereafter issued senior secured
debt.
The Company is entitled to a release of the collateral under the Facility, upon
request, if certain senior debt ratings are achieved or if its consolidated
ratio of net total debt to consolidated EBITD for the most recently ended
fiscal quarter is 3.15 to 1.0 or lower. The Company's ratio at December 30,
1995 was 2.99 to 1.0, and the Company expects to request the release of
collateral in April, 1996.
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 and total 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.
Interest Rate Protection Program
The Company uses derivatives to limit its exposure to rising interest rates.
The guidelines the Company follows are: (i) use average daily bank balance to
determine annual debt amounts subject to interest rate exposure, (ii) limit the
annual amount of debt subject to interest rate reset and the amount of floating
rate debt to a combined total of $1 billion or less, (iii) include no leveraged
products, and (iv) hedge without regard to profit motive or sensitivity to
current mark-to-market status. The Company's compliance with these guidelines
is reviewed semi-annually with the Financial Policy Committee of the Company's
Board of Directors.
The Company currently has in place various interest rate hedging agreements
with notional amounts aggregating $3,165,000. The effect of these agreements is
to: (i) fix the rate on $425,000 floating rate debt, with $200,000 of swaps
expiring in May 1996, $100,000 expiring in December 1998, and the remaining
$125,000 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 $530,000 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, with the Company
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 $75,000 in 2000, $395,000 in 2001, and $60,000 in 2002; (iii) swap
the contractual interest rate on $350,000 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%,
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
with $100,000 of these contracts expiring in May 1999 and the remaining
$250,000 expiring in August 2002, and concurrently, fixing the rate on $300,000
of floating rate debt, with $100,000 of swaps expiring in August 1996, $100,000
expiring in May 1997, and $100,000 expiring 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 $735,000 of four, 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 $75,000
of these swaps expiring in February 1998, $75,000 expiring in March 1998,
$50,000 expiring in October 1999, $100,000 expiring in November 1999, $50,000
expiring in July 2000, $110,000 expiring in November 2000, $125,000 expiring in
January 2001, and $150,000 expiring in July 2003; and (v) cap six month LIBOR
on $825,000 for one to five years at rates between 5.0% and 6.0%, with $275,000
expiring in the first quarter of 1996, $50,000 of the caps expiring in each of
July 1997 and July 1998, $100,000 expiring in December 1997, $100,000 expiring
in each of January 1997 and January 1998, and the remaining $150,000 expiring
in January 1999. Interest expense was increased $2,760 in 1995 and reduced
$13,449 and $11,943 in 1994 and 1993, respectively, as a result of the
Company's hedging program.
The present value of the estimated annual effect on future interest expense of
the Company's derivative portfolio, based on six month LIBOR of 5.5% as in
effect at year-end and the forward yield curve at year-end is:
<TABLE>
<CAPTION>
YEAR-END
LIBOR FORWARD YIELD
AT 5.5% CURVE
-------- ---------------
LIBOR
INCOME (EXPENSE) RATE
------------------ -----
<S> <C> <C> <C>
1996.................................................. $ (7,311) $ (7,322) 5.29%
1997.................................................. (5,349) (5,166) 5.24%
1998.................................................. (4,646) (4,786) 5.62%
1999.................................................. (3,535) (4,361) 5.85%
2000.................................................. (4,237) (4,810) 5.99%
2001.................................................. (1,102) (1,670) 6.16%
2002.................................................. 1,851 434 6.22%
2003.................................................. 292 (148) 6.33%
-------- --------
$(24,037) $(27,829)
</TABLE>
(See Fair Value of Financial Instruments footnote.)
9 1/4% Senior Secured Debentures
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior Secured
Debentures (the "9 1/4% Senior Secureds"). As of December 30, 1995, the Company
has repurchased $68,989 of this issue, $29,139 of these repurchases were
completed in 1995. The 9 1/4% Senior Secureds become due on January 1, 2005.
The 9 1/4% Senior Secureds are redeemable at any time on or after January 1,
1998, in whole or in part at the option of the Company. The redemption prices
commence at 104.625% and are reduced by 1.156% annually until January 1, 2002
when the redemption price is 100%.
8 1/2% Senior Secured Debentures
On July 1, 1993, the Company issued $200,000 of 8 1/2% Senior Secured
Debentures (the "8 1/2% Senior Secureds"). The 8 1/2% Senior Secureds become
due on June 15, 2003. The 8 1/2% Senior Secureds are redeemable at any time on
or after June 15, 1998, in whole or in part at the option of the Company. The
redemption prices commence at 104.250% and are reduced by 1.4165% annually
until June 15, 2001, when the redemption price is 100%.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $125,000 9%
Senior Subordinated Notes due August 15, 1999, redeemable at any time on or
after August 15, 1996 in whole or in part at the option of the Company at par;
(ii) $175,000 9 3/4% Senior Subordinated Debentures due February 15, 2004,
redeemable at any time on or after February 15, 1997 in whole or in part at the
option of the Company, commencing at 104.875% in 1997 and reduced by 1.625%
annually until 2000 when the redemption price is 100% (of the total $72,581
repurchased by the Company, $24,131 was repurchased in 1995); (iii) $100,000 9
3/4% Senior Subordinated Debentures due February 15, 2004, Series B, redeemable
at any time on or after February 15, 1997 in whole or in part at the option of
the Company, commencing at 104.875% in 1997 and reduced by 1.625% annually
until 2000 when the redemption price is 100% (the Company has repurchased
$51,949 of the 9 3/4% Senior Subordinated Debentures, Series B. $21,949 of
these purchases occurred in 1995); (iv) $250,000 9 7/8% Senior Subordinated
Debentures due August 1, 2002, redeemable at any time on or after August 1,
1999, in whole or in part at the option of the Company at par (the Company has
repurchased $163,342 of the 9 7/8% Senior Subordinated Debentures, $124,492 in
1995); (v) $355,774 6 3/4% to 9 5/8% Senior Subordinated Notes due March 15,
1999 to October 15, 2009, with portions of these issues subject to early
redemption by the Company; (vi) $250,000 10% Senior Subordinated Notes due May
1, 1999. This issue is not subject to early redemption by the Company. The
Company repurchased $83,306 of the 10% Senior Subordinated Notes during 1995. A
total of $110,756 of this issue has been repurchased. The proceeds from these
offerings, together with proceeds from the sale of common stock were used to
repay, purchase or redeem outstanding indebtedness of the Company in the year
issued.
6 3/8% Convertible Junior Subordinated Notes
The 6 3/8% Convertible Junior Subordinated Notes were converted at the election
of the holders into approximately 10.7 million shares of common stock on or
before the redemption date of September 5, 1995.
Redemption Event
Subject to certain conditions (including repayment in full of all obligations
under the Credit Agreement or obtaining the requisite consents under the Credit
Agreement), the Company's publicly issued debt will be subject to redemption,
in whole or in part, at the option of the holder upon the occurrence of a
redemption event, upon not less than five days' notice prior to the date of
redemption, at a redemption price equal to the default amount, plus a specified
premium. "Redemption Event" is defined in the indentures as the occurrence of
(i) any person or group, together with any affiliate thereof, beneficially
owning 50% or more of the voting power of the Company or (ii) any one person or
group, or affiliate thereof, succeeding in having a majority of its nominees
elected to the Company's Board of Directors, in each case, without the consent
of a majority of the continuing directors of the Company.
Mortgage Financing
During 1989 the Company completed a $612,475, 10% mortgage financing of 127 of
its retail properties, distribution warehouse facilities, food processing
facilities and other properties (the "Properties"), with a net book value of
$325,327 held by 13 newly formed wholly-owned subsidiaries. The wholly-owned
subsidiaries mortgaged the Properties, which are leased to the Company or
affiliates of the Company, to a newly formed special purpose corporation,
Secured Finance Inc.
The mortgage loans had an original maturity of 15 years. The Properties are
subject to the liens of Secured Finance Inc. The mortgage loans are subject to
semi-annual payments of interest and principal on $150,000 of the borrowing
based on a 30-year payment schedule and interest only on the remaining $462,475
principal amount. The unpaid principal amount will be due on December 15, 2004.
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to $1,750,000
of unrated commercial paper and borrow up to $1,750,000 from the lenders under
the Credit Agreement on a competitive bid basis. The total of unrated
commercial paper, $221,739 at December 30, 1995, and competitive bid
borrowings, $462,000 at December 30, 1995, however, may not exceed $1,750,000.
All commercial paper and competitive bid borrowings must be supported by
availability under the Credit Agreement. These borrowings have been classified
as long-term because the Company expects that during 1996 these borrowings will
be refinanced using the same type of securities. Additionally, the Company has
the ability to refinance the short-term borrowings under the Facility which
matures July 20, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash And Short-term Investments
The carrying amount approximates fair value because of the short maturity of
those instruments.
Long-term Investments
The fair values of these investments are estimated based on quoted market
prices for those or similar investments.
Long-term Debt
The fair value of the Company's long-term debt, including the current portion
thereof, is estimated based on the quoted market price for the same or similar
issues.
Interest Rate Protection Agreements
The fair value of these agreements is based on the net present value of the
future cash flows using the forward interest rate yield curve in effect at the
respective years-end. If the swaps and caps were cancelled as of the respective
years-end the result would have been a net cash outflow for 1995 and 1994. The
swaps and caps are linked to the Company's debt portfolio. The improvement in
the value of the swaps and caps relates to a decrease in market rates during
1995, a corresponding increase in the fair value of linked debt, and a change
in the mix of swaps held. (See Accounting Policies and Debt Obligations
footnotes.)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and short-term investments. $ 27,223 $ 27,223
Long-term investments for which
it is
Practicable.................... $ 53,423 $ 53,423 $ 68,752 $ 68,752
Not Practicable................ $ 29,508 $ -- $ 38,672 $ --
Long-term debt for which it is
Practicable.................... $1,795,139 $1,942,414 $2,273,165 $2,375,293
Not Practicable................ $1,548,299 $ -- $1,461,104 $ --
Interest Rate Protection Agree-
ments
Variable rate pay swaps........ $ -- $ 30,595 $ -- $ (92,925)
Fixed rate pay swaps........... $ -- $ (56,120) $ -- $ 15,572
Interest rate caps............. $ 6,773 $ 3,378 $ 6,823 $ 22,451
---------- ---------- ---------- ----------
$ 6,773 $ (22,147) $ 6,823 $ (54,902)
</TABLE>
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The investments for which it was not practicable to estimate fair value relate
to equity investments in unrelated entities for which there is no market and
investments in real estate development partnerships for which there is no
market.
It was not practicable to estimate the fair value of $1,008,128 of long-term
debt outstanding under the Company's Credit Agreement. There is no liquid
market for this debt. The remaining long-term debt that it was not practicable
to estimate relates to Industrial Revenue Bonds of $205,035, various mortgages
of $297,313, and other notes of $37,823 for which there is no market.
LEASES
The Company operates primarily in leased facilities. Lease terms generally
range from 10 to 25 years with options to renew at varying terms. Certain of
the leases provide for contingent payments based upon a percent of sales.
Rent expense (under operating leases) consists of:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Minimum rentals....................................... 288,961 $288,499 $275,336
Contingent payments................................... 10,867 10,974 14,973
------- -------- --------
299,828 $299,473 $290,309
</TABLE>
Assets recorded under capital leases consists of:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Distribution and manufacturing facilities................. 35,382 $ 38,742
Store facilities.......................................... 219,515 203,142
Less accumulated amortization............................. (118,482) (112,403)
-------- ---------
136,415 $ 129,481
</TABLE>
Minimum annual rentals for the five years subsequent to 1995 and in the
aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996....................................................... $ 30,454 $ 277,213
1997....................................................... 29,654 263,073
1998....................................................... 29,006 249,876
1999....................................................... 28,715 233,632
2000....................................................... 27,773 215,374
Thereafter................................................. 235,929 1,746,018
-------- ----------
381,531 $2,985,186
Less estimated executory costs included in capital leases.. 22,769
--------
Net minimum lease payments under capital leases............ 358,762
Less amount representing interest.......................... 178,558
--------
Present value of net minimum lease payments under capital
leases.................................................... $180,204
</TABLE>
EXTRAORDINARY LOSS
The extraordinary loss in 1995, 1994 and 1993 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share equals net earnings (loss) divided by
the weighted average number of common shares outstanding, after giving effect
to dilutive stock options. Fully diluted earnings per common share for 1995 is
computed by adjusting both net earnings and shares outstanding as if the
September
A-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1995 conversion of the Convertible Junior Subordinated Notes occurred on the
first day of the year. The net earnings adjustment in 1995 was $3,590. Shares
outstanding are also adjusted for the dilutive effect of stock options. Fully
diluted earnings per common share for 1994 and 1993 equals net earnings plus
after-tax interest incurred on the 8 1/4% Convertible Junior Subordinated
Debentures up to the date of their redemption on October 24, 1994, and on the 6
3/8% Convertible Junior Subordinated Notes of $14,805 and $16,065,
respectively, divided by common shares outstanding after giving effect to
dilutive stock options and for shares assumed to be issued on conversion of the
Company's convertible securities.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at December 30, 1995. The stock
has a par value of $100 and is issuable in series.
COMMON STOCK
The Company has authorized 350,000,000 shares of $1 par common stock. The main
trading market for the Company's common stock is the New York Stock Exchange,
where it is listed under the symbol KR. For the three years ended December 30,
1995, changes in common stock were:
<TABLE>
<CAPTION>
ISSUED IN TREASURY
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------
January 2, 1993.................... 104,378,000 $104,378 12,925,729 $328,861
Exercise of stock options including
restricted stock grants........... 896,173 10,658 9,342 62
Sale of treasury shares to the
Company's employee benefit plans.. (12,251) (2,033,225) (51,679)
Shares issued through public offer-
ing............................... 13,275,000 203,493
Tax benefit from exercise of non-
qualified stock options........... 2,256
----------- -------- ---------- --------
January 1, 1994.................... 118,549,173 308,534 10,901,846 277,244
Exercise of stock options including
restricted stock grants........... 2,023,975 26,473 15,479 376
Sale of treasury shares to the
Company's employee benefit plans.. (3,495) (1,341,094) (34,104)
Tax benefit from exercise of non-
qualified stock options........... 7,056
----------- -------- ---------- --------
December 31, 1994.................. 120,573,148 338,568 9,576,231 243,516
Exercise of stock options including
restricted stock grants........... 2,506,667 40,017 8,120 272
Shares issued on conversion of Con-
vertible Junior Subordinated
Notes............................. 10,698,106 196,451 (8,401) (157)
Tax benefit from exercise of non-
qualified stock options........... 11,505
----------- -------- ---------- --------
December 30, 1995.................. 133,777,921 $586,541 9,575,950 $243,631
</TABLE>
The number of shareowners of record of common stock as of March 15, 1996, was
49,517.
STOCK OPTION PLANS
The Company grants options for common stock to employees under various plans,
as well as to its non-employee directors owning a minimum of 1,000 shares of
common stock of the Company, at an option price equal to the fair market value
of the stock at the date of grant. In addition to cash payments, the plans
provide for the exercise of options by exchanging issued shares of stock of the
Company. At December 30, 1995 and December 31, 1994, 3,219,730 and 6,088,924
shares of common stock, respectively, were available
A-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for future options. Options may be granted under the 1987, 1988, 1990 and 1994
plans until 1997, 1998, 2000, and 2004, respectively, and generally will expire
10 years from the date of grant. Options granted prior to May 1994 become
exercisable six months from the date of grant. Options granted beginning in May
1994 vest in one year to three years. At December 30, 1995, options for
8,869,223 shares were exercisable. All grants outstanding become immediately
exercisable upon certain changes of control of the Company.
Changes in options outstanding under the stock option plans, excluding
restricted stock grants, were:
<TABLE>
<CAPTION>
SHARES SUBJECT OPTION PRICE
TO OPTION RANGE PER SHARE
<S> <C> <C>
-----------------------------
Outstanding, January 2, 1993..................... 12,201,697 $ 4.69--$23.44
Granted.......................................... 314,865 $17.50--$21.13
Exercised........................................ (784,658) $ 4.69--$18.69
Cancelled or expired............................. (123,545) $ 9.13--$23.44
----------
Outstanding, January 1, 1994..................... 11,608,359 $ 4.92--$23.44
Granted.......................................... 2,666,175 $20.57--$25.32
Exercised........................................ (1,878,973) $ 4.92--$23.44
Cancelled or expired............................. (89,679) $ 9.13--$25.32
----------
Outstanding, December 31, 1994................... 12,305,882 $ 4.92--$25.32
Granted.......................................... 2,774,650 $25.50--$33.82
Exercised........................................ (2,339,390) $ 4.92--$25.50
Cancelled or expired............................. (77,615) $ 9.13--$25.94
----------
Outstanding, December 30, 1995................... 12,663,527 $ 4.92--$33.82
</TABLE>
In addition to stock options, the Company may grant stock appreciation rights
(SARs). In general, the eligible optionees are permitted to surrender the
related option and receive shares of the Company's common stock and/or cash
having a value equal to the appreciation on the shares subject to the options.
The appreciation of SARs is charged to earnings in the current period based
upon the market value of common stock. As of December 30, 1995 and December 31,
1994, there were no SARs outstanding.
The Company also may grant limited stock appreciation rights (LSARs) to
executive officers in tandem with the related options. LSARs operate in the
same manner as SARs but are exercisable only following a change of control of
the Company. As of December 30, 1995 and December 31, 1994, there were no LSARs
outstanding.
Also, the Company may grant restricted stock awards to eligible employee
participants. In general, a restricted stock award entitles an employee to
receive a stated number of shares of common stock of the Company subject to
forfeiture if the employee fails to remain in the continuous employ of the
Company for a stipulated period. The holder of an award shall be entitled to
the rights of a shareowner except that the restricted shares and the related
rights to vote or receive dividends may not be transferred. The award is
charged to earnings over the period in which the employee performs services and
is based upon the market value of common stock at the date of grant for those
grants without performance contingencies. As of December 30, 1995 and December
31, 1994, awards related to 209,426 and 95,509 shares, respectively, were
outstanding. Of the 209,426 awards outstanding at December 30, 1995, 100,000
shares are contingent on the attainment of certain performance objectives. The
charge to earnings for grants with performance-contingent vesting includes
share appreciation between the grant date and the vesting date.
The Company may grant performance units, either in conjunction with or
independent of a grant of stock options. Performance units entitle a grantee to
receive payment in common stock and/or cash based on the extent to which
performance goals for the specified period have been satisfied. As of December
30, 1995 and December 31, 1994, there were no performance units outstanding.
Incentive shares may be granted which consist of shares of common stock issued
subject to achievement of performance goals. No incentive shares were
outstanding as of December 30, 1995 and December 31, 1994.
A-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONTINGENCIES
The Company continuously evaluates contingencies based upon the best available
evidence.
Management believes that allowances for loss have been provided to the extent
necessary and that its assessment of contingencies is reasonable. To the extent
that resolution of contingencies results in amounts that vary from management's
estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Income Taxes--The Company has closed all tax years through 1983 with the
Internal Revenue Service. The Internal Revenue Service has completed its
examination of the Company's tax returns for 1984 through 1989. All issues have
been resolved with one exception. Efforts to resolve this issue for years 1984
through 1986 with the Appeals Division of the Internal Revenue Service were
unsuccessful. As a result the Company has filed a petition with the United
States Tax Court in Washington, D.C. Litigation was completed in November 1995
and the decision is currently pending. This issue for years 1987 through 1989
is being held in abeyance pending the outcome of this court case. The Company
has provided for this and other tax contingencies.
Insurance--The Company's workers' compensation risks are self-insured in
certain states. In addition, other workers' compensation risks and certain
levels of insured general liability risks are based on retrospective premium
plans, deductible plans, and self-insured retention plans. The liability for
workers' compensation risks is accounted for on a present value basis. Actual
claim settlements and expenses incident thereto may differ from the provisions
for loss. Property risks have been underwritten by a subsidiary and are
reinsured in unrelated insurance companies. Operating divisions and
subsidiaries have paid premiums, and the insurance subsidiary has provided loss
allowances, based upon actuarially determined estimates.
Litigation--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 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 and 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 believes that it has substantial
meritorious defenses to the claims alleged against it, and Fry's intends to
defend the litigation vigorously. The Company is involved in this and various
other legal actions arising in the normal course of business. Management is of
the opinion that their outcome will not have a material adverse effect on the
Company's financial position or results of operations.
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan in which each
holder of common stock is entitled to one common stock purchase right for each
share of common stock owned. The Plan was amended and restated as of November
30, 1995. When exercisable, the nonvoting rights entitle the registered holder
to purchase one share of common stock at a price of $175 per share. The rights
will become exercisable, and separately tradeable, ten days after a person or
group acquires 10% or more of the Company's common stock or ten business days
following a tender offer or exchange offer resulting in a person or group
having beneficial ownership of 10% or more of the Company's common stock. In
the event the rights become exercisable and thereafter the Company is acquired
in a merger or other business combination, each right
A-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
will entitle the holder to purchase common stock of the surviving corporation,
for the exercise price, having a market value of twice the exercise price of
the right. Under certain other circumstances, including the acquisition of 25%
or more of the Company's common stock, each right will entitle the holder to
receive upon payment of the exercise price, shares of common stock with a
market value of two times the exercise price. At the Company's option, the
rights, prior to becoming exercisable, are redeemable in their entirety at a
price of $.01 per right. The rights are subject to adjustment and expire March
19, 2006.
PENSION PLANS
The Company administers non-contributory defined benefit retirement plans for
substantially all non-union employees. Funding for the pension plans is based
on a review of the specific requirements and on evaluation of the assets and
liabilities of each plan. Employees are eligible to participate upon the
attainment of age 21 (25 for participants prior to January 1, 1986) and the
completion of one year of service, and benefits are based upon final average
salary and years of service. Vesting is based upon years of service.
The Company-administered pension benefit obligations and the assets were valued
as of the end of 1995 and 1994. Substantially all plan assets are invested in
cash and short-term investments or listed stocks and bonds, including $118,187
and $89,635 of common stock of The Kroger Co. at the end of 1995 and 1994,
respectively. The status of the plans at the end of 1995 and 1994 was:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-----------------
Actuarial present value of benefit obligations:
Vested employees............................................ $642,582 $528,204
Non-vested employees........................................ 39,503 27,299
-------- --------
Accumulated benefit obligations............................. 682,085 555,503
Additional amounts related to projected salary increases.... 134,208 111,635
-------- --------
Projected benefit obligations............................... 816,293 667,138
Plan assets at fair value.................................... 878,121 705,982
-------- --------
Plan assets in excess of projected benefit obligations....... $ 61,828 $ 38,844
Consisting of:
Unamortized transitional asset.............................. $ 22,997 $ 32,394
Unamortized prior service cost and net gain................. 18,617 (8,188)
Adjustment required to recognize minimum liability.......... 11,266 7,820
Prepaid pension cost in Consolidated Balance Sheet.......... 8,948 6,818
-------- --------
$ 61,828 $ 38,844
</TABLE>
The components of net periodic pension income for 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
-----------------------------
Service cost.................................... $ 20,249 $ 18,959 $ 17,752
Interest cost................................... 57,218 47,778 48,601
Return on assets................................ (211,942) 23,935 (141,143)
Net amortization and deferral................... 131,360 (103,495) 68,041
--------- -------- --------
Net periodic pension income for the year........ $ (3,115) $(12,823) $ (6,749)
Assumptions:
Discount rate.................................. 7.25% 8.5% 7.25%
Salary Progression rate........................ 4.25% 5.5% 4.25%
Long-term rate of return on plan assets........ 9.5% 9.5% 9.5%
</TABLE>
1995 and 1994 assumptions represent the rates in effect at the end of the
fiscal year. These rates were used to calculate the actuarial present value of
the benefit obligations at December 30, 1995 and December 31, 1994,
respectively. However, for the calculation of periodic pension income for 1995
and 1994 the assumptions in the table above for 1994 and 1993, respectively,
were used. The 1996 calculation of periodic pension income will be based on the
assumptions in the table above for 1995.
A-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1995, 1994 and 1993
was $24,902, $24,298 and $20,388, respectively.
The Company participates in various multi-employer plans for substantially all
union employees. Benefits are generally based on a fixed amount for each year
of service. Contributions and expense for 1995, 1994 and 1993 were $90,872,
$87,711 and $86,377, respectively. Information on the actuarial present value
of accumulated plan benefits and net assets available for benefits relating to
the multi-employer plans is not available.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. The majority of the
Company's employees may become eligible for these benefits if they reach normal
retirement age while employed by the Company. Funding of retiree health care
and life insurance benefits occurs as claims or premiums are paid. For 1995,
1994 and 1993, the combined payments for these benefits were $10,025, $10,996
and $12,266, respectively.
As of January 3, 1993 the Company implemented SFAS No. 106 using the immediate
recognition approach. This 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 standard, the Company recorded in 1993, a
one-time, non-cash charge against earnings of $248,739 before taxes ($159,193
after taxes). This cumulative adjustment as of January 3, 1993 represents the
discounted present value of expected future retiree benefits attributed to
employees' service rendered prior to that date.
The following table sets forth the postretirement benefit plans combined status
at December 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO)
Retirees.................................................... $100,166 $ 91,162
Fully eligible active participants.......................... 36,862 41,604
Other active participants................................... 125,098 111,021
-------- --------
262,126 243,787
Unrecognized net gain....................................... 34,394 34,288
-------- --------
Accrued postretirement benefit cost......................... $296,520 $278,075
</TABLE>
The components of net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service costs (benefits attributed to employee serv-
ices during the year)................................ $ 9,344 $ 9,181 $10,261
Interest cost on accumulated postretirement benefit
obligations.......................................... 20,662 19,743 19,607
Net amortization and deferral......................... (725) -- --
------- ------- -------
$29,281 $28,924 $29,868
</TABLE>
The significant assumptions used in calculating the APBO are as follows:
<TABLE>
<CAPTION>
HEALTH CARE TREND RATE
-------------------------
DISCOUNT YEARS TO
RATE INITIAL ULTIMATE ULTIMATE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Transition Obligation........................ 8% 15% 6% 15
Year-end 1993................................ 7.25% 13% 4.5% 13
Year-end 1994................................ 8.50% 12.3% 4.5% 12
Year-end 1995................................ 7.25% 10.0% 5.0% 7
</TABLE>
A-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The impact of a one percent increase in the medical trend rate is as follows:
<TABLE>
<CAPTION>
PERIODIC
COST APBO
----------------
<S> <C> <C>
Transition..................................................... $2,000 $ 9,800
Year-end 1993.................................................. $2,331 $17,135
Year-end 1994.................................................. $4,088 $27,283
Year-end 1995.................................................. $4,037 $32,209
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
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 impact of which will not
be significant to the financial statements.
In October 1995 the Financial Accounting Standards Board issued Statement on
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.
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
1995 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................... $5,464,954 $5,652,890 $6,959,216 $5,860,735 $23,937,795
Merchandise costs....... 5,359,203 5,515,839 6,857,196 5,696,019 23,428,257
Extraordinary loss...... (5,336) (5,451) (1,516) (3,750) (16,053)
Net earnings............ 59,141 77,012 61,161 105,499 302,813
Primary earnings per
common share:
Earnings before ex-
traordinary loss .... .56 .71 .52 .84 2.65
Extraordinary loss.... (.05) (.05) (.01) (.03) (.13)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .51 .66 .51 .81 2.52
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .53 .67 .49 .84 2.50
Extraordinary loss.... (.04) (.04) (.01) (.03) (.12)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .49 .63 .48 .81 2.38
1994
- --------------------------------------------------------------------------------
Sales................... $5,328,804 $5,394,228 $6,650,257 $5,585,833 $22,959,122
Merchandise costs....... 4,052,901 4,081,213 5,052,997 4,217,829 17,404,940
Extraordinary loss...... (8,332) (2,645) (15,175) (555) (26,707)
Net earnings............ 47,358 67,333 36,022 91,483 242,196
Primary earnings per
common share:
Earnings before ex-
traordinary loss .... .50 .62 .45 .80 2.37
Extraordinary loss.... (.07) (.02) (.13) (.01) (.24)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .43 .60 .32 .79 2.13
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .46 .57 .43 .75 2.19
Extraordinary loss.... (.06) (.02) (.12) (.01) (.21)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .40 .55 .31 .74 1.98
</TABLE>
A-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
The third quarter 1994 earnings include a $4,364 pre-tax charge ($2,705 after
tax) offset by a $5,942 tax credit in connection with the Company's
contribution to The Kroger Co. Foundation. Also included in third quarter 1994
earnings is a $25,100 pre-tax charge to recognize future lease commitments and
losses on equipment in certain San Antonio stores sold to Megafoods, Inc. which
declared bankruptcy during the third quarter of 1994. The Company sold its San
Antonio stores to Megafoods in the 1993 third quarter. Also during the third
quarter of 1994 the Company recorded a $25,100 pre-tax gain on the disposition
of its investment in HSI after providing for certain tax indemnities related to
HSI. The extraordinary loss in the four quarters of 1995 and 1994 relates to
expenses associated with the early retirement of debt.
Common Stock Price Range
<TABLE>
<CAPTION>
1995 1994
------------- -------------
QUARTER HIGH LOW HIGH LOW
--------------------------------------------------
<S> <C> <C> <C> <C>
1st................... 27 7/8 23 3/8 25 7/8 19 3/8
2nd................... 28 25 25 3/8 21 1/8
3rd................... 34 3/4 26 1/2 26 7/8 23
4th................... 37 3/4 31 7/8 26 7/8 21 3/4
</TABLE>
Under the Company's Credit Agreement dated July 19, 1994, as amended, the
Company is prohibited from paying cash dividends during the term of the Credit
Agreement. The Company is permitted to pay dividends in the form of stock of
the Company.
A-32
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28,
1995 1994 1994 1993 1991
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales from continuing
operations............. $23,937,795 $22,959,122 $22,384,301 $22,144,588 $21,350,530
Earnings from continuing
operations before ex-
traordinary loss and
cumulative effect of
change in
accounting(A).......... 318,866 268,903 170,805 101,160 100,694
Extraordinary loss (net
of income tax
credit)(B) ............ (16,053) (26,707) (23,832) (107,103) (20,839)
Cumulative effect of
change in accounting
(net of income tax
credit)(C)............. (159,193)
Net earnings (loss)(A).. 302,813 242,196 (12,220) (5,943) 79,855
Earnings (loss) per
share
Earnings from continu-
ing operations before
extraordinary loss(A). 2.50 2.19 1.50 1.11 1.12
Extraordinary loss(B).. (12) (.21) (.19) (1.17) (.23)
Cumulative effect of
change in
accounting(C)......... (1.28)
Net earnings (loss)(A). 2.38 1.98 .03 (.06) .89
Total assets............ 5,044,717 4,707,674 4,480,464 4,303,084 4,114,351
Long-term obligations,
including obligations
under capital leases... 3,489,728 3,889,194 4,135,013 4,472,978 4,407,764
Shareowners' deficit.... (1,603,013) (2,153,684) (2,459,642) (2,700,044) (2,749,183)
Cash dividends per com-
mon share.............. (D) (D) (D) (D) (D)
- --------------------------------------------------------------------------------------------
</TABLE>
(A) See Other Charges and Credits in the Notes to Consolidated Financial
Statements for information pertaining to 1994 and 1993.
(B) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(C) See Postretirement Health Care and Life Insurance Benefits in the Notes to
Consolidated Financial Statements.
(D) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
A-33
<PAGE>
EXECUTIVE OFFICERS
DAVID B. DILLON THOMAS E. MURPHY
President and Chief Group Vice President
Operating Officer
JACK W. PARTRIDGE, JR.
PAUL W. HELDMAN Group Vice President
Vice President, Secretary and
General Counsel JOSEPH A. PICHLER
Chairman of the Board and
MICHAEL S. HESCHEL Chief Executive Officer
Executive Vice President and
Chief Information Officer RONALD R. RICE
President--Manufacturing,
LORRENCE T. KELLAR Senior Vice President
Group Vice President
JAMES R. THORNE
PATRICK J. KENNEY Senior Vice President
Executive Vice President
LAWRENCE M. TURNER
W. RODNEY MCMULLEN Vice President and Treasurer
Group Vice President and
Chief Financial Officer
- --------------------------------------------------------------------------------
The Company has a variety of plans designed to allow employees to acquire stock
in Kroger. Employees of Kroger and its subsidiaries own shares through a profit
sharing plan, as well as 401(k) plans and a payroll deduction plan called the
Kroger Stock Exchange. If employees have questions concerning their shares in
the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
Star Bank, N.A. Cincinnati
P.O. Box 5277
Cincinnati, Ohio 45201
Toll Free 1-800-872-3307
Questions regarding the Company's 401(k) plan should be directed to the
employee's Human Resources Manager or 1-800-2KROGER.
Questions concerning any of the other plans should be directed to the
employee's local Human Resources Manager.
SHAREOWNERS: The Bank of New York is Registrar and Transfer Agent for the
Company's Common Stock. For questions concerning changes of address, etc.,
individual shareowners should contact:
Written inquiries: Certificate transfer and address changes:
The Bank of New York The Bank of New York
Investor Relations Department Receive and Deliver Department
P.O. Box 11258 P.O. Box 11002
Church Street Station Church Street Station
New York, New York 10286 New York, New York 10286
The Bank's toll-free number is: 1-800-524-4458.
SHAREOWNER UPDATES: The Kroger Co. provides a pre-recorded overview of the
Company's most recent quarter. Call 1-800-4STOCKX or, in Cincinnati, 762-4723.
FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial
information, including the Company's most recent report on Form 10-Q or 10-K,
or press release. Written inquiries should be addressed to Shareholder
Relations, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100.
- --------------------------------------------------------------------------------
<PAGE>
The Kroger Co. . 1014 Vine Street . Cincinnati, Ohio 45202 . (513) 762-4000
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 5, 1996
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the REGAL
HOTEL, 150 WEST FIFTH STREET, Cincinnati, Ohio, on May 16, 1996, at 10 A.M.,
for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 1999 and to elect one director to serve until the
annual meeting of shareholders in 1998 or until their successors have
been elected and qualified;
2. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1996; and
3. To transact such other business as may properly be brought before the
meeting; all as set forth in the Proxy Statement accompanying this
Notice.
Holders of common shares of record at the close of business on March 19, 1996,
will be entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT
THE MEETING, IN PERSON OR BY PROXY. PLEASE SIGN AND DATE THE ENCLOSED PROXY AND
MAIL IT AT ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS REQUIRED
IF MAILED WITHIN THE UNITED STATES.
By order of the Board of
Directors,
Paul W. Heldman, Secretary
. FOLD AND DETACH HERE .
- -------------------------------------------------------------------------------
THE KROGER CO.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD MAY 16, 1996
The undersigned hereby appoints each of JOSEPH A. PICHLER, PATRICIA SHONTZ
LONGE and T. BALLARD MORTON, JR., or if more than one is present and acting
then a majority thereof, proxies, with full power of substitution and
revocation, to vote the common shares of The Kroger Co. which the undersigned
is entitled to vote at the annual meeting of shareholders, and at any
adjournment thereof, with all the powers the undersigned would possess if
personally present, including authority to vote on the matters shown on the
reverse in the manner directed, and upon any other matter which may properly
come before the meeting. The undersigned hereby revokes any proxy previously
given to vote such shares at the meeting or at any adjournment.
THE PROXIES ARE DIRECTED TO VOTE AS SPECIFIED ON THE REVERSE HEREOF AND IN
THEIR DISCRETION ON ALL OTHER MATTERS COMING BEFORE THE MEETING. EXCEPT AS
SPECIFIED TO THE CONTRARY ON THE REVERSE, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED FOR ALL NOMINEES LISTED, INCLUDING THE DISCRETION TO CUMULATE
VOTES AND FOR PROPOSAL 2.
(CONTINUED, AND TO BE SIGNED, ON OTHER SIDE)
THE KROGER CO.
P.O. BOX 11127
NEW YORK, N.Y. 10203-0127
<PAGE>
DID YOU KNOW???
YOUR COMPANY IS THE WORLD'S LARGEST FLORIST. SEND FLOWERS ANYWHERE IN THE
WORLD BY CALLING
-------------------------
1-800-334-SEND
8 AM-5 PM EST
-------------------------
[LOGO OF FLOWERS FROM AROUND THE WORLD]
. FOLD AND DETACH HERE .
- --------------------------------------------------------------------------------
--------
| |
| |
--------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES AND FOR PROPOSAL 2.
1. ELECTION OF DIRECTORS
FOR ALL NOMINEES WITHHOLD AUTHORITY TO VOTE EXCEPTIONS
listed below [_] for all nominees listed below [_] [_]
Nominees DAVID B. DILLON, RICHARD W. DILLON, JOHN T. LAMACCHIA, EDWARD M.
LIDDY, T. BALLARD MORTON, JR., AND KATHERINE D. ORTEGA.
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
the EXCEPTIONS box above and write that nominee's name on the space provided
below.
------------------------------------------------------------------------------
2. Approval of Coopers & Lybrand L.L.P., as auditors.
If you wish to vote in accordance with
the recommendations of management, all
you need do is sign and return this
card. The Proxy Committee cannot vote
your shares unless you sign and return
the card.
FOR [_] AGAINST [_] ABSTAIN [_]
CHANGE OF ADDRESS
OR COMMENTS MARK HERE
Please sign exactly as name appears hereon. Joint owners should each sign.
Where applicable, indicate position or representative capacity.
Dated: ___________________________, 1996
________________________________________
Signature
________________________________________
Signature
VOTES MUST BE INDICATED
X
(X) IN BLACK OR BLUE INK.
- --------------------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
