<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.
- --------------------------------------------------------------------------------
(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] No fee required
[_] 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:
<PAGE>
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
AND
1996 ANNUAL REPORT
----------
[KROGER LOGO]
<PAGE>
COVER PRINTED ON RECYCLED PAPER
LOGO
<PAGE>
TO OUR FELLOW SHAREHOLDERS:
The strong performance of The Kroger Co. in Fiscal Year 1996 was highlighted
by:
. the fourth consecutive year of improved sales, cash flow, and earnings;
. continuation of the largest store construction program in the Company's
history;
. completion of consolidated distribution center projects to achieve
economies of scale;
. substantial progress in cost reduction.
These achievements, the result of dedicated efforts by 212,000 Kroger
associates, helped generate a 24% increase in the price of Kroger's stock
during 1996.
1996 IN REVIEW
Earnings before a charge for early debt retirement were $352.7 million,
compared to $318.9 million in 1995. Fully diluted earnings per share rose from
$2.50 to $2.67 on the same basis. After the debt retirement charge, Kroger's
net earnings were $349.8 million, or $2.65 per share. Operating cash flow
increased 6.7% to $1.241 billion.
Sales in 1996 reached $25.2 billion, a 5.2% increase over 1995. Comparable
store sales, which include sales from expanded and relocated stores, increased
4% while identical food store sales rose 1% excluding the effects of strikes at
two divisions.
Capital expenditures totaled $734 million in 1996, about even with the previous
year. In addition, Kroger completed $72 million in sale and leaseback
transactions for supermarkets. During the Fiscal Year, our Company opened,
expanded or relocated 116 stores, which increased total food store square
footage by 6.7%. At the end of 1996, Kroger operated 1,356 food stores under
seven names in 24 states and 831 convenience stores under six banners. Retail
operations are supported by 36 manufacturing plants which produce Kroger-label
products as well as items for other food manufacturing and retail clients.
During the past four years, Kroger has invested approximately $232 million in
technology and logistics projects. The financial return on these investments is
very attractive and the new systems provide a competitive advantage. These
systems have improved customer service while reducing product, distribution,
and operating costs.
FINANCIAL REVIEW AND DEBT REDUCTION
Strong operating cash flow and careful working capital management strengthened
Kroger's financial structure in 1996. The Company redeemed the $125 million
outstanding balance of 9% Senior Subordinated Notes and issued $240 million of
8.15% Senior Notes. Net interest expense for the year declined to just under
$300 million from $312.7 million.
As of early 1997, both Fitch Investors Service, L.P. and Moody's Investors
Service upgraded the Company's debt to "investment grade," citing Kroger's
consistent financial performance. This upgrade is a major achievement for our
Company and a positive development for shareholders. It expands the base of
potential investors, reduces interest costs on future borrowings, and improves
Kroger's access to capital.
OPERATING STRATEGY, 1997-1999
Kroger's objective is to generate a minimum 13-15% annualized increase in
earnings per share over the next three years. This goal is challenging, but
achievable. In order to reach it, the Company will remain focused on strategies
to generate sales and earnings growth from:
- --construction of new square footage;
- --generation of higher returns from existing assets; and
- --enhancement of technology and logistics systems.
1
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. New Square Footage. Over the next three years, Kroger will invest
approximately $800-$850 million annually to complete 100 store projects each
year. This growth will increase retail square footage by about 5-6% per year.
As in the recent past, we will concentrate our storing program in existing
markets. Kroger enjoys the number one or two share in virtually every major and
secondary market we serve. Our capital investment strategy is designed to build
on this strength and take advantage of distribution, administrative, and
advertising efficiencies.
Kroger will continue to consider selective acquisitions that complement our
operating territories. In early 1997, we acquired 10 stores from Harvest Foods,
Inc. in Arkansas. These new locations augment Kroger's strong presence in the
Little Rock metropolitan area and bring our stores to several contiguous areas.
. Higher returns from existing assets. Kroger's combination food and drug store
is the powerful format that drives our business. Our division and store
managers are experts at operating these facilities in a manner that offers
exciting product variety and merchandising approaches, one-stop shopping
convenience, and outstanding customer service in a cost effective manner.
The stores are in excellent physical condition. Within the past five years,
half have been constructed, expanded, or remodeled. They are equipped with
modern technology and information systems, such as in-store processors and a
satellite network, that enhance efficiency and enable our associates to focus
on serving customer needs. We are now implementing a new generation of
technologies that will further enhance store productivity. These include
improved check authorization systems, electronic shelf price audits, electronic
funds transfer, and electronic pharmacy claims adjudication.
In 1995-96, Kroger invested approximately $70 million in logistics projects
designed to streamline our distribution network and reduce costs of
transportation and storage. A substantial portion of this investment was
earmarked to expand three existing consolidation centers and to build a fourth
center for the distribution of slow-moving grocery and health and beauty care
items. In addition, the Company is consolidating small satellite warehouses for
grocery and perishable products to reduce distribution costs.
For many years, Kroger has centrally procured produce, health and beauty care
items, and meat and deli products. Most grocery items have been purchased by
individual marketing areas. In early 1997, Kroger began to achieve additional
buying efficiencies by coordinating certain grocery purchases across marketing
areas. Kroger can now take advantage of its $25 billion sales volume to
negotiate national promotions that will reduce product costs.
. Technology and logistics enhancements. Kroger's investment in technology and
logistics surpassed $72 million in 1996. Some of the projects underway include:
Warehouse information management system (WIMS): a computerized real time
program that enables our distribution centers to reduce inventory levels while
improving the accuracy of purchase orders and invoices. WIMS is currently under
test in two distribution centers.
Computer assisted ordering (CAO): a promising technology which matches product
shipments to actual sales volumes, thus reducing inventory and improving each
store's ability to manage precious shelf space. More than 350 stores are
currently using CAO.
Paperless environment: the replacement of paper by electronic data wherever
economical. In cooperation with major suppliers, Kroger is eliminating paper
invoices and purchase orders through electronic data interchange (EDI). The
goal is to eliminate paper transactions. We are also using electronic data
transmission in a variety of internal programs.
LABOR RELATIONS
Kroger experienced a positive labor relations environment in 1996, except for
strikes in our King Soopers and City Markets divisions. Overall, the Company
continued to make progress by successfully negotiating more than 60 collective
bargaining agreements. Several of these are extended 4-5 year contracts.
2
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COMMUNITY ACTIVITIES
Throughout 1996, Kroger's community relations activities enhanced the Company's
corporate reputation among customers, associates, civic and charitable
organizations, and public officials. The Kroger Co. Foundation contributed $2.9
million to a wide variety of community projects. Cash contributions from
operating earnings totaled $5.5 million. In addition, the Company donated more
than $5.5 million of products--much of which served communities affected by
emergency or disaster relief situations.
Thousands of Kroger associates were enthusiastic volunteer participants in a
number of community-wide charitable events. For example, Kroger employees
raised just over $1 million during 1996 for the March of Dimes, which
represented the third highest total collected by any company in the United
States.
The favorable publicity generated by these activities strengthened Kroger's
community reputation for customer service. In April, the Cincinnati-Dayton
division was honored as "Employer of the Year" by Arc, an agency that supports
people with mental retardation. The award was prompted in part by complimentary
letters from Kroger shoppers who had been served by store associates with
physical or mental disabilities.
THE YEAR AHEAD
Kroger management is confident that the Company's strategy will continue to
generate solid growth and increasing value for shareholders. The execution of
our business strategy is founded upon the support and talents of Kroger's
212,000 associates. Their exceptional service to customers and communities is
the source of Kroger's strong performance. We extend our sincere thanks for
their commitment.
In March 1997 the Company announced a 2-for-1 stock split on its common stock,
effective as of the close of business on April 4, 1997. The decision to split
the stock reflects the Board of Directors' confidence in the long term
performance and strength of the Company and is a compliment to the sustained
commitment of Kroger's dedicated associates.
DIRECTOR AND EXECUTIVE CHANGES
Edward M. Liddy, President and Chief Operating Officer of the Allstate
Corporation, was elected to the Board of Directors.
Warren F. Bryant, President of Dillon Companies, Inc., was elected to the
additional position of Chief Executive Officer of Dillon. Donald E. Becker,
Vice President--Merchandising, Cincinnati-Dayton Marketing Area, was promoted
to President, Central Marketing Area, replacing Theodore Engel, who retired
after 39 years of distinguished service. Don W. McGeorge, President of the
Michigan Marketing Area, was named President of the Columbus Marketing Area,
succeeding William D. Parker, who retired after 40 years service with Kroger.
McGeorge was replaced as President in Michigan by Bruce A. Lucia, who had been
Executive Vice President of the division. Mark Salisbury was promoted to
President of Tom Thumb Convenience Stores, and Henry R. Waguespack was named
President of Kwik Shop, Inc. John Cox was named President of Jackson Ice Cream
Co., Inc. Geoffrey J. Covert joined Kroger as Vice President, Grocery Products
Group.
/s/ Joseph A. Pichler /s/ David B. Dillon
- --------------------------- -----------------------------------
Joseph A. Pichler Chairman David B. Dillon President and Chief
and Chief Executive Officer Operating Officer
3
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 4, 1997
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the OMNI
NETHERLAND PLAZA, 35 WEST FIFTH STREET, Cincinnati, Ohio, on May 15, 1997, at
10 A.M., for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 2000 or until their successors have been elected and
qualified;
2. To consider and act upon a proposal to approve the 1997 Long-Term
Incentive Plan;
3. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1997; and
4. 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 18, 1997,
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 4, 1997
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 that 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, John T. LaMacchia, 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 4, 1997.
As of the close of business on March 18, 1997, the Company's outstanding voting
securities consisted of 126,959,971 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 that notice is made by or on behalf of the shareholder or by
the Chairman or Secretary upon the convening of the meeting, each shareholder
will have the right to cumulate votes at the election.
4
<PAGE>
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 or divide them among nominees in
full votes in any manner. Any vote "FOR" the election of directors will
constitute discretionary authority to the Proxy Committee to cumulate votes, as
the Proxy Committee determines, 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 that proposal. The 1997 Long-Term Incentive Plan is to be
approved by a majority of the shares represented at the meeting. Therefore,
broker non-votes will have no effect and abstentions will have the effect of a
vote against the 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 14 members divided into
three classes. Prior to the annual meeting of shareholders, the Board of
Directors expects to increase the authorized size of the Board to 15 members.
Five directors are to be elected at the annual meeting to serve until the
annual meeting in 2000 or until their successors have been elected by the
shareholders, or by the Board of Directors pursuant to the Company's
Regulations, and qualified. Candidates for director receiving the greatest
number of votes cast by holders of shares entitled to vote at a meeting at
which a quorum is present are elected, up to the maximum number of directors to
be chosen at the meeting. The committee memberships stated below are those in
effect as of the date hereof. It is intended that, except to the extent that
authority is withheld, the accompanying proxy will be voted for the election of
the following five persons:
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- ------------------------------------------------------------------------------------------------
NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE CONTINUING UNTIL 2000
<S> <C> <C> <C>
REUBEN V. ANDERSON Mr. Anderson is a member, in the Jackson, Mississippi of- 54 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
chair of the Social Responsibility Committee and a member
of the Audit Committee.
CLYDE R. MOORE Mr. Moore is President, Chief Operating Officer, and a di- 43 --
rector of Thomas & Betts Corporation, a manufacturer of
electrical and electronic components. He has been elected
President and Chief Executive Officer of Thomas & Betts
Corporation effective May 7, 1997. Prior to this Mr. Moore
held a variety of senior operating positions at Thomas &
Betts Corporation and FL Industries, Inc. Mr. Moore is a
member of the advisory board of the American Manufacturing
Corporation.
JOHN D. ONG Mr. Ong is Chairman of The BFGoodrich Company, a chemical 63 1975
and aerospace company. He is a director of Cooper Indus-
tries, Inc.; Ameritech Corporation; The Geon Company;
ASARCO Inc.; and TRW Inc. Mr. Ong is vice chair of the Fi-
nancial Policy Committee and a member of the Corporate
Governance and Executive Committees.
JOSEPH A. PICHLER Mr. Pichler is Chairman of the Board and Chief Executive 57 1983
Officer of Kroger. He is a director of The BFGoodrich Com-
pany and Cincinnati Milacron. Mr. Pichler is chair of the
Executive Committee.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
MARTHA ROMAYNE SEGER Dr. Seger is a Financial Economist and currently is a 65 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 Social Responsibility Committees.
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1999
RICHARD W. DILLON Mr. Dillon is Chairman Emeritus of the Board of Dillon 69 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 55 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, Chief Operating Officer, and a 51 1996
director of the 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 Officer of Sears, Roebuck and Co., where
he held a variety of senior operating and financial posi-
tions 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. He
is a member of the Audit and Financial Policy Committees.
T. BALLARD MORTON, Mr. Morton is Executive in Residence of the College of 64 1968
JR. Business & Public Administration of the University of
Louisville. He is a director of PNC Bank, Kentucky, Inc.
and LG&E Energy Corp. Mr. Morton is chair of the Financial
Policy Committee, vice chair of the Compensation Commit-
tee, and a member of the Executive Committee.
KATHERINE D. ORTEGA Ms. Ortega served as an Alternate Representative of the 62 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
Ultramar Diamond Shamrock Corporation; 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>
7
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
- ------------------------------------------------------------------------------------------------
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1998
<S> <C> <C> <C>
JOHN L. CLENDENIN Mr. Clendenin is Chairman of the Board of BellSouth Corpo- 62 1986
ration, a holding company with subsidiaries in the tele-
communications business. He is a director of Wachovia
Corp.; Equifax Incorporated; Providian Corporation; RJR
Nabisco Holdings Corp.; Springs Industries, Inc.; Coca
Cola Enterprises, Inc.; The Home Depot, Inc.; and National
Service Industries, Inc. Mr. Clendenin is chair of the
Corporate Governance Committee and a member of the Social
Responsibility Committee.
DAVID B. DILLON Mr. Dillon was elected President and Chief Operating Offi- 46 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.
PATRICIA SHONTZ Dr. Longe is an Economist and a Senior Partner of The 63 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 vice chair of the Corporate Governance Com-
mittee and a member of the Compensation Committee.
THOMAS H. O'LEARY Mr. O'Leary is Chairman of Burlington Resources Inc., a 63 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 Emeritus and Consultant of Baker 65 1994
Hughes Incorporated, a company that provides equipment and
services to the petroleum and process industries. He is a
director of Union Texas Petroleum Holdings Inc., Varco In-
ternational, and Wynn's International Inc. Mr. Woods is
vice chair of the Social Responsibility Committee and a
member of the Audit Committee.
</TABLE>
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(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 $28,000 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 1996 of $167 per director. The
Company also provides a major medical plan for directors.
Under the 1994 Long-Term Incentive Plan, in 1996 the Company granted to each of
its non-employee directors owning a minimum of 1,000 shares of Company common
stock as of the date of the 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
28, 1996, the value of each grant of options made in 1996, none of which were
exercisable, was $10,860. If the shareholders approve the 1997 Long-Term
Incentive Plan, these grants to directors will continue on the same terms
except that the vesting period will increase to five years.
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,
Compensation, and Corporate Governance Committees. During 1996, the Audit
Committee met three times, the Compensation Committee met three times, and the
Corporate Governance Committee met two 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
1996. During 1996, all directors attended at least 75% of the aggregate number
of Board meetings and committee meetings on which that director was a member,
with the exception of Mr. Ong and Dr. Seger.
The Corporate Governance Committee will consider shareholder recommendations
for nominees for membership on the Board of Directors. Recommendations relating
to the Company's annual meeting in May 1998, 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 6, 1997.
CERTAIN TRANSACTIONS
The law firm of Gilliland & Hayes, of which Bradley D. Dillon, son of Richard
W. Dillon, is a partner, rendered legal services to subsidiaries of the Company
which resulted in fees paid to the law firm in 1996 of $202,305. 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 1996 of $17,779. The management of the Company
has determined that amounts paid by the Company for the services are fair and
competitive.
9
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION
The following table shows the compensation for the past three years of the
Chief Executive Officer and each of the Company's four most highly compensated
executive officers, excluding the Chief Executive Officer (the "named executive
officers"):
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION(1)
------------------------------ -------------------------
AWARDS
-------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(2) (3) (4) (5)
Joseph A. Pichler 1996 $452,400 $486,893 $18,741 30,000 $ 26,760
Chairman and Chief 1995 $447,046 $614,197 $16,412 30,000 $ 24,300
Executive Officer 1994 $430,385 $684,447 $19,511 27,000 $ 23,023
David B. Dillon 1996 $326,977 $321,773 $ 5,186 18,000 $504,955(6)
President and Chief 1995 $305,083 $309,731 $ 4,456 $332,250 25,000 $ 31,166(7)
Operating Officer 1994 $290,000 $281,059 15,000 $ 1,650
Patrick J. Kenney 1996 $278,100 $258,455 $15,732 15,000 $ 22,085
Executive Vice President 1995 $262,308 $293,688 $12,291 $138,437 20,000 $ 18,065
1994 $250,000 $277,959 $12,840 $205,625 15,000 $ 17,012
Michael S. Heschel 1996 $268,100 $258,455 $ 9,275 25,000 $ 13,470
Executive Vice President 1995 $252,308 $293,688 $ 7,389 $138,437 20,000 $ 11,633
1994 $240,000 $277,959 $ 8,653 $205,625 15,000 $ 11,093
Ronald R. Rice 1996 $223,692 $155,080 $13,186 15,000 $ 19,411
Senior Vice President 1995 $215,885 $194,364 $10,984 $ 93,500 15,000 $ 17,130
1994 $202,615 $214,049 $11,656 20,000 $ 15,374
</TABLE>
- ------
(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, 9,600,
13,000, 13,000, and 1,334 shares outstanding, respectively, at December 28,
1996, with an aggregate value of $4,625,000, $444,000, $601,250, $601,250,
and $61,978, respectively. The aggregate value is based on the market price
of the Company's common stock on December 28, 1996. 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 four 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 two years, 9,000
shares in 1999, and 1,000 shares in 2000. The restrictions remaining on
outstanding restricted stock awards to Mr. Rice lapse 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 vest
for equal number of shares in the three succeeding years from the date of
grant. 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) For 1996, these amounts include the Company's matching contribution under
The Kroger Co. Savings Plan in the amounts of $450, $900, $0, $450, and
$900, respectively, for Messrs. Pichler, Dillon, Kenney, Heschel and Rice
and reimbursement of certain premiums for policies of life insurance in the
amounts of $26,310, $7,280, $22,085, $13,020 and $18,511, respectively, for
Messrs. Pichler, Dillon, Kenney, Heschel, and Rice.
(6) $496,775 of this amount represents an additional payment to Mr. Dillon
pursuant to the Company's relocation program.
(7) $23,154 of this amount represents an additional payment to Mr. Dillon
pursuant to the Company's relocation program.
10
<PAGE>
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which
options to purchase common stock of the Company are granted to officers and
other employees of the Company and its subsidiaries. The following table shows
option grants in fiscal year 1996 to the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
- ------------------------------------------------------------------ -----------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Pichler 30,000 1.06% $41.50 4/17/2006 $0 $782,974 $1,984,209
David B. Dillon 18,000 0.64% $41.50 4/17/2006 $0 $469,784 $1,190,526
Patrick J. Kenney 15,000 0.53% $41.50 4/17/2006 $0 $391,487 $ 992,105
Michael S. Heschel 25,000 0.89% $41.50 4/17/2006 $0 $652,478 $1,653,508
Ronald R. Rice 15,000 0.53% $41.50 4/17/2006 $0 $391,487 $ 992,105
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year. These options
vest in equal number of shares in 1997, 1998 and 1999, 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 1996 by each of the named executive officers and the
fiscal year-end value of unexercised options:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES TABLE
- --------------------------------------------------------------------------
NUMBER OF
SECURITIES
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 $ 0 242,080/59,000 $7,655,631/$763,330
David B. Dillon 24,505 $767,857 136,333/39,667 $4,257,010/$532,550
Patrick J. Kenney 0 $ 0 153,035/31,666 $5,061,187/$416,878
Michael S. Heschel 33,333 $579,477 4,999/41,668 $ 107,147/$464,378
Ronald R. Rice 4,000 $100,240 61,332/31,668 $1,573,133/$431,247
</TABLE>
- ------
(1) No SARs were granted or outstanding during the fiscal year.
As of March 1, 1997, senior officers held options to acquire stock of the
Company that expire in varying amounts from 1997 through 2006. Of these
options, 27,550, 164,733, and 11,000, expire in 1997, 1998, and 1999,
respectively. It is expected that these options will be exercised prior to
their expiration.
11
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS
The Company made no Long-Term Incentive Plan awards, excluding stock options
and restricted stock, to any named executive officer during fiscal year 1996.
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;
. include, as part of total compensation, opportunities for equity
ownership;
. use incentives that offer more than competitive compensation when the
Company achieves superior results;
. base incentive payments on earnings before interest, taxes, depreciation
and LIFO charges ("EBITD") and on sales results.
Accordingly, 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 1996, Kroger granted 2,837,510 stock options to approximately 5,000
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. At
the present time, the shares in the 1994 Long-Term Incentive Plan nearly are
exhausted. As a result, the Company is submitting for shareholder approval its
1997 Long-Term Incentive Plan that was adopted by the Board of Directors
subject to shareholder approval. (See Item No. 2, below.)
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 Mr. Bryant, approximately 33% of total potential cash compensation is based
on Dillon EBITD and sales performance. In the case of all other 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 1996 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 84.7% of their potentials. Mr. Bryant's bonus payout is based in
total on Dillon operations and represented 55.5% of his potential. Mr. Rice's
bonus payout is based in part on the manufacturing group's operations and
represented 68.9% of his potential. All other executive officers received bonus
payouts of 94.0% of their respective potentials.
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 84.7% 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.
In 1995, the Compensation Committee engaged Towers Perrin 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, the
Board adopted a performance based restricted stock plan and made awards under
which Mr. Pichler could 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.
In 1995 and 1996, Mr. Pichler tentatively earned 20,000 and 10,000 shares, by
virtue of the Company's shareholder return relative to the reference group
being in the first quartile and the second quartile, respectively. Mr. Pichler
also is party to an employment contract with the Company which is more
particularly described elsewhere in the Proxy statement. (See p. 16). 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, and its proposed 1997 Long-Term Incentive Plan, comply with the
Internal Revenue Service's final regulations on the deductibility limit.
Accordingly, the compensation expense incurred thereunder should be deductible.
The Company continues to 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 also will
attempt to maximize the amount of compensation expense that is tax deductible
by the Company.
Compensation Committee:
Thomas H. O'Leary, Chair
T. Ballard Morton, 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-
12/29/91 $100 $100 $100
FY92 $ 74 $108 $127
FY93 $101 $118 $126
FY94 $121 $120 $134
FY95 $188 $165 $172
FY96 $233 $203 $216
</TABLE>
The Company's fiscal year ends on the Saturday closest to December 31.
- ------
*Total assumes $100 invested on December 29, 1991 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 will 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, Dillon, Kenney, Heschel, and Rice in
1996, which was covered by the Plan, was $1,066,597, $636,708, $571,788,
$561,788, and $418,056, respectively. As of December 28, 1996, they had 9, 1,
35, 5, and 36 years of credited service, respectively.
DILLON PLANS
Dillon Companies, Inc. and its subsidiaries maintain pension, profit sharing,
stock ownership, and savings plans that provide benefits at levels comparable
to the plans described above. David B. Dillon 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 those plans.
15
<PAGE>
Under the Dillon Employees' Profit Sharing 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 that the participating employee's total compensation bears to the total
compensation of all participating employees employed by the particular Dillon
division or subsidiary. On participating employees' termination upon attaining
the age 60, death or disability, they are entitled to their full contribution
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 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 Plans. Benefits payable under the Profit Sharing
Plan may exceed the amount payable under the Pension Plan, and participants are
entitled to the greater of the two. The table does not reflect benefits payable
under Dillon's Profit Sharing 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. Dillon also maintains an Excess
Benefit Plan that pays benefits which exceed the maximum benefit payable under
ERISA by defined benefit and defined contribution plans.
<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 7, 1997, 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................................. 2,999(8)
John L. Clendenin.................................. 2,999(8)
David B. Dillon.................................... 247,854(1)(6)(7)
Richard W. Dillon.................................. 175,624(2)(8)
Michael S. Heschel................................. 14,157(6)(7)
Patrick J. Kenney.................................. 178,433(6)(7)
John T. LaMacchia.................................. 2,999(8)
Edward M. Liddy.................................... 2,400
Patricia Shontz Longe.............................. 5,999(8)
T. Ballard Morton, Jr.............................. 11,999(8)
Thomas H. O'Leary.................................. 2,999(8)
John D. Ong........................................ 2,999(8)
Katherine D. Ortega................................ 3,588(8)
Joseph A. Pichler.................................. 513,915(3)(6)(7)
Ronald R. Rice..................................... 78,083(6)(7)
Martha Romayne Seger............................... 3,199(8)
James D. Woods..................................... 2,999(8)
Directors and Executive Officers as a group (in-
cluding those named above)........................ 1,764,537(4)(5)(6)(7)
</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. Mr. Dillon disclaims beneficial ownership of these shares.
(3) This amount does not include 2,000 shares owned by Mr. Pichler's wife or
1,508 shares owned by his son. Mr. Pichler disclaims beneficial ownership
of these shares.
(4) The figure shown does not include an aggregate of 14,652 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 those shares.
(5) 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
1.4% of common stock of the Company.
(6) This amount includes shares which represent options exercisable on or
before April 8, 1997, in the following amounts: Mr. David Dillon, 136,333;
Mr. Heschel, 0; Mr. Kenney, 153,035; Mr. Pichler, 230,080; Mr. Rice,
61,332; and all directors and executive officers as a group, 992,594.
(7) 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.
(8) This amount includes 1,999 shares which represent options exercisable on or
before April 8, 1997.
17
<PAGE>
As of February 7, 1997, 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 14,068,358(1) 11.1%
Cincinnati, OH 45202
The Dillon Cos. Employee Master Trust 700 East 30th Street 8,318,623(1) 6.5%
Hutchinson, KS 67052
</TABLE>
- ------
(1) Shares beneficially owned by plan trustees for the benefit of participants
in employee benefit plans.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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. Those 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 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 1996
all filing requirements applicable to its officers, directors and ten percent
beneficial owners were satisfied except that Mr. Richard W. Dillon
inadvertently filed an amended Form 4, reporting a sale of 5,086 shares by a
trust under which he is a co-trustee and a beneficiary, four days late, and Mr.
James R. Thorne inadvertently filed a Form 4, reporting the sale of a
fractional share resulting from the closing of an account under an employee
benefit plan, eight days late.
APPROVAL OF THE 1997 LONG-TERM INCENTIVE PLAN
(ITEM NO. 2)
The Board of Directors has adopted, subject to shareholder approval, The Kroger
Co. 1997 Long-Term Incentive Plan ("Plan") for which a maximum of 10,000,000
shares of common stock will be reserved. The purpose of the Plan is to assist
in attracting and retaining employees and directors of outstanding ability and
to promote the identification of their interests with those of the shareholders
of the Company. If approved, the Plan will be effective as of May 15, 1997. On
March 20, 1997, Board of Directors adopted a resolution to make a distribution
in the nature of a 2-for-1 stock split to shareholders of record on April 4,
1997. The stock split will not, therefore, increase the number of shares
available under the Plan.
In 1988, the Company instituted a broad-based stock option program designed
to motivate employees at all levels of the organization. In 1996 the stock
option committee made grants of stock options to approximately 5,000 employees.
This program was adopted in efforts to more closely align the interests of
employees and shareholders, as stock appreciation will benefit both non-
employee shareholders and employees. The 1997 Long-Term Incentive Plan
continues this policy.
The stock option committee currently intends to modify the manner in which
stock options granted to approximately 100 of the most senior executives will
vest. Performance based options will comprise half of the grant made to these
individuals. These options will vest during the first four years from the date
of the grant only if the Company's stock price has achieved a 63% appreciation
from the option price. Thereafter, the options
18
<PAGE>
vest only if the Company's stock price has achieved a minimum of a 13%
appreciation per annum from the date of grant or 200% appreciation, whichever
is less. The other half of the options granted to these individuals are
expected to vest in equal installments over five years from the date of grant.
The stock option committee will implement these limitations on vesting for the
general grant to be made in 1997. It will consider these same limitations and
other alternatives for future grants.
DESCRIPTION OF THE PLAN
General. The Plan consists of three separate programs; the Insider Program, the
Non-Insider Program and the Outside Director Program. Officers of the Company,
including inside directors, subject to Section 16(a) of the Securities Exchange
Act of 1934 (the "Exchange Act") are eligible for grants or awards under the
Insider Program while all other employees of the Company are eligible for
grants or awards under the Non-Insider Program. Non-employee directors will
receive grants under the Outside Director Program as more particularly
described below. Currently, 13 officers are eligible to participate in the
Insider Program and the remaining approximately 200,000 employees of the
Company are eligible to participate in the Non-Insider Program. Grants will be
made under the Outside Director Program to all non-employee directors who own a
minimum of 1,000 shares of common stock of the Company on the date of the
grant. As of February 7, 1997, all twelve of the non-employee directors are
eligible for grants under the Outside Director Program.
Administration. The Insider Program and the Outside Director Program will be
administered by a committee of the Board of Directors which meets the standards
of Rule 16b-3(d)(1) under the Exchange Act and initially will be those members
of the Compensation Committee of the Board of Directors who qualify as "outside
directors" under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Non-Insider Program will be administered by a
committee appointed by the Chief Executive Officer, the members of which are
ineligible to receive grants or awards under the Non-Insider Program. The
administering committee in each case is referred to as the "Committee."
The Committee is authorized to grant nonstatutory stock options and to award
restricted stock to participants under the Insider Program and the Non-Insider
Program. Annually, the Committee will grant to eligible participants under the
Outside Director Program a nonstatutory stock option to purchase 2,000 shares
of common stock of the Company. The Committee will determine the types and
amounts of awards or grants, the recipients of awards or grants, vesting
schedules, restrictions, performance criteria, and other provisions of the
grants or awards. All of these provisions will be set forth in a written
agreement with the participant.
In addition to other rights of indemnification they may have as directors or
employees of the Company, members of the Committee will be indemnified by the
Company for reasonable expenses incurred in connection with defense of any
action brought against them by reason of action taken or failure to act under
or in connection with the Plan or any grant or award thereunder, if the members
acted in good faith and in a manner which they believed to be in the best
interests of the Company.
The Board of Directors may terminate or amend the Plan at any time without
shareholder approval, except that it may not amend the Plan without shareholder
approval if required by applicable law, regulations, or rules of the principal
exchange or interdealer quotation system on which the common stock is listed or
quoted. Unless earlier terminated by the Board of Directors, the Plan will
terminate on February 21, 2007. Termination of the Plan will have no effect on
the validity of any options or restricted stock outstanding on the date of
termination. Unless otherwise provided in the agreement, awards and grants will
not be transferable other than by will or the laws of descent and distribution.
Shares Subject to Grant. Under the Plan up to 10,000,000 authorized but
unissued or reacquired shares of common stock may be issued upon the exercise
of nonstatutory stock options and as restricted stock. In no event may any
participant receive awards and grants totaling more than 300,000 shares of
common stock in the aggregate under the Plan.
19
<PAGE>
If an option expires, or if restricted stock is not issued or is forfeited
prior to the payment of a dividend on those shares to a participant, the shares
not exercised, unissued or forfeited, as the case may be, will generally become
available for other grants or awards under the Plan.
Outside Director Program. The Outside Director Program is a formula plan in
which non-employee directors who own at least 1,000 shares of common stock of
the Company at the time of the grant will receive annually during each of 1997
through 1999, a nonstatutory stock option to purchase 2,000 shares of common
stock at an option price equal to the fair market value of the common stock on
the date of the grant. The option generally will have a 10-year term (subject
to earlier termination in the event of termination of Board membership other
than by reason of retirement) and will vest in equal share amounts,
respectively, on the five annual anniversary dates from the date of grant. The
Plan provides for the first grant to eligible directors of nonstatutory options
covering 2,000 shares of common stock to be made on May 15, 1997, subject to
approval by the Company's stockholders of the Plan.
Stock Options. Nonstatutory stock options granted under the Plan will have
exercise prices not less than the greater of the fair market value per share of
the optioned stock or the par value of a share of common stock, a term of not
more than ten years after the date of grant, and generally may not be exercised
before six months from the date of grant. Subject to the terms of the Plan, the
Committee determines the vesting schedule and other terms and conditions
applicable to stock options granted to employees. An eligible participant may
receive more than one option.
The Committee may in its discretion provide for the payment of the option
exercise price otherwise than in cash, including by delivery of common stock,
valued at its fair market value on the date of exercise, or by a combination of
both cash and common stock.
Restricted Stock. The Committee may award restricted stock to participants. The
stock will be subject to forfeiture, restrictions on transferability, and other
restrictions as specified in the agreement. The Committee has authority to
impose other terms and conditions as it may determine in its discretion
including making the vesting of awards contingent on the achievement of
performance goals. Performance goals may be established by the Committee and
may be based on earnings or earnings growth; sales; return on assets, equity or
investment; total shareholder return; regulatory compliance; satisfactory
internal or external audits; improvement of financial ratings; achievement of
balance sheet or income statement objectives or any other objective goals
established by the Committee and may be absolute in terms or measured against
or in relation to other companies comparably, or otherwise situated to the
Company. During the period that a restricted stock award is subject to
restrictions, an employee has the right to vote the shares and to receive
dividends. The maximum number of shares of restricted stock that can be issued
under the Plan is 500,000.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Nonstatutory Stock Options. A grantee will not recognize income on the grant of
a nonstatutory stock option but generally will recognize ordinary income upon
the exercise thereof. The amount of income recognized upon the exercise of a
nonstatutory stock option generally will be measured by the excess, if any, of
the fair market value of the shares at the time of exercise over the exercise
price, provided the shares issued are either transferable or not subject to a
substantial risk of forfeiture.
In the case of ordinary income recognized by a grantee as described above in
connection with the exercise of a nonstatutory stock option, the Company will
be entitled to a deduction in the amount of ordinary income so recognized by
the grantee, provided the Company satisfies certain federal income tax
reporting requirements.
Restricted Stock. The recipient of restricted stock is not required to include
the value of these shares in ordinary income until the first time the grantee's
rights in the shares are transferable or are not subject to a substantial risk
of forfeiture, whichever occurs earlier, unless the grantee elects to be taxed
on receipt of the shares. In either case, the amount of income will be equal to
the excess of the fair market value of the stock at
20
<PAGE>
the time the income is recognized over the amount paid for the stock. The
Company will be entitled to a deduction in the amount of the ordinary income
recognized by the grantee for the Company's taxable year which includes the
last day of the grantee's taxable year in which the grantee recognizes the
income, provided the Company satisfies certain federal income tax reporting
requirements.
General. The rules governing the tax treatment of options and restricted stock
and stock acquired upon the exercise of options are quite technical, so that
the above description of tax consequences is necessarily general in nature and
does not purport to be complete. Moreover, statutory provisions are, of course,
subject to change, as are their interpretations, and their application may vary
in individual circumstances. Finally, the tax consequences under applicable
state law may not be the same as under the federal income tax laws.
Tax Deductibility Cap. Section 162(m) of the Code provides that certain
compensation received in any year by a "covered employee" in excess of
$1,000,000 is non-deductible by the Company for federal income tax purposes.
Section 162(m) provides an exception, however, for "performance-based
compensation." The Committee currently intends to structure grants and awards
made under the Plan to "covered employees" as performance-based compensation
that is exempt from Section 162(m).
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1997 LONG-TERM
INCENTIVE PLAN
----------------------------
NAME AND POSITION(1) DOLLAR VALUE NUMBER OF UNITS
- -------------------- ------------ ---------------
<S> <C> <C>
Non-Executive Director Group....................... $0(2) 24,000(3)
</TABLE>
- ------
(1) Awards, values and benefits are not determinable for other than the Non-
Executive Director Group.
(2) Options to be granted to Non-Executive Directors upon approval of
shareholders at fair market value of stock.
(3) Based on number of eligible Non-Executive Directors as of February 7, 1997.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL
-------------
21
<PAGE>
SELECTION OF AUDITORS
(ITEM NO. 3)
The Board of Directors, on February 21, 1997, appointed the firm of Coopers &
Lybrand L.L.P. as Company auditors for 1997, 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 1997 be, and it hereby is, ratified."
Fees for all audit services provided by Coopers & Lybrand L.L.P. in 1996
totaled $682,849. In addition, fees totaling $70,651 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--1998 ANNUAL MEETING. Shareholder proposals intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1998 should be addressed to the Secretary of the Company and
must be received at the Company's executive offices not later than December 6,
1997.
-------------
Attached to this Proxy Statement is the Company's 1996 Annual Report which
includes a brief description of the Company's business indicating its general
scope and nature during 1996, together with the audited financial information
contained in the Company's 1996 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
22
<PAGE>
FINANCIAL REPORT 1996
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 stockholders' 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 28, 1996, 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 1996. 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 28, 1996 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 28, 1996, the Company operated 1,356 supermarkets, most of which
are leased. Of this number, 1,105 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 251 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 28, 1996, the Company, through its Dillon subsidiary, operated
831 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 711 of these stores while 120
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 1996 were $6.2 billion compared to $5.9
billion in the fourth quarter of 1995, a 5.8% increase. Sales for the full year
increased 5.1%. Food stores sales for the fourth quarter 1996 were 5.0% ahead
of the fourth quarter 1995 and 4.5% ahead for the year. A review of sales by
lines of business for the three years ended December 28, 1996, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
% OF 1996 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Food Stores.............. 93.4% $23,508 +4.5% $22,488 +4.9% $21,442 +4.9%
Convenience Stores....... 3.8% 948 +11.6% 850 -5.4% 898 -5.6%
Other sales.............. 2.8% 714 +19.0% 600 -3.1% 619 -37.5%
------ ------- ------- -------
Total sales.............. 100.0% $25,170 +5.1% $23,938 +4.3% $22,959 +2.6%
</TABLE>
Sales in identical food stores, stores that have been in operation and have not
been expanded or relocated for one full year, increased .5% in the fourth
quarter and .5% for the full year. Identical store sales, excluding the strike
in the King Soopers and City Markets divisions, were up 1.0% for the full year.
In the fourth quarter comparable store sales, which include results of expanded
and relocated stores, increased 4.0%. The increase in food stores' sales can be
attributed primarily to inflation of less than .5%, the opening or expansion of
116 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, and book stores. The Company expects
to emphasize this "one-stop shopping" convenience format tailored to each
market to obtain future sales growth.
Convenience stores' sales increased 11.6% for the year and 15.4% during the
fourth quarter of 1996. The convenience stores' sales increase can be
attributed to a 12% increase in gas retails for the quarter on a 10.5% increase
in gallons sold. In-store sales in identical convenience stores increased 1.9%
for both the fourth quarter and the full year. Gasoline sales at identical
convenience stores increased 13.3% in the fourth quarter 1996 on a 1.1%
increase in gallons sold, and gasoline sales increased 8.9% for the year on a
1.5% increase in gallons sold.
Other sales primarily consists of outside sales by the Company's manufacturing
divisions. The increase in other sales compared to 1995 was 24.2% for the
fourth quarter and 19.0% for the year. Manufacturing division outside sales
increased 22.5% in the fourth quarter 1996 and 15.4% for the full year.
Total food store square footage increased 6.7%, 4.6% and 4.7% in 1996, 1995,
and 1994, respectively. The Company expects to increase retail food store
square footage by approximately 5-6% in both 1997 and 1998. Convenience store
square footage increased 1.5% in 1996, decreased 10.6% in 1995, and increased
.4% in 1994.
Sales per average square foot for the last three years were:
<TABLE>
<CAPTION>
TOTAL SALES
PER
AVERAGE SQUARE
FOOT
--------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Food Stores...................................................... $403 $405 $404
Convenience Stores............................................... $519 $475 $436
</TABLE>
Sales per average square foot for convenience stores for 1996, 1995, and 1994
exclude stores that are operated by franchisees. The decrease in sales per
average square foot for food stores can be attributed to a large increase in
square footage at the end of 1996 as new store construction was completed.
The Company produced record sales in 1996 despite work stoppages at the King
Soopers and City Markets divisions. In 1996 and 1995 sales improved despite
increased competition from other food retailers, supercenters, mass
merchandisers, and restaurants. The Company's wide regional diversity allowed
it to withstand these challenges and to produce record results.
A-3
<PAGE>
The sales improvement in 1994 was the result of new square footage combined
with the increased productivity of existing stores.
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. 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 (the "Credit Agreement"), as amended, 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"). All such
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 28, 1996 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," increased 6.7% in 1996 to $1.241 billion compared to
$1.163 billion in 1995 and $1.065 billion in 1994. Excluding the effect of
strikes in the King Soopers and City Markets divisions, EBITD would have been
approximately $1.274 billion for 1996. EBITD growth was generated by sales
gains, 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 1995 and 1994 were due in large
part to increased sales combined with improved gross profits rates.
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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Merchandise costs as reported.............................. 75.65% 75.60% 75.81%
LIFO charge................................................ .05% .05% .07%
------ ------ ------
Merchandise costs as adjusted.............................. 75.60% 75.55% 75.74%
</TABLE>
On a consolidated basis, cost of goods increased for the year. However, the
consolidated gross profit rate does not reflect the general trend in food
stores. The food stores' gross profit rates were favorable to last year. Much
of the decline in the consolidated gross profit rate was due to lower gross
margins experienced at the convenience stores, primarily in gasoline. The
Company will continue to invest capital in technology focusing on improved
store operations, procurement, and distribution practices. Warehousing costs as
a percent of sales declined from 1995's rates. The gross profit rate is
expected to be favorably influenced by the Company's advances in consolidated
distribution and coordinated purchasing, reduced transportation costs, and
strong private label sales.
A-4
<PAGE>
The Company expects to limit product cost increases through continued use of
technology, outsourcing, and a variety of store level efficiency enhancements.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in 1996,
1995 and 1994 were 18.34%, 18.41% and 18.42%, respectively.
Operating, general and administrative costs declined 40 basis points in the
fourth quarter and 7 basis points for the full year. The improved fourth
quarter results were caused by a combination of factors, including favorable
workers compensation and general liability trends, cost reduction achieved
through enhanced technology, a reduction in employee benefit costs, and reduced
administrative expenses.
The Company's goal for 1997 is to further 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
1997, the Company plans to open or expand approximately 100 stores compared to
116 in 1996. 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 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 tax years 1984-1989. All issues have been resolved
with one exception. Efforts to resolve this issue for tax years 1984-1986 with
the Appeals Division of the Internal Revenue Service were unsuccessful. As a
result the Company filed a petition with the United States Tax Court in
Washington, D.C. Litigation was completed in November 1995 and a decision was
rendered in January 1997 in favor of the Company. The Company is awaiting a
decision from the Internal Revenue Service regarding appeal. This issue for
years 1987-1989 is being held in abeyance pending the ultimate outcome of this
court case. The Company has provided for this and other tax contingencies.
NET EARNINGS
Net earnings totaled $349.8 million in 1996 compared to $302.8 million in 1995
and $242.2 million in 1994. Earnings in 1996 compared to 1995 and 1994 were
affected by: (i) an after tax extraordinary loss from the early retirement of
debt in 1996 of $2.9 million compared to $16.1 million in 1995 and $26.7
million in 1994, (ii) net interest expense in 1996 of $300.0 million versus
$312.7 million in 1995 and $327.6 million in 1994, and (iii) depreciation
expense of $343.7 million, $311.3 million and $277.8 million in 1996, 1995 and
1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management and Interest Expense
Net interest expense declined to $300.0 million in 1996 as compared to $312.7
million in 1995 and $327.6 million in 1994.
In 1996, the Company made open market purchases of $49.9 million of its senior
and subordinated debt and redeemed $134.7 million of its subordinated debt. The
repurchases and redemption were effected with proceeds from the issuance of
$240 million of new senior debt, additional bank borrowings and cash generated
from operations. In 1995 the Company repurchased, on the open market, $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 debt. A portion of
these redemptions were financed by $111.4 million of new subordinated debt and
$132.3 million in additional bank borrowings.
A-5
<PAGE>
The Company has in place a Senior Competitive Advance and Revolving Credit
Facility Agreement ("Credit Agreement") providing a $1.75 billion revolving
credit loan through July 20, 2002. The average interest rate on the Company's
bank debt, which totaled $1.001 billion at year-end 1996 versus $1.008 billion
at year-end 1995 was 6.16% compared to 6.84% in 1995 and 5.57% in 1994. The
Company's rate on the bank debt is variable.
The Company currently expects 1997 net interest expense, estimated using year-
end 1996 rates, to total approximately $295 million. A 1% increase in market
rates would increase this estimated expense by approximately $6.5 million. A 1%
decrease in market rates would reduce the estimated expense by approximately
$9.4 million.
Long-term debt, including capital leases and current portion thereof, increased
$157.0 million to $3.681 billion at year-end 1996 from $3.524 billion at year-
end 1995. The Company purchased a portion of the debt issued by the lenders of
certain of its structured financings, which cannot be retired early, in an
effort to effectively further reduce the Company's interest expense. Excluding
the debt incurred to make these purchases, which are classified as investments,
the Company's long-term debt would be $152.6 million less or $3.528 billion at
year-end 1996 compared to $3.465 billion at year-end 1995.
Required principal repayments over the next five years amount to $285.8 million
at year-end 1996 versus $429.2 million and $670.7 million at year-end 1995 and
1994, respectively. Scheduled debt maturities for the five years subsequent to
1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year 1............................................... $ 11,642 $ 24,939 $ 7,926
Year 2............................................... 16,095 11,838 14,341
Year 3............................................... 197,876 16,839 12,875
Year 4............................................... 28,868 337,419 15,507
Year 5............................................... 31,301 38,212 620,012
</TABLE>
In 1996, Year 3 maturities include the remaining $124.7 million of 10% Senior
Subordinated Notes.
In 1995, Year 4 maturities included the remaining $139.2 million of 10% Senior
Subordinated Notes, and $125.0 million of 9% Senior Subordinated Notes.
In 1994, Year 5 maturities included $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 remaning 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.
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 $3.160 billion. The effect of these
agreements is to: (i) fix the rate on $465 million floating rate debt, with
$100 million of swaps expiring in December 1998, $125 million expiring in
January 1999, $75 million expiring in January 2001, $65 million expiring in
December 2004, and the remaining $100 million expiring in 2007, for which the
Company pays an average rate of 6.72% and receives 6 month LIBOR; (ii) fix
A-6
<PAGE>
the rate on $860 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, 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 7.11% and receiving 6 month LIBOR on these agreements which will expire $375
million in 2000, $395 million in 2001, and $90 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 $200 million of floating rate
debt, with $100 million expiring in May 1997, and $100 million expiring in
August 1998, for which the Company pays an average rate of 6.87%; 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 $550 million
for one to five years at rates between 5.0% and 6.0%, with $50 million of the
caps expiring in each of July 1997 and July 1998, $100 million expiring in
December 1997, $100 million expiring in each of January 1997 and January 1998,
and the remaining $150 million expiring in January 1999. Interest expense was
increased $11,071 and $2,760 in 1996 and 1995, respectively, and reduced
$13,449 in 1994, as a result of the Company's hedging program.
The Company's borrowings under the Credit Agreement are permitted to be in the
form of commercial paper. At December 28, 1996, the Company had $187.7 million
of commercial paper outstanding of the $1.001 billion in total bank borrowings.
After deducting amounts set aside as backup for the Company's unrated
commercial paper program, $739.5 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
In 1996, the Company redeemed the entire $125 million outstanding balance of
its 9% Senior Subordinated Notes and approximately $9.7 million of its General
Term Notes, Series B. The Company also made open market purchases totaling
$23.4 million of its 9 1/4% Senior Secured Debentures and $26.5 million of its
various senior subordinated debt issues. Borrowings under the Credit Agreement,
proceeds from exercise of stock options, the issuance of new senior debt, the
sale of assets and excess cash from operations were used to finance these
redemptions and repurchases. The outstanding balances of these debt issues at
December 28, 1996 were $695.8 million for the senior subordinated debt issues
which includes the General Term Notes, and $107.6 million for the 9 1/4% Senior
Secured Debentures.
During 1995 the Company redeemed 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 redemptions and repurchases were affected 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.
A-7
<PAGE>
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.
CAPITAL EXPENDITURES
Capital expenditures totaled $733.8 million for 1996, compared to $726.1
million in 1995. Capital outlays in 1994 were $534.0 million. During 1996 the
Company opened, acquired or expanded 116 food stores and 31 convenience stores
compared to 83 food stores and 19 convenience stores in 1995 and 82 food stores
and 17 convenience stores in 1994. The Company also completed 53 food store and
9 convenience store remodels during 1996. During 1996, the Company closed or
sold 49 food stores and 19 convenience stores.
The Company expects 1997 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 5-6% through the opening, expansion or acquisition of approximately
90-100 food stores. The Company also expects to complete within-the-wall
remodels of 50 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 1996 the Company generated $477.8 million in cash from operating
activities compared to $798.5 million in 1995 and $750.3 million in 1994. The
decrease from 1995 is primarily due to an increase in operating assets and
liabilities that used $248.5 million of cash in 1996 compared to generating
cash of $143.0 million in 1995. The largest component of the change in
operating assets and liabilities was net owned inventories due in part to the
Company's storing program and warehouse expansions which increased $224.5
million as compared to a decrease of $109.1 million in 1995. Additionally,
prepaid and other assets increased $120.6 million, primarily because of the
Company's funding of a Voluntary Employee Benefit Association Trust for
employee benefit plan expenses. Offsetting these net uses of cash were
increases in net earnings before extraordinary losses of $47.1 million and non-
cash charges for depreciation and amortization of $32.5 million.
Investing activities used $856.9 million compared to $665.6 million of cash
used in 1995 and $546.5 million of cash used in 1994. The increase in the use
of cash was due to increased purchase of investments of $140.9 million and
increased capital expenditures of $7.7 million combined with a decrease in
proceeds from sale of assets and investments of $40.3 million.
Cash provided by financing activities in 1996 totaled $379.1 million compared
to uses of $160.2 million and $297.8 million in 1995 and 1994, respectively.
The decrease in the use of cash during 1996 as compared to 1995 is due to a
1996 net debt increase of $146.9 million versus 1995's net debt reduction of
$191.0 million. Additionally, $6.8 million less cash was needed for debt
prepayments and finance charges and an additional $175.4 million was provided
by outstanding checks. An additional $19.5 million was provided from the sale
of stock and related transactions.
A-8
<PAGE>
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 1996 the Company negotiated over 50 labor contracts, but it did incur
work stoppages in the King Soopers and City Markets divisions. Typical
agreements are 3 to 5 years in duration, and as such agreements expire, the
Company expects to negotiate with the unions and to enter into new collective
bargaining agreements. There can be no assurance, however, that such agreements
will be reached without work stoppage. A prolonged work stoppage affecting a
substantial number of stores could have a material adverse effect on the
results of the Company's operations. Major union contracts that will be
negotiated in 1997 include Phoenix, Dallas, Atlanta and Nashville store
employees.
SUBSEQUENT EVENTS
On January 29, 1997, the Company announced that it would begin a stock
repurchase program in order to reduce dilution caused by the Company's stock
option plans for employees. The repurchase program will be funded by proceeds
derived from employee stock option exercises, plus associated tax benefits.
Effective as of February 15, 1997, the Company redeemed the entire outstanding
balances of its 9 3/4% Senior Subordinated Debentures and its 9 3/4% Senior
Subordinated Debentures, Series B, both of which were due in 2004. The balance
outstanding under both issues totaled approximately $142 million.
SPECIAL NOTE
The foregoing Management's Discussion and Analysis contains certain forward-
looking statements about the future performance of the Company which are based
on management's assumptions and beliefs in light of the information currently
available to it. These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially from
those statements including, but not limited to: competitive practices and
pricing in the food and drug industries generally and particularly in the
Company's principal markets; changes in the financial markets related to the
cost of the Company's capital; the ability of the Company to access the public
debt and equity markets to refinance indebtedness and fund the Company's
capital expenditure program on satisfactory terms; supply or quality control
problems with the Company's vendors; labor disputes and material shortages; and
changes in economic conditions that affect the buying patterns of the Company's
customers.
A-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
We have audited the accompanying consolidated balance sheet of The Kroger Co.
as of December 28, 1996 and December 30, 1995, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 28, 1996, December 30, 1995, and December 31, 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 28, 1996 and December 30, 1995, and the consolidated results of its
operations and its cash flows for the years ended December 28, 1996, December
30, 1995, and December 31, 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 22, 1997
A-10
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 28, December 30,
(In thousands of dollars) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Receivables......................................... $ 324,050 $ 288,067
Inventories:
FIFO cost.......................................... 2,175,630 2,034,880
Less LIFO reserve.................................. (461,689) (449,163)
----------- -----------
1,713,941 1,585,717
Property held for sale.............................. 38,333 40,527
Prepaid and other current assets.................... 276,440 192,673
----------- -----------
Total current assets.............................. 2,352,764 2,106,984
Property, plant and equipment, net................... 3,063,534 2,662,338
Investments and other assets......................... 409,115 275,395
----------- -----------
TOTAL ASSETS...................................... $ 5,825,413 $ 5,044,717
=========== ===========
LIABILITIES
Current liabilities
Current portion of long-term debt................... $ 11,642 $ 24,939
Current portion of obligations under capital leases. 9,501 8,975
Accounts payable.................................... 1,650,256 1,540,067
Other current liabilities........................... 1,041,521 991,456
----------- -----------
Total current liabilities......................... 2,712,920 2,565,437
Long-term debt....................................... 3,478,743 3,318,499
Obligations under capital leases..................... 180,748 171,229
Deferred income taxes................................ 151,036 153,232
Other long-term liabilities.......................... 483,672 439,333
----------- -----------
TOTAL LIABILITIES................................. 7,007,119 6,647,730
----------- -----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1996--136,461,521 shares
1995--133,777,921 shares............................. 658,230 586,541
Accumulated deficit.................................. (1,596,050) (1,945,923)
Common stock in treasury, at cost
1996--9,581,856 shares...............................
1995--9,575,950 shares............................... (243,886) (243,631)
----------- -----------
TOTAL SHAREOWNERS' DEFICIT........................ (1,181,706) (1,603,013)
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT........ $ 5,825,413 $ 5,044,717
=========== ===========
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-11
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands, except per share amounts) (52 WEEKS) (52 Weeks) (52 Weeks)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales.................................... $25,170,909 $23,937,795 $22,959,122
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 19,041,465 18,098,027 17,404,940
Operating, general and administrative... 4,616,749 4,406,445 4,228,046
Rent.................................... 301,629 299,828 299,473
Depreciation and amortization........... 343,769 311,272 277,750
Net interest expense.................... 299,984 312,685 327,550
----------- ----------- -----------
Total................................. 24,603,596 23,428,257 22,537,759
----------- ----------- -----------
Earnings before tax expense and extraor-
dinary loss............................. 567,313 509,538 421,363
Tax expense.............................. 214,578 190,672 152,460
----------- ----------- -----------
Earnings before extraordinary loss....... 352,735 318,866 268,903
Extraordinary loss, net of income tax
benefit................................. (2,862) (16,053) (26,707)
----------- ----------- -----------
Net earnings.......................... $ 349,873 $ 302,813 $ 242,196
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(1,945,923) $(2,248,736) $(2,490,932)
Net earnings............................ 349,873 302,813 242,196
----------- ----------- -----------
End of year............................. $(1,596,050) $(1,945,923) $(2,248,736)
=========== =========== ===========
Primary earnings per Common Share
Earnings before extraordinary loss ..... $ 2.68 $ 2.65 $ 2.37
Extraordinary loss...................... (.02) (.13) (.24)
------ ------ ------
Net earnings............................ $ 2.66 $ 2.52 $ 2.13
====== ====== ======
Average number of common shares used in
primary
calculation............................. 131,375 120,413 113,537
Fully-diluted earnings per Common Share
Earnings before extraordinary loss ..... $ 2.67 $ 2.50 $ 2.19
Extraordinary loss...................... (.02) (.12) (.21)
------ ------ ------
Net earnings............................ $ 2.65 $ 2.38 $ 1.98
====== ====== ======
Average number of common shares used in
fully-diluted
calculation............................. 132,033 129,232 129,714
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
A-12
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 28, 1996, December 30, 1995, and December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands of dollars) (52 WEEKS) (52 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings................................ $ 349,873 $ 302,813 $ 242,196
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary loss......................... 2,862 16,053 26,707
Depreciation and amortization.............. 343,769 311,272 277,750
Amortization of deferred financing costs... 13,004 13,189 15,305
Gain on sale of investment................. (25,099)
Loss (gain) on sale of assets.............. 4,496 (710) (3,672)
LIFO charge................................ 12,526 14,103 16,087
Non-cash contribution...................... 4,364
Other changes, net......................... (200) (1,176) 694
Net increase in cash from changes in
operating assets and liabilities, net of
effects from sale of subsidiary, detailed
hereafter................................. (248,528) 143,002 195,931
--------- --------- -----------
Net cash provided by operating activities. 477,802 798,546 750,263
--------- --------- -----------
Cash Flows From Investing Activities:
Capital expenditures........................ (733,883) (726,142) (533,965)
Proceeds from sale of assets................ 9,242 49,530 21,819
(Increase) decrease in property held for
sale....................................... 580 2,942 (19,694)
(Increase) decrease in other investments.... (132,796) 8,106 (65,124)
Proceeds from sale of investment............ 50,469
--------- --------- -----------
Net cash used by investing activities..... (856,857) (665,564) (546,495)
--------- --------- -----------
Cash Flows From Financing Activities:
Debt prepayment costs....................... (4,196) (22,244) (24,696)
Financing charges incurred.................. (17,927) (6,716) (22,868)
Principal payments under capital lease
obligations................................ (9,229) (8,780) (8,249)
Proceeds from issuance of long-term debt.... 382,161 113,246 902,979
Reductions in long-term debt................ (235,214) (304,234) (1,207,125)
Outstanding checks.......................... 193,997 18,633
Proceeds from issuance of capital stock..... 48,120 38,451 24,753
Proceeds from sale of treasury stock........ 151 30,609
Capital stock reacquired.................... (254) (217) (257)
Tax benefit of non-qualified stock options.. 21,597 11,505 7,056
--------- --------- -----------
Net cash provided (used) by financing
activities............................... 379,055 (160,205) (297,798)
--------- --------- -----------
Net decrease in cash and temporary cash
investments................................. 0 (27,223) (94,030)
Cash and Temporary Cash Investments:
Beginning of year........................... 0 27,223 121,253
--------- --------- -----------
End of year................................. $ 0 $ 0 $ 27,223
========= ========= ===========
</TABLE>
A-13
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
Years Ended December 28, 1996, December 30, 1995, and December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
(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).......................... $(140,750) $ 10,396 $(51,831)
Receivables................................. (35,983) (18,207) 17,114
Prepaid and other current assets............ (120,641) (3,992) (5,749)
Accounts payable............................ (83,808) 98,681 68,080
Accrued expenses............................ 76,423 43,501 110,290
Deferred income taxes....................... 45,665 (10,008) (4,170)
Other liabilities........................... 10,566 22,631 62,197
--------- -------- --------
$(248,528) $143,002 $195,931
========= ======== ========
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries.
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 others and operates convenience
stores.
Inventories
Inventories are stated at the lower of cost (principally LIFO) or market.
Approximately 88% of inventories for 1996 and 87% of inventories for 1995 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 $302 million, $281 million and $250 million for 1996, 1995
and 1994, 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-15
<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 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. Outstanding checks represent
disbursements which are funded as the item is presented for payment.
Cash paid during the year for interest and income taxes was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
--------------------------
Interest............................................. $304,240 $322,411 $329,570
Income taxes......................................... 166,732 175,151 131,156
</TABLE>
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
------------------------
Land.................................................. $ 308,451 $ 231,624
Buildings and land improvements....................... 1,034,441 792,089
Equipment............................................. 2,895,826 2,609,915
Leaseholds and leasehold improvements................. 807,422 763,381
Construction-in-progress.............................. 417,080 492,750
Leased property under capital leases.................. 263,398 254,897
----------- -----------
5,726,618 5,144,656
Accumulated depreciation and amortization............. (2,663,084) (2,482,318)
----------- -----------
$ 3,063,534 $ 2,662,338
=========== ===========
</TABLE>
Approximately $723,961, original cost, of Property, Plant and Equipment
collateralizes certain mortgage obligations.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
-----------------
Deferred financing costs..................................... $ 90,171 $ 85,417
Goodwill..................................................... 39,745 43,253
Investments in Debt Securities............................... 152,675 58,988
Other........................................................ 126,524 87,737
-------- --------
$409,115 $275,395
======== ========
</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-16
<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).
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
-------------------
Salaries and wages......................................... $ 292,393 $286,058
Taxes, other than income taxes............................. 146,781 152,006
Interest................................................... 39,202 39,993
Other...................................................... 563,145 513,399
---------- --------
$1,041,521 $991,456
========== ========
</TABLE>
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
----------------------------
Federal
Current.......................................... $146,296 $178,936 $127,393
Deferred......................................... 43,638 (10,008) 2,184
-------- -------- --------
189,934 168,928 129,577
State and local................................... 24,644 21,744 22,883
-------- -------- --------
214,578 190,672 152,460
Tax credit from extraordinary loss................ (1,792) (10,263) (17,075)
-------- -------- --------
$212,786 $180,409 $135,385
======== ======== ========
</TABLE>
Targeted job tax credits reduced the tax provision by $1,206 in 1995, and
$3,240 in 1994.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
----------------
Statutory rate................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit................ 2.8 2.8 3.5
Tax credits................................................... (.2) (.4) (1.2)
Other, net.................................................... .2 (1.1)
---- ---- ----
37.8% 37.4% 36.2%
==== ==== ====
</TABLE>
A-17
<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>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax assets:
Compensation related costs............................. $ 27,873 $ 25,983
Insurance related costs................................ 33,109 32,131
Inventory related costs................................ 19,092 19,045
Other.................................................. 19,844 25,076
--------- ---------
99,918 102,235
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (63,691) (24,669)
Lease accounting....................................... (3,680) (4,180)
Inventory related costs................................ (33,116) (27,585)
Other.................................................. (8,582) (9,118)
--------- ---------
(109,069) (65,552)
--------- ---------
Current deferred taxes, net............................. $ (9,151) $ 36,683
========= =========
Long-term deferred tax assets:
Compensation related costs............................. $ 125,466 $ 118,255
Insurance related costs................................ 43,492 40,956
Lease accounting....................................... 24,214 23,748
Other.................................................. 15,466 8,293
--------- ---------
208,638 191,252
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (312,546) (295,303)
Compensation related costs............................. (14,239) (14,100)
Lease accounting....................................... (1,863) (5,845)
Deferred charges....................................... (7,471) (7,979)
Other.................................................. (23,555) (21,257)
--------- ---------
(359,674) (344,484)
--------- ---------
Long-term deferred taxes, net........................... $(151,036) $(153,232)
========= =========
</TABLE>
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Variable Rate Revolving Credit Facility, due 2002........ $1,001,459 $1,008,128
Credit Facility.......................................... 110,000
9 1/4% Senior Secured Debentures, due 2005............... 107,648 131,011
8 1/2% Senior Secured Debentures, due 2003............... 200,000 200,000
8.15% Senior Notes due 2006.............................. 240,000
9% Senior Subordinated Notes, due 1999................... 125,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 96,008 102,419
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 46,050 48,051
9 7/8% Senior Subordinated Debentures, due 2002.......... 83,065 86,658
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009.................................................... 346,064 355,774
10% Senior Subordinated Notes, due 1999.................. 124,703 139,244
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 605,665 606,982
4 9/10% to 8 5/8% Industrial Revenue Bonds, due in vary-
ing amounts through 2021................................ 203,785 205,035
7 7/8% to 10 1/4% mortgages, due in varying amounts
through 2017............................................ 280,711 297,313
3 1/2% to 10 1/4% notes, due in varying amounts through
2017.................................................... 45,227 37,823
---------- ----------
Total debt............................................... 3,490,385 3,343,438
Less current portion..................................... 11,642 24,939
---------- ----------
Total long-term debt..................................... $3,478,743 $3,318,499
========== ==========
</TABLE>
The aggregate annual maturities and scheduled payments of long-term debt for
the five years subsequent to 1996 are:
<TABLE>
<CAPTION>
<S> <C>
1997...................................................... $ 11,642
1998...................................................... $ 16,095
1999...................................................... $197,876
2000...................................................... $ 28,868
2001...................................................... $ 31,301
</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 $152,675 less or $3,337,710 at year-end 1996
compared to $3,284,450 at year-end 1995.
Variable Rate Revolving Credit Facility
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
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 December 28, 1996, the Applicable Percentage was .225%
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 28, 1996 was .15%.
Collateral
The Company's obligations under the Facility originally were collateralized by
a pledge of a substantial portion of the Company's and certain of its
Subsidiaries' assets, including substantially all of the Company's and such
Subsidiaries' inventory and equipment and the stock of all Subsidiaries, which
collateral also secured the Company's obligations under its Secured Debentures.
On April 29, 1996, pursuant to the terms of the Credit Agreement, the Company
elected to release all collateral.
Prepayment
The Company may prepay the Facility, in whole or in part, at any time, without
a prepayment penalty.
Certain Covenants
The Credit Agreement contains covenants which, among other things, (i) restrict
investments, capital expenditures, and other material outlays and commitments
relating thereto; (ii) restrict the incurrence of debt, including the
incurrence of debt by subsidiaries; (iii) restrict dividends and payments,
prepayments, and repurchases of capital stock; (iv) restrict mergers and
acquisitions and changes of business or conduct of business; (v) restrict
transactions with affiliates; (vi) restrict certain sales of assets; (vii)
restrict changes in accounting treatment and reporting practices except as
permitted under generally accepted accounting principles; (viii) require the
maintenance of certain financial ratios and levels, including fixed charge
coverage ratios, senior debt 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.
Credit Facility
Effective December 13, 1996, the Company entered into a $110,000 financing
("VEBA Financing") to fund the cost of providing certain employee benefits. The
following constitutes only a summary of the principal terms and conditions of
the financing. Reference is made to the credit agreement related to the VEBA
Financing attached as an exhibit to the Company's Current Report on Form 8-K
dated December 26, 1996.
The VEBA Financing provides for an initial term of 364 days. The Company
annually may request a 364 day extension, subject to approval of the lenders.
The Company currently intends to request, on an annual basis, that the lenders
grant such an extension. Should the lenders decline the extension request, the
Company expects to refinance the VEBA Financing with funds available under the
Credit Agreement. The Company has classified this financing as long-term with a
maturity equal to the Credit Agreement.
The VEBA Financing is a variable rate facility with a current borrowing rate of
LIBOR plus 20 basis points, in addition to a facility fee of 9 basis points.
The VEBA Financing includes various covenants, none of which, individually or
in the aggregate, are more restrictive than those contained in the Credit
Agreement.
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 28, 1996, the Company
has repurchased $92,352 of this issue, $23,363 of these repurchases were
completed in 1996. 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
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
January 1, 2002 when the redemption price is 100%. These debentures were
originally secured. On April 29, 1996, all collateral was released pursuant to
the terms of the indenture.
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%. These debentures were
originally secured. On April 29, 1996, all collateral was released pursuant to
the terms of the indenture.
8.15% Senior Notes
On July 24, 1996, the Company issued $240,000 of 8.15% Senior Notes (the "8.15%
Senior Notes"). The 8.15% Senior Notes become due on July 15, 2006 and are not
redeemable prior to their final maturity.
9% Senior Subordinated Notes
The 9% Senior Subordinated Notes were redeemed on August 14, 1996.
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $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 $78,992 repurchased by the Company,
$6,411 was repurchased in 1996); (ii) $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 $53,950 of the 9 3/4%
Senior Subordinated Debentures, Series B. $2,001 of these purchases occurred in
1996); (iii) $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 $166,935 of the 9
7/8% Senior Subordinated Debentures, $3,593 in 1996); (iv) $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 at varying
times and premiums (the Company repurchased $9,710 of the notes in 1996); (v)
$250,000 10% Senior Subordinated Notes due May 1, 1999. This issue is not
subject to early redemption by the Company. The Company repurchased $14,541 of
the 10% Senior Subordinated Notes during 1996. A total of $125,297 of this
issue has been repurchased.
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
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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, $196,000 at December 28, 1996, and competitive bid
borrowings, $251,500 at December 28, 1996, 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 1997 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.
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 $1,000,000 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 $3,160,000. The effect of these agreements is
to: (i) fix the rate on $465,000 floating rate debt, with $100,000 of swaps
expiring in December 1998, $125,000 expiring in January 1999, $75,000 expiring
in January 2001, $65,000 expiring in December 2004, and the remaining $100,000
expiring in 2007, for which the Company pays an average rate of 6.72% and
receives 6 month LIBOR; (ii) fix the rate on $860,000 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 7.11% and receiving 6 month
LIBOR on these agreements which will expire $375,000 in 2000, $395,000 in 2001,
and $90,000 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%, 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 $200,000 of
floating rate debt, with $100,000 expiring in May 1997, and $100,000 expiring
in August 1998, for which the Company pays an average rate of 6.87%;
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 $550,000 for one
to five years at rates between 5.0% and 6.0%, with $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 $11,071 and
$2,760 in 1996 and 1995, respectively, and reduced $13,449 in 1994, as a result
of the Company's hedging program.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The present value of the estimated annual effect on future interest expense of
the Company's derivative portfolio, based on six month LIBOR of 5.63% as in
effect at year-end and the forward yield curve at year-end is:
<TABLE>
<CAPTION>
YEAR-END
LIBOR FORWARD YIELD
AT 5.63% CURVE
-------- ---------------
LIBOR
INCOME (EXPENSE) RATE
------------------ -----
<S> <C> <C> <C>
1997.................................................. $ (8,113) $ (7,775) 5.88%
1998.................................................. (7,910) (6,958) 6.17%
1999.................................................. (7,700) (6,536) 6.97%
2000.................................................. (6,585) (5,929) 6.59%
2001.................................................. (1,653) (1,934) 6.73%
2002.................................................. 1,038 (658) 6.85%
2003.................................................. (310) (430) 6.94%
2004.................................................. (469) 80 7.02%
-------- --------
$(31,702) $(30,140)
======== ========
</TABLE>
(See Fair Value of Financial Instruments footnote.)
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:
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 1996 and 1995. The
swaps and caps are linked to the Company's debt portfolio. (See Accounting
Policies and Debt Obligations footnotes.)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term investments for which
it is
Practicable.................... $ 154,748 $ 154,645 $ 53,423 $ 53,423
Not Practicable................ $ 31,576 $ -- $ 29,508 $ --
Long-term debt for which it is
Practicable.................... $1,849,203 $1,980,925 $1,795,139 $1,942,414
Not Practicable................ $1,641,182 $ -- $1,548,299 $ --
Interest Rate Protection Agree-
ments
Variable rate pay swaps........ $ -- $ 4,900 $ -- $ 30,595
Fixed rate pay swaps........... $ -- $ (37,311) $ -- $ (56,120)
Interest rate caps............. $ 3,854 $ 2,807 $ 6,773 $ 3,378
---------- ---------- ---------- ----------
$ 3,854 $ (29,604) $ 6,773 $ (22,147)
========== ========== ========== ==========
</TABLE>
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The investments for which it was not practicable to estimate fair value relate
to equity investments accounted for under the equity method and investments in
real estate development partnerships for which there is no market.
It was not practicable to estimate the fair value of $1,001,459 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 $203,785, various mortgages
of $280,711, and other notes of $155,227 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>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals...................................... $291,256 $288,961 $288,499
Contingent payments.................................. 10,373 10,867 10,974
-------- -------- --------
$301,629 $299,828 $299,473
======== ======== ========
</TABLE>
Assets recorded under capital leases consists of:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Distribution and manufacturing facilities................. $ 30,381 $ 35,382
Store facilities.......................................... 233,017 219,515
Less accumulated amortization............................. (118,589) (118,482)
--------- ---------
$ 144,809 $ 136,415
========= =========
</TABLE>
Minimum annual rentals for the five years subsequent to 1996 and in the
aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1997....................................................... $ 31,974 $ 293,302
1998....................................................... 31,332 280,191
1999....................................................... 31,042 265,751
2000....................................................... 30,099 246,444
2001....................................................... 29,041 225,502
Thereafter................................................. 245,364 1,955,358
-------- ----------
398,852 $3,266,548
==========
Less estimated executory costs included in capital leases.. 20,606
--------
Net minimum lease payments under capital leases............ 378,246
Less amount representing interest.......................... 187,997
--------
Present value of net minimum lease payments under capital
leases.................................................... $190,249
========
</TABLE>
EXTRAORDINARY LOSS
The extraordinary loss in 1996, 1995 and 1994 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per common share equals net earnings divided
by the weighted average number of common shares outstanding, after giving
effect to dilutive stock options. Fully diluted
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
earnings per common share for 1995 is computed by adjusting both net earnings
and shares outstanding as if the September 1995 conversion of the 6 3/8%
Convertible Junior Subordinated Notes occurred on the first day of the year.
The net earnings adjustment in 1995 was $3,590. Fully diluted earnings per
common share for 1994 equal 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, 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 28, 1996. 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 28,
1996, changes in common stock were:
<TABLE>
<CAPTION>
ISSUED IN TREASURY
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-------------------------------------------
January 1, 1994................... 118,549,173 $ 308,534 10,901,846 $277,244
Exercise of stock options includ-
ing 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 includ-
ing restricted stock grants...... 2,506,667 40,017 8,120 272
Shares issued on conversion of
Convertible 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
Exercise of stock options includ-
ing restricted stock grants...... 2,683,600 50,091 5,906 255
Tax benefit from exercise of non-
qualified stock options.......... 21,598
----------- --------- ---------- --------
December 28, 1996................. 136,461,521 $ 658,230 9,581,856 $243,886
=========== ========= ========== ========
</TABLE>
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 28, 1996 and December 30, 1995, 455,059 and 3,219,730
shares of common stock, respectively, were available
A-25
<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. 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>
WEIGHTED AVERAGE
SHARES SUBJECT OF EXERCISE
TO OPTION PRICE OF OPTIONS
<S> <C> <C>
---------------------
Outstanding, January 1, 1994.................... 11,608,359 $15.40
Granted......................................... 2,666,175 $23.39
Exercised....................................... (1,878,973) $13.23
Cancelled or expired............................ (89,679) $19.79
----------
Outstanding, December 31, 1994.................. 12,305,882 $17.43
Granted......................................... 2,774,650 $25.70
Exercised....................................... (2,339,390) $16.89
Cancelled or expired............................ (77,615) $14.18
----------
Outstanding, December 30, 1995.................. 12,663,527 $19.36
Granted......................................... 2,843,510 $41.42
Exercised....................................... (2,669,708) $18.07
Cancelled or expired............................ (91,759) $32.24
----------
Outstanding, December 28, 1996.................. 12,745,570 $24.46
==========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and fully diluted net earnings per share would have been reduced by
approximately $12,800, or $.09 per share and $5,200, or $.04 per share, for
1996 and 1995, respectively. The weighted average fair value of the options
granted during 1996 and 1995 was estimated as $11.77 and $7.91, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: volatility of 22.7% and 26.6%, for 1996
and 1995, respectively, risk-free interest rate of 6.3% and 6.4%, for 1996 and
1995 respectively, and an expected term of approximately 3.3 years for both
1996 and 1995. A summary of options outstanding and exercisable at December 28,
1996 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING LIFE IN EXERCISE EXERCISABLE EXERCISE
PRICE AT 12/28/96 YRS. PRICE AT 12/28/96 PRICE
- ---------------------------------------------------------------------------
----------------------------
<S> <C> <C> <C> <C> <C>
$ 4.92-$10.00 1,014,958 1.36 $ 7.35 1,014,958 $ 7.35
$10.00-$20.00 3,436,067 4.94 16.17 3,436,067 16.17
$20.00-$30.00 5,490,510 7.14 24.37 3,992,720 24.07
$30.00-$44.50 2,804,035 9.42 41.44 9,700 41.06
---------- ---------
12,745,570 8,453,445
========== =========
</TABLE>
At December 30, 1995 and December 31, 1994, options for 8,869,223 shares and
9,725,292 shares, respectively, were exercisable at a weighted average exercise
price of $17.04 and $15.34, respectively.
In addition to stock options, the Company may grant stock appreciation rights
(SARs) under the 1994 plan. 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 28, 1996 and
December 30, 1995, there were no SARs outstanding.
A-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 28, 1996 and December 30, 1995, 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 is 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 28, 1996 and December 30,
1995, awards related to 178,902 and 209,426 shares, respectively, were
outstanding. Of the awards outstanding at December 28, 1996 and 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 under the 1994 plan, 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 28, 1996 and December 30, 1995, there were no performance units
outstanding.
Incentive shares may be granted under the 1994 plan, which consist of shares of
common stock issued subject to achievement of performance goals. No incentive
shares were outstanding as of December 28, 1996 and December 30, 1995.
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 tax years 1984- 1989. All issues
have been resolved with one exception. Efforts to resolve this issue for tax
years 1984-1986 with the Appeals Division of the Internal Revenue Service were
unsuccessful. As a result the Company filed a petition with the United States
Tax Court in Washington, D.C. Litigation was completed in November 1995 and a
decision was rendered in January 1997 in favor of the Company. The Company is
awaiting a decision from the Internal Revenue Service regarding appeal. This
issue for years 1987-1989 is being held in abeyance pending the ultimate
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 with unrelated insurance companies. Operating divisions and
subsidiaries have paid premiums, and the insurance subsidiary has provided loss
allowances, based upon actuarially determined estimates.
Litigation--The Company is involved in various 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
A-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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 1996 and 1995. Substantially all plan assets are invested in
cash and short-term investments or listed stocks and bonds, including $94,229
and $118,187 of common stock of The Kroger Co. at the end of 1996 and 1995,
respectively. The status of the plans at the end of 1996 and 1995 was:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
-----------------
Actuarial present value of benefit obligations:
Vested employees............................................. $686,203 $642,582
Non-vested employees......................................... 40,837 39,503
-------- --------
Accumulated benefit obligations.............................. 727,040 682,085
Additional amounts related to projected salary increases..... 147,057 134,208
-------- --------
Projected benefit obligations................................ 874,097 816,293
Plan assets at fair value..................................... 947,725 878,121
-------- --------
Plan assets in excess of projected benefit obligations........ $ 73,628 $ 61,828
======== ========
Consisting of:
Unamortized transitional asset............................... $ 14,456 $ 22,997
Unamortized prior service cost and net gain.................. 40,860 18,617
Adjustment required to recognize minimum liability........... 13,619 11,266
Prepaid pension cost in Consolidated Balance Sheet........... 4,693 8,948
-------- --------
$ 73,628 $ 61,828
======== ========
</TABLE>
The components of net periodic pension expense (income) for 1996, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
-----------------------------
Service cost.................................... $ 25,977 $ 20,249 $ 18,959
Interest cost................................... 61,090 57,218 47,778
Return on assets................................ (110,819) (211,942) 23,935
Net amortization and deferral................... 28,785 131,360 (103,495)
-------- --------- --------
Net periodic pension expense (income) for the
year........................................... $ 5,033 $ (3,115) $(12,823)
======== ========= ========
Assumptions:
Discount rate.................................. 7.75% 7.25% 8.5%
Salary Progression rate........................ 4.75% 4.25% 5.5%
Long-term rate of return on plan assets........ 9.5% 9.5% 9.5%
</TABLE>
A-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1996 and 1995 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 28, 1996 and December 30, 1995,
respectively. However, for the calculation of periodic pension expense for 1996
and income for 1995 the assumptions in the table above for 1995 and 1994,
respectively, were used. The 1997 calculation of periodic pension expense
(income) will be based on the assumptions in the table above for 1996.
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1996, 1995 and 1994
was $21,278, $24,902 and $24,298, 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 1996, 1995 and 1994 were $88,758,
$90,872 and $87,711, 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 1996,
1995 and 1994, the combined payments for these benefits were $10,634, $10,025
and $10,996, respectively.
The following table sets forth the postretirement benefit plans combined status
at December 28, 1996 and December 30, 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO)
Retirees.................................................... $ 96,262 $100,166
Fully eligible active participants.......................... 36,898 36,862
Other active participants................................... 120,012 125,098
-------- --------
253,172 262,126
Unrecognized net gain....................................... 59,762 34,394
-------- --------
Accrued postretirement benefit cost......................... $312,934 $296,520
======== ========
</TABLE>
The components of net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service costs (benefits attributed to employee serv-
ices during the year)............................... $ 9,557 $ 9,344 $ 9,181
Interest cost on accumulated postretirement benefit
obligations......................................... 18,006 20,662 19,743
Net amortization and deferral........................ (991) (725) --
------- ------- -------
$26,572 $29,281 $28,924
======= ======= =======
</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>
Year-end 1994................................ 8.50% 12.3% 4.5% 12
Year-end 1995................................ 7.25% 10.0% 5.0% 7
Year-end 1996................................ 7.75% 9.3% 5.0% 6
</TABLE>
The effect of a one percent increase in the medical trend rate is as follows:
<TABLE>
<CAPTION>
PERIODIC
COST APBO
-----------------------
<S> <C> <C>
Year-end 1994.................................................. $4,088 $27,283
Year-end 1995.................................................. $4,037 $32,209
Year-end 1996.................................................. $4,114 $23,942
</TABLE>
A-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The Company will
implement the statement in the fourth quarter 1997, the effect of which has not
yet been determined.
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
1996 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................... $5,784,254 $5,844,366 $7,343,132 $6,199,157 $25,170,909
Merchandise costs....... 4,367,967 4,412,202 5,582,032 4,679,264 19,041,465
Extraordinary loss...... (1,084) (766) (928) (84) (2,862)
Net earnings............ 75,406 77,612 71,420 125,435 349,873
Primary earnings per
common share:
Earnings before ex-
traordinary loss .... .59 .60 .55 .95 2.68
Extraordinary loss.... (.01) (.01) (.01) 0 (.02)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .58 .59 .54 .95 2.66
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .59 .60 .55 .95 2.67
Extraordinary loss.... (.01) (.01) (.01) 0 (.02)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .58 .59 .54 .95 2.65
<CAPTION>
1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales................... $5,464,954 $5,652,890 $6,959,216 $5,860,735 $23,937,795
Merchandise costs....... 4,129,439 4,267,794 5,284,006 4,416,787 18,098,027
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
</TABLE>
Common Stock Price Range
<TABLE>
<CAPTION>
1996 1995
------------- -------------
QUARTER HIGH LOW HIGH LOW
--------------------------------------
<S> <C> <C> <C> <C>
1st................... 39 5/8 33 1/2 27 7/8 23 3/8
2nd................... 44 37 1/2 28 25
3rd................... 45 37 1/8 34 3/4 26 1/2
4th................... 47 1/2 40 3/4 37 3/4 31 7/8
</TABLE>
The number of shareowners of record of common stock as of March 10, 1997, was
47,128.
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-30
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2,
1996 1995 1994 1994 1993
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales from continuing
operations............. $25,170,909 $23,937,795 $22,959,122 $22,384,301 $22,144,588
Earnings from continuing
operations before ex-
traordinary loss and
cumulative effect of
change in accounting... 352,735 318,866 268,903 170,805 101,160
Extraordinary loss (net
of income tax
credit)(A) ............ (2,862) (16,053) (26,707) (23,832) (107,103)
Cumulative effect of
change in accounting
(net of income tax
credit)(B)............. (159,193)
Net earnings (loss)..... 349,873 302,813 242,196 (12,220) (5,943)
Fully diluted earnings
(loss) per share
Earnings from continu-
ing operations before
extraordinary loss.... 2.67 2.50 2.19 1.50 1.11
Extraordinary loss(A).. (.02) (.12) (.21) (.19) (1.17)
Cumulative effect of
change in
accounting(B)......... (1.28)
Net earnings (loss).... 2.65 2.38 1.98 .03 (.06)
Total assets............ 5,825,413 5,044,717 4,707,674 4,480,464 4,303,084
Long-term obligations,
including obligations
under capital leases... 3,659,491 3,489,728 3,889,194 4,135,013 4,472,978
Shareowners' deficit.... (1,181,706) (1,603,013) (2,153,684) (2,459,642) (2,700,044)
Cash dividends per com-
mon share.............. (C) (C) (C) (C) (C)
- ---------------------------------------------------------------------------------------------
</TABLE>
(A) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(B) See Postretirement Health Care and Life Insurance Benefits in the
respective year's Notes to Consolidated Financial Statements.
(C) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
A-31
<PAGE>
EXECUTIVE OFFICERS
WARREN F. BRYANT THOMAS E. MURPHY
President and Chief Executive Officer--
Group Vice President
Dillon Companies, Inc.
JACK W. PARTRIDGE, JR.
DAVID B. DILLON Group Vice President
President and Chief Operating Officer
JOSEPH A. PICHLER
PAUL W. HELDMAN Chairman of the Board and Chief
Executive Officer
Vice President, Secretary and General Counsel
MICHAEL S. HESCHEL RONALD R. RICE
President--Manufacturing, Senior Vice
President
Executive Vice President andChief Information Officer
PATRICK J. KENNEY
Executive Vice President JAMES R. THORNE
Senior Vice President
W. RODNEY MCMULLEN
Group Vice President and LAWRENCE M. TURNER
Chief Financial Officer Vice President and Treasurer
- --------------------------------------------------------------------------------
The Company has a variety of plans designed to allow employees to acquire stock
in Kroger. Employees of Kroger and its subsidiaries own shares through a profit
sharing plan, as well as 401(k) plans and a payroll deduction plan called the
Kroger Stock Exchange. If employees have questions concerning their shares in
the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
Star Bank, N.A. Cincinnati
P.O. Box 5277
Cincinnati, Ohio 45201
Toll Free 1-800-872-3307
Questions 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 Receive and Deliver Department
Investor Relations Department P.O. Box 11002
P.O. Box 11258 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.
Financial information also is available on the Internet at www.cfonews.com/kr.
- --------------------------------------------------------------------------------
<PAGE>
The Kroger Co. . 1014 Vine Street . Cincinnati, Ohio 45202 . (513) 762-4000
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 4, 1997
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the OMNI
NETHERLAND PLAZA, 35 W. 5TH ST., Cincinnati, Ohio, on May 15, 1997, at 10 A.M.,
for the following purposes:
1. To elect five directors to serve until the annual meeting of
shareholders in 2000 or until their successors have been
elected and qualified;
2. To consider and act upon a proposal to approve the 1997 Long-Term
Incentive Plan;
3. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1997; and
4. 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 18, 1997,
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 15, 1997
The undersigned hereby appoints each of JOSEPH A. PICHLER, JOHN T. LA MACCHIA
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 PROPOSALS 2 AND 3.
(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 PROPOSALS 2
AND 3.
1. ELECTION OF DIRECTORS
FOR ALL NOMINEES WITHHOLD AUTHORITY TO VOTE EXCEPTIONS
listed below [_] for all nominees listed below [_] [_]
Nominees REUBEN V. ANDERSON, CLYDE R. MOORE, JOHN D. ONG, JOSEPH A. PICHLER,
AND MARTHA ROMAYNE SEGER.
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 1997 Long-Term Incentive Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
3. 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: ___________________________, 1997
________________________________________
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.
