<PAGE>
Filed pursuant to Rule 424(b)(5)
Registration No.: 333-06763
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 18, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED APRIL 18, 1997
$200,000,000
THE KROGER CO.
% SENIOR NOTES DUE 2007
-----------
Interest on the Notes is payable on and of each year, commencing
, 1997. The Notes are not redeemable prior to maturity. The Notes will be
represented by one or more global Notes registered in the name of The
Depository Trust Company. Beneficial interests in the global Notes will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. The Notes will be issued only in
denominations of $1,000 and integral multiples thereof. See "Description of the
Notes."
SEE "RISK FACTORS" AT PAGE 3 OF THE PROSPECTUS FOR CERTAIN RISK FACTORS
RELEVANT TO AN INVESTMENT IN THE NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) COMPANY(1)(3)
----------------- ------------ -------------
<S> <C> <C> <C>
Per Note........................... % % %
Total.............................. $ $ $
</TABLE>
- -----
(1) Plus accrued interest from , 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses estimated at $175,000 payable by the Company.
-----------
The Notes are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that the Notes will be ready for
delivery in book-entry form only through the facilities of DTC in New York, New
York on or about , 1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
CITICORP SECURITIES, INC.
-----------
The date of this Prospectus Supplement is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS, AND THE
IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
AVAILABLE INFORMATION
In addition to the locations identified in the accompanying Prospectus, the
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the Commission.
S-2
<PAGE>
THE COMPANY
The Company was founded in 1883, incorporated in 1902, and maintains its
principal executive offices in Cincinnati, Ohio. The Company is the nation's
largest supermarket operator measured by total sales for 1996. At December 28,
1996, the Company operated 1,356 supermarkets in 24 states and 711 convenience
stores in 15 states. Additionally the Company had 120 franchised convenience
stores in 4 states. The Company also operates food processing facilities which
enable the Company's stores to offer quality, low-cost private label
perishable and non-perishable products, and an efficient warehouse and
distribution system which supplies products to its stores.
RECENT DEVELOPMENTS
On April 16, 1997, the Company announced earnings, earnings per share, cash
flow, and sales, for the first quarter 1997. Earnings before an extraordinary
item were $92.3 million compared to $76.5 million in the first quarter of
1996, or 69 cents per share on a fully diluted basis prior to giving effect to
the 2-for-1 stock split to be distributed to shareholders on April 22, 1997.
Net earnings after the extraordinary item for the early retirement of debt
were $87.0 million compared with net earnings of $75.4 million in the first
quarter of 1996, or a pre-split 65 cents per fully diluted share. First
quarter operating cash flow--earnings before interest expense, taxes,
depreciation, and LIFO--increased to $309.6 million from $274.1 million. Sales
in the first quarter increased 6.1% to $6.14 billion from $5.78 billion.
Comparable food store sales, which include results from relocated or expanded
stores, increased 4.1%. Food store sales increased 5.6%, and identical food
store sales improved 0.4%.
On April 18, 1997, the Company approved a term sheet for a new credit
facility (the "New Facility") to replace the existing Credit Agreement (as
defined in the accompanying Prospectus) and the $110 million Credit Agreement
dated December 13, 1996, among the Company, the Lenders, The Bank of New York,
as Agent, and BNY Capital Markets, Inc., as Arranging Agent. The New Facility,
to be entered into among the Company, Citibank, N.A., The Chase Manhattan
Bank, The First National Bank of Chicago, The Bank of New York, and other
lenders to be determined, will provide for a five year term facility in the
amount of $1.5 billion and a 364 day facility in the amount of $500 million.
The New Facility will have fewer affirmative and negative covenants, and a
more attractive pricing grid, compared to the Credit Agreement. The parties
are expected to close on the New Facility in May 1997.
USE OF PROCEEDS
The Company will apply the net proceeds from the sale of the Notes,
estimated to be approximately $ , to repay amounts outstanding under the
Credit Agreement. From time to time, the Company expects to use borrowings
under the Credit Agreement and the New Facility to repurchase or redeem
outstanding indebtedness of the Company, or for other general corporate
purposes. Amounts borrowed under the Facility bear interest as described under
"Description of the Credit Agreement--Interest Rates" in the accompanying
Prospectus. Borrowings under the Facility were used for general corporate
purposes, including the repurchase of outstanding indebtedness. See
"Underwriting."
S-3
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of December 28, 1996, as adjusted to give effect to the issuance of the
Notes offered hereby and the use of the gross proceeds thereof to repay
amounts under the Credit Agreement pending reborrowings, from time to time,
and certain borrowings thereunder were used to (i) repurchase or redeem
outstanding Senior Subordinated debt through March 22, 1997, and (ii) redeem
on February 15, 1997, the entire outstanding balances of the 9 3/4% Senior
Subordinated Debentures and the 9 3/4% Senior Subordinated Debentures, Series
B; and for other general corporate purposes. The table and the related
footnotes should be read in conjunction with the Consolidated Financial
Statements and the related Notes thereto, which are set forth in the Company's
Annual Report on Form 10-K which is incorporated by reference in the
accompanying Prospectus.
<TABLE>
<CAPTION>
DECEMBER 28, 1996
-----------------------------
ACTUAL AS ADJUSTED
------------ ---------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Total current portion of long-term debt and capital
leases............................................ $ 21,143 $ 21,143
============ ============
LONG TERM DEBT:
Industrial revenue bonds........................... $ 201,030 $ 201,030
Other notes........................................ 318,519 318,519
Variable Rate Revolving Credit Facility due 2002... 1,001,459 952,650
364 Day Credit Facility............................ 110,000 110,000
8 1/2% Senior Secured Debentures due 2003 (1)...... 200,000 200,000
9 1/4% Senior Secured Debentures due 2005 (1)...... 107,648 107,648
8.15% Senior Notes due 2006........................ 240,000 240,000
Notes offered hereby............................... 200,000
10% Mortgage Loans................................. 604,197 604,197
9 3/4% Senior Subordinated Debentures due 2004 .... 96,008 0
9 3/4% Senior Subordinated Debentures due 2004--Se-
ries B............................................ 46,050 0
10% Senior Subordinated Notes due 1999............. 124,703 123,861
9 7/8% Senior Subordinated Debentures due 2002..... 83,065 82,780
6 3/4% to 9 5/8% Senior Subordinated Notes, due
1999 to 2009 (2).................................. 346,064 338,058
------------ ------------
Total long-term debt........................... 3,478,743 3,478,743
------------ ------------
Obligations under capital leases................... 180,748 180,748
------------ ------------
SHAREOWNERS' DEFICIT:
Common capital stock, $1 par, 350,000,000 shares
authorized; 136,461,521 shares issued............. 658,230 658,230
Accumulated deficit................................ (1,596,050) (1,596,050)
Less: common stock in treasury at cost: 9,581,856
shares............................................ (243,886) (243,886)
------------ ------------
Total shareowners' deficit..................... (1,181,706) (1,181,706)
------------ ------------
Total capitalization........................... $ 2,477,785 $ 2,477,785
============ ============
</TABLE>
- --------
(1) These debentures became unsecured obligations when the collateral, which
secured the Facility and these debentures, was released on April 29, 1996.
(2) $8,745 and $739 of these "actual" and "as adjusted" notes are variable
rate instruments.
S-4
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below is certain selected financial information of the Company.
The statement of operations data, balance sheet data and other data as of and
for the fiscal years ended December 28, 1996, December 30, 1995, December 31,
1994, January 1, 1994, and January 2, 1993, have been derived from
Consolidated Financial Statements of the Company which have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants. The
following data should be read in conjunction with the Consolidated Financial
Statements and related Notes thereto which are incorporated by reference in
the accompanying Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1)
------------------------------------------------------------------
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)
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $25,170,909 $23,937,795 $22,959,122 $22,384,301 $22,144,588
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Merchandise costs, in-
cluding warehousing
and transportation.... 19,041,465 18,098,027 17,404,940 17,109,060 17,078,839
Operating, general and
administrative........ 4,616,749 4,406,445 4,228,046 4,024,468 3,877,550
Rent................... 301,629 299,828 299,473 290,309 288,113
Depreciation and amor-
tization.............. 343,769 311,272 277,750 263,810 251,822
Interest expense, net.. 299,984 312,685 327,550 389,991 474,849
Restructuring and
other charges(2)...... 22,725
----------- ----------- ----------- ----------- -----------
Total................ 24,603,596 23,428,257 22,537,759 22,100,363 21,971,173
----------- ----------- ----------- ----------- -----------
Earnings before income
tax expense,
cumulative effect of
change in
accounting, and ex-
traordinary loss....... 567,313 509,538 421,363 283,938 173,415
Income tax expense...... 214,578 190,672 152,460 113,133 72,255
----------- ----------- ----------- ----------- -----------
Earnings before
cumulative effect of
change in accounting,
and extraordinary loss. 352,735 318,866 268,903 170,805 101,160
Extraordinary loss(3)... (2,862) (16,053) (26,707) (23,832) (107,103)
Cumulative effect of
change in
accounting(4).......... (159,193)
----------- ----------- ----------- ----------- -----------
Net earnings (loss)..... $ 349,873 $ 302,813 $ 242,196 $ (12,220) $ (5,943)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital deficit. $ (360,156) $ (458,453) $ (242,843) $ (25,001) $ (5,533)
Property, plant and
equipment, net......... 3,063,534 2,662,338 2,252,663 1,981,308 1,877,172
Total assets............ 5,825,413 5,044,717 4,707,674 4,480,464 4,303,084
Long-term debt(5)....... 3,478,743 3,318,499 3,726,343 3,975,362 4,323,950
Obligations under capi-
tal leases(6).......... 180,748 171,229 162,851 159,651 149,028
Shareowners' deficit.... (1,181,706) (1,603,013) (2,153,684) (2,459,642) (2,700,044)
OTHER DATA:
EBITD(7)............... $ 1,241,094 $ 1,162,824 $ 1,064,858 $ 976,792 $ 908,228
Capital expenditures... 733,883 726,142 533,965 376,138 241,234
Non-cash interest...... 12,978 13,123 15,305 79,248 122,981
Ratio of earnings to
fixed charges(8)...... 2.2 2.0 1.8 1.5 1.3
ADDITIONAL DATA--SUPER-
MARKETS:
Number of stores....... 1,356 1,325 1,301 1,277 1,274
Average sales per
store................. $ 17,336 $ 16,972 $ 16,481 $ 16,009 $ 15,855
Average square foot-
age................... 44,639 42,828 41,692 40,581 39,919
ADDITIONAL DATA--CONVE-
NIENCE STORES:
Number of stores(9).... 711 694 789 931 940
Average sales per
store................. $ 1,334 $ 1,225 $ 1,139 $ 1,021 $ 974
Average square foot-
age................... 2,599 2,602 2,560 2,514 2,506
</TABLE>
See the Notes to Summary Historical Consolidated Financial Data on the
following page.
S-5
<PAGE>
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) The Company operates with a fiscal year of 52 or 53 weeks.
(2) See Other Charges and Credits in the Notes to Consolidated Financial
Statements for information pertaining to 1994, and Other Charges in the
Notes to Consolidated Financial Statements for information pertaining to
1993.
(3) Extraordinary loss is net of income tax credit of $1,792, $10,263,
$17,075, $14,607, and $65,644, for the years ended December 28, 1996,
December 30, 1995, December 31, 1994, January 1, 1994, and January 2,
1993, respectively.
(4) As of January 3, 1993 the Company implemented Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" using the immediate
recognition approach. This new standard requires that the expected cost of
retiree benefits be charged to expense during the years that the employees
render service rather than the Company's past practice of recognizing
these costs on a cash basis. As part of adopting the new standard, the
Company recorded in the first quarter 1993, a one-time, non-cash charge
against earnings of $248,739 before taxes ($159,193 after taxes) or $1.28
per share on a fully diluted basis. This cumulative adjustment as of
January 3, 1993 represents the discounted present value of expected future
retiree benefits attributed to employees' service rendered prior to that
date.
(5) Excludes current and long-term portion of obligations under capital leases
and current portion of long-term debt.
(6) Excludes current portion of obligations under capital leases.
(7) EBITD represents earnings before interest, depreciation, restructuring and
other charges, LIFO charge (credit), extraordinary items, cumulative
effect of accounting changes, and income tax expense. This information is
presented to facilitate an understanding of the Credit Agreement covenants
presented elsewhere in the accompanying Prospectus. See "Description of
the Credit Agreement--Certain Covenants."
(8) For purposes of determining the ratio of earnings to fixed charges,
"earnings" includes earnings before income tax expense, cumulative effect
of change in accounting for postretirement benefits, and extraordinary
loss, plus fixed charges (excluding capitalized interest), and "fixed
charges" consists of interest (including capitalized interest) on all
indebtedness, amortization of deferred financing costs and that portion of
rental expense which the Company believes to be representative of
interest.
(9) Decline in number of convenience stores in 1994 is related to a change in
accounting for certain franchised convenience stores. The decline in 1995
is due to the sale of Time Savers Stores, Inc.
S-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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>
S-7
<PAGE>
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.
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>
S-8
<PAGE>
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.
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.
S-9
<PAGE>
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.
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 remaining outstanding balance of the 6
3/8% Convertible Junior Subordinated Notes. All of the holders elected to
convert the notes into approximately 10.7 million shares of common stock.
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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 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
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<PAGE>
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.
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
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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.
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.
S-13
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby (referred to in the accompanying Prospectus as the "Offered Debt
Securities") supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the Debt Securities set
forth in the Prospectus, to which description reference is hereby made. The
Notes will be issued under a Senior Indenture dated as of July 15, 1996 (as
amended and supplemented from time to time, the "Senior Indenture"), between
the Company and Comerica Bank, as Trustee, whose interest has been succeeded
to by Star Bank, National Association (the "Senior Trustee"). Certain defined
terms in the Indenture are capitalized herein. Whenever a defined term is
referred to and not herein defined, the definition thereof is contained in the
Indenture.
GENERAL
The Notes offered hereby will be limited to $200,000,000 aggregate principal
amount and will mature on , 2007. The Notes will bear interest from at
the rate per annum shown on the front cover of this Prospectus Supplement
payable semiannually on and of each year and at maturity (each such
date is herein called an "Interest Payment Date"), commencing , 1997, to
the person in whose name the Note (or one or more predecessor Notes) is
registered at the close of business on the or , as the case may be,
next preceding such Interest Payment Date.
The Notes rank pari passu in right of payment with any existing and future
unsecured senior indebtedness of the Company and senior to all existing and
future subordinated indebtedness of the Company.
The Notes are unsecured and not entitled to any sinking fund.
The Notes will be issued only in registered, book-entry form, in
denominations of $1,000 and any integral multiple thereof.
In the case where any Interest Payment Date or the maturity date of the
Notes does not fall on a Business Day, payment of interest or principal
otherwise payable on such day need not be made on such day, but may be made on
the next succeeding Business Day with the same force and effect as if made on
such interest Payment Date or the maturity date of the Notes, as the case may
be, and no interest shall accrue for the period from and after such Interest
Payment Date or maturity date. The term "Business Day" shall mean any day
other than a Saturday or Sunday or a day on which banking institutions in New
York City or Detroit, Michigan are authorized or obligated by law or executive
order to close.
OPTIONAL REDEMPTION
The Notes are not subject to redemption prior to maturity.
COVENANTS
The Senior Indenture provides that the following covenants will be
applicable to the Company:
Limitations on Liens. The Company covenants that, so long as any Notes
remain outstanding, it will not, and will not permit any Restricted Subsidiary
(as defined below) to issue, assume or guarantee any Indebtedness which is
secured by a mortgage, pledge, security interest, lien or encumbrance of any
kind (including any conditional sale or other title retention agreement, any
lease in the nature thereof, and any agreement to give any of the foregoing)
(each a "lien") upon any Operating Property or Operating Asset, whether now
owned or hereafter acquired, of the Company or any Restricted Subsidiary
without effectively providing that the Notes (together with, if the Company
shall so
S-14
<PAGE>
determine, any other Indebtedness of the Company ranking equally with the
Notes) shall be equally and ratably secured by a lien on such assets ranking
ratably with or equal to (or at the Company's option prior to) such secured
Indebtedness, except that the foregoing restriction shall not apply to (a)
liens on any property or assets of any corporation existing at the same time
such corporation becomes a Restricted Subsidiary provided that such lien does
not extend to any other property of the Company or any of its Restricted
Subsidiaries; (b) liens on any property or assets (including stock) existing
at the time of acquisition thereof, or to secure the payment of the purchase
price of such property or assets, or to secure indebtedness incurred, assumed
or guaranteed by the Company or a Restricted Subsidiary for the purpose of
financing the purchase price of such property or of improvements or
construction thereon or attaching to property substituted by the Company to
obtain the release of a lien on other property of the Company on which a lien
then exists, which indebtedness is incurred, assumed or guaranteed prior to,
at the time of, or within 18 months after such acquisition (or in the case of
real property, completion of such improvement or construction or commencement
of full operations at such property, whichever is later (which in the case of
a retail store is the opening of the store for business to the public))
provided that such lien does not extend to any other property of the Company
or any of its Restricted Subsidiaries; (c) liens securing indebtedness owing
by any Restricted Subsidiary to the Company or another Restricted Subsidiary;
(d) liens on any property or assets of a corporation existing at the time such
corporation is merged into or consolidated with the Company or a Restricted
Subsidiary or at the time of a purchase, lease or other acquisition of the
assets of a corporation or firm as an entirety or substantially as an entirety
by the Company or a Restricted Subsidiary provided that such lien does not
extend to any other property of the Company or any of its Restricted
Subsidiaries; (e) liens on any property or assets of the Company or a
Restricted Subsidiary in favor of the United States of America or any State
thereof, or in favor of any other country or political subdivision thereof, to
secure certain payments pursuant to any contract or statute or to secure any
indebtedness incurred or guaranteed for the purpose of financing all or any
part of the purchase price (or, in the case of real property, the cost of
construction) of the property or assets subject to such liens (including but
not limited to, liens incurred in connection with pollution control,
industrial revenue or similar financing); (f) liens existing on properties or
assets of the Company or any Restricted Subsidiary existing on the date
hereof; provided that such liens shall secure only those obligations which
they secure on the date hereof or any extension, renewal or replacement
thereof; (g) any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part, of any lien referred to in the
foregoing clauses (a) to (f), inclusive; (h) certain statutory liens or other
similar liens arising in the ordinary course of business of the Company or a
Restricted Subsidiary, or certain liens arising out of governmental contracts;
(i) certain pledges, deposits or liens made or arising under worker's
compensation or similar legislation or in certain other circumstances; (j)
certain liens in connection with legal proceedings, including certain liens
arising out of judgments or awards; (k) liens for certain taxes or
assessments, landlord's liens, mechanic's liens and liens and charges
incidental to the conduct of the business, or the ownership of the property or
assets of the Company or of a Restricted Subsidiary, which were not incurred
in connection with the borrowing of money and which do not in the opinion of
the Company, materially impair the use of such property or assets in the
operation of the business of the Company or such Restricted Subsidiary or the
value of such property or assets for the purposes thereof; or (l) liens not
permitted by the foregoing clauses (a) to (k), inclusive, if at the time of
and after giving effect to, the creation or assumption of such liens, the
aggregate amount of all Indebtedness of the Company and its Restricted
Subsidiaries secured by all liens not so permitted by the foregoing clauses
(a) through (k), inclusive, together with the Attributable Debt (as defined
below) in respect of Sale and Lease-Back Transactions permitted by clause (a)
under "Limitation on Sale and Lease-Back Transactions" below, does not exceed
10% of Consolidated Net Tangible Assets (as defined below).
Limitation on Sale and Lease-Back Transactions. So long as any Notes under
the Senior Indenture are outstanding, the Company will not, and will not
permit any Restricted Subsidiary to, enter into any arrangement with any
person providing for the leasing by the Company or a Restricted
S-15
<PAGE>
Subsidiary of any Operating Property or Operating Asset (other than any such
arrangement involving a lease for a term, including renewal rights, for not
more than three years and leases between the Company and a Subsidiary or
between Subsidiaries), whereby such Operating Property or Operating Asset has
been or is to be sold or transferred by the Company or a Restricted Subsidiary
to such person (a "Sale and Lease-Back Transaction") unless (a) the Company or
such Restricted Subsidiary would, at the time of entering into a Sale and
Lease-Back Transaction, be entitled to incur Indebtedness secured by a lien on
the Operating Property or Operating Asset to be leased in an amount at least
equal to the Attributable Debt in respect of such transaction without equally
and ratably securing the Notes pursuant to the provisions described under
"Limitations on Liens" above, or (b) the proceeds of the sale of the Operating
Property or Operating Assets to be leased are at least equal to their fair
market value and an amount in cash equal to the net proceeds is applied,
within 180 days of the effective date of such transactions to the purchase or
acquisition (or, in the case of Operating Property, the construction) of
Operating Property or Operating Assets or to the retirement, repurchase,
redemption or repayment (other than at maturity or pursuant to a mandatory
sinking fund or redemption provision and other than Indebtedness owned by the
Company or any Restricted Subsidiary) of Notes or of Funded Indebtedness (as
defined below) of the Company ranking on a parity with or senior to the Notes,
or in the case of a Sale and Lease-Back Transaction by a Restricted
Subsidiary, of Funded Indebtedness of such Restricted Subsidiary, provided
that in connection with any such retirement, any related loan commitment or
the like shall be reduced in an amount equal to the principal amount so
retired. The foregoing restriction shall not apply to, in the case of any
Operating Property or Operating Assets acquired or constructed subsequent to
the date eighteen months prior to the date of the Indenture, any Sale and
Lease-Back Transaction with respect to such Operating Asset or Operating
Property (including presently owned real property upon which such Operating
Property is to be constructed) if a binding commitment is entered into with
respect to such Sale and Lease-Back Transaction within 18 months after the
later of the acquisition of the Operating Property or Operating Asset or the
completion of improvements or construction thereon or commencement of full
operations at such Operating Property (which in the case of a retail store is
the opening of the store for business to the public).
DEFINITIONS
"Attributable Debt" means in connection with a Sale and Lease-Back
Transaction the total net amount of rent required to be paid during the
remaining primary term of such lease, discounted at a rate per annum equal to
the interest rate on the Notes, calculated in accordance with generally
accepted accounting principles. The net amount of rent required to be paid
under any such lease for any such period shall be the aggregate amount of rent
payable by the lessee with respect to such period after excluding amounts
required to be paid on account of maintenance, repairs, insurance, taxes,
assessments, utility, operating and labor costs and similar charges.
"Capital Lease" means any lease of property which, in accordance with
generally accepted accounting principles, should be capitalized on the
lessee's balance sheet or for which the amount of the asset and liability
thereunder as if so capitalized should be disclosed in a note to such balance
sheet; and "Capitalized Lease Obligation" means the amount of the liability
which should be so capitalized or disclosed.
"Consolidated Net Tangible Assets" means, for the Company and its
Subsidiaries on a consolidated basis determined in accordance with generally
accepted accounting principles, the aggregate amounts of assets (less
depreciation and valuation reserves and other reserves and items deductible
from gross book value of specific asset accounts under generally accepted
accounting principles) which under generally accepted accounting principles
would be included on a balance sheet after deducting therefrom (a) all
liability items except deferred income taxes, commercial paper, short-term
bank Indebtedness, Funded Indebtedness, other long-term liabilities and
shareholders' equity and (b) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles.
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<PAGE>
"Funded Indebtedness" means any Indebtedness maturing by its terms more than
one year from the date as of which the determination is made, including (i)
any Indebtedness having a maturity of 12 months or less but by its terms being
renewable or extendible at the option of the borrower beyond 12 months from
such date of determination and (ii) rental obligations payable more than 12
months from such date under Capital Leases (such rental obligations to be
included as Funded Indebtedness at the amount so capitalized at the date of
such computation and to be included for the purposes of the definition of
Consolidated Net Tangible Assets both as an asset and as Funded Indebtedness
at the amount so capitalized).
"Operating Assets" means all merchandise inventories, furniture, fixtures
and equipment (including all transportation and warehousing equipment but
excluding office equipment and data processing equipment) owned or leased
pursuant to Capital Leases by the Company or a Restricted Subsidiary.
"Operating Property" means all real property and improvements thereon owned
or leased pursuant to Capital Leases by the Company or a Restricted Subsidiary
and constituting, without limitation, any store, warehouse, service center or
distribution center wherever located, provided that such term shall not
include any store, warehouse, service center or distribution center which the
Company's Board of Directors declares by written resolution not to be of
material importance to the business of the Company and its Restricted
Subsidiaries.
"Restricted Subsidiaries" means all Subsidiaries other than Non-Restricted
Subsidiaries. "Non-Restricted Subsidiary" means any Subsidiary that the
Company's Board of Directors has in good faith declared pursuant to a written
resolution not to be of material importance, either singly or together with
all other Non-Restricted Subsidiaries, to the business of the Company and its
consolidated Subsidiaries taken as a whole.
"Subsidiary" means (i) any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions are at
the time directly or indirectly owned by the Company and/or one or more
Subsidiaries or (ii) any partnership of which more than 50% of the partnership
interest is owned by the Company or any Subsidiary.
The covenants applicable to the Notes would not necessarily afford holders
protection in the event of a highly leveraged or other transaction involving
the Company or in the event of a material adverse change in the Company's
financial condition or results of operation, and the Notes do not contain any
other provisions that are designed to afford protection in the event of a
highly leveraged transaction involving the Company.
MERGER AND CONSOLIDATION
The Senior Indenture provides that the Company will not merge or consolidate
with any corporation, partnership or other entity and will not sell, lease or
convey all or substantially all its assets to any entity, unless the Company
shall be the surviving entity, or the surviving entity or the successor entity
that acquires all or substantially all the assets of the Company shall be a
corporation or partnership organized under the laws of the United States or a
State thereof or the District of Columbia and shall expressly assume all
obligations of the Company under the Senior Indenture and the Notes issued
thereunder, and immediately after such merger, consolidation, sale, lease or
conveyance, the Company or such successor entity shall not be in default in
the performance of the covenants and conditions of the Senior Indenture to be
performed or observed by the Company.
EVENTS OF DEFAULT
The "Events of Default" with respect to the Notes will consist of the events
set forth in clauses (a) through (e) as described in the first paragraph under
"Description of Debt Securities--Events of Default and Notice Thereof" in the
Prospectus.
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BOOK-ENTRY SYSTEM
Upon issuance, the Notes will be represented by one or more global
securities (the "Book-Entry Notes"). Each global security representing the
Book-Entry Notes will be deposited with, or on behalf of, The Depository Trust
Company, as Depositary (the "Depositary"), and registered in the name of a
nominee of the Depositary. Book-Entry Notes will not be exchangeable at the
option of the Holder for certificated Notes and, except under the
circumstances described below, will not otherwise be issuable in definitive
form.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, a "clearing corporation,"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions among its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for physical movement of securities certificates. The Depositary's
participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly.
Upon issuance of the Book-Entry Notes, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Notes represented by such Book-Entry Notes to the accounts of
institutions that have accounts with the Depositary or its nominee
("participants"). The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in the Book-Entry Notes will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in such Book-Entry Notes will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to
participants' interests) for such Book-Entry Notes or by participants or
persons that hold through participants. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability to transfer
beneficial interests in the Book-Entry Notes.
So long as the Depositary or its nominee, is the registered owner of the
Book-Entry Notes, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Book-Entry Notes for all purposes
under the Senior Indenture. Except as set forth below, owners of beneficial
interests in such Book-Entry Notes will not be entitled to have the Notes
represented by such Book-Entry Notes registered in their names, will not
receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or holders thereof under the Senior
Indenture.
Principal and interest payments on Book-Entry Notes registered in the name
of or held by the Depositary or its nominee will be made to the Depositary or
its nominee, as the case may be, as the registered owner or holder of the
Book-Entry Notes. Neither the Company, the Trustee nor any paying agent for
such Book-Entry Notes will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in Book-Entry Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payments of
principal or interest in respect of the Book-Entry Notes, will credit
immediately the accounts of the related participants with
S-18
<PAGE>
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Book-Entry Notes as shown on the records of the
Depositary. The Company also expects that payments by participants to owners
of beneficial interests in such Book-Entry Notes held through such
participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such participants.
Unless and until it is exchanged, in whole or in part, for Notes in
definitive form in accordance with the terms of the Notes, the Book-Entry
Notes may not be transferred except as a whole by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to
a successor of the Depositary or a nominee of such successor. If the
Depositary is at any time unwilling or unable to continue as depository or if
at any time the Depositary ceases to be a clearing agency registered under the
Securities Exchange Act of 1934, as amended, and a successor Depositary is not
appointed by the Company within 90 days, the Company will issue Notes in
definitive registered form in exchange for the Book-Entry Notes. In addition,
the Company may at any time and in its sole discretion determine not to have
any Notes represented by one or more Book-Entry Notes. Further, if an event of
default, or an event which, with the giving of notice or lapse of time, or
both, would constitute an event of default under the Senior Indenture occurs
and is continuing with respect to the Notes, or if the Company so specifies
with respect to the Notes, the Depositary may exchange the Book-Entry Notes
for Notes in definitive registered form. In any such instance, an owner of a
beneficial interest in a Book-Entry Note will be entitled to physical delivery
in definitive form of Notes represented by such Book-Entry Note in principal
amount equal to such beneficial interest and to have such Notes registered in
its name.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under terms satisfactory to the Senior Trustee, the Company may discharge
certain obligations to holders of the Notes which have not already been
delivered to the Senior Trustee for cancellation and which have either become
due and payable or are by their terms due and payable within one year (or
scheduled for redemption within one year) by irrevocably depositing with the
Senior Trustee cash or U.S. Government Obligations (as defined in the Senior
Indenture) as trust funds in an amount certified to be sufficient to pay at
maturity (or upon redemption) the principal of and interest on the Notes.
The Company may also discharge any and all of its obligations to holders of
the Notes at any time ("defeasance"), but may not thereby avoid its duty to
register the transfer or exchange of the Notes, to replace any temporary,
mutilated, destroyed, lost, or stolen Notes or to maintain an office or agency
in respect of such series of the Notes. Defeasance may be effected only if,
among other things: (i) the Company irrevocably deposits with the Trustee cash
or U.S. Government Obligations as trust funds in an amount certified to be
sufficient to pay at maturity the principal of and interest on all outstanding
Notes; and (ii) the Company delivers to the Senior Trustee an opinion of
counsel to the effect that the holders of the Notes will not recognize income,
gain or loss for United States federal income tax purposes as a result of such
defeasance and that defeasance will not otherwise alter such holders' United
States federal income tax treatment of principal and interest payments on the
Notes (such opinion must be based on a ruling of the Internal Revenue Service
or a change in United States federal income tax law occurring after the date
of the Senior Indenture, since such a result would not occur under current tax
law).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds.
S-19
<PAGE>
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
will trade in the Depositary's same-day funds settlement system until
maturity, and secondary market trading activity in the Notes will therefore be
required by the Depositary to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.
THE TRUSTEE
Star Bank, National Association, is the Trustee under the Indenture. In the
performance of its duties, the Trustee is entitled to indemnification for any
act which would involve it in expense or liability and will not be liable as a
result of any action taken in connection with the performance of its duties
except for its own gross negligence or default. The Trustee is protected in
acting upon any direction or document reasonably believed by it to be genuine
and to be signed by the proper party or parties or upon the opinion or advice
of counsel. The Trustee may resign upon written notice to the Company as
provided in the Senior Indenture. The Trustee may acquire obligations of the
Company for its own account. The Trustee performs certain banking and other
services for the Company, and is a Lender under the Facility.
S-20
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Pricing Agreement, the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has severally agreed to
purchase, the principal amount of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------- ------------
<S> <C>
Goldman, Sachs & Co. ......................................... $
Chase Securities Inc. ........................................
Citicorp Securities, Inc. ....................................
------------
Total..................................................... $200,000,000
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement and the Pricing
Agreement, the Underwriters are committed to take and pay for all of the
Notes, if any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession of % of the principal amount of the Notes. The Underwriters
may allow, and such dealers may reallow, a concession not to exceed % of the
principal amount of the Notes to certain brokers and dealers. After the Notes
are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Underwriters.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
From time to time, certain of the Underwriters or their affiliates have
provided various commercial or investment banking services and other services
to the Company and its affiliates. In addition, Citicorp Securities, Inc. is
an affiliate of Citibank, N.A., which is an Administrative Agent, Paying Agent
and Lender under the Credit Agreement. Chase Securities Inc. is an affiliate
of The Chase Manhattan Bank (formerly Chemical Bank), which is an
Administrative Agent, Collateral Agent and Lender under the Credit Agreement.
The proceeds of the offering of the Notes will be used to repay borrowings
under the Credit Agreement. Each of Citibank, N.A. and The Chase Manhattan
Bank will be an agent and a lender under the New Facility. See "Recent
Developments."
Affiliates of the Underwriters will in aggregate receive more than 10% of
the proceeds of this offering as a result of the repayment of borrowings under
the Credit Agreement. Accordingly, this offering is being conducted in
accordance with Rule 2710(c)(8) of the National Association of Securities
Dealers, Inc.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with the offering, the Underwriters may purchase and sell the
Notes in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Notes; and syndicate short positions involve the
sale by the Underwriters of a greater number of Notes than they are required
to purchase from the Company in the offering. The Underwriters also may
S-21
<PAGE>
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the securities sold in the offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Notes, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
VALIDITY OF THE NOTES
The validity of the Notes will be passed upon for the Company by Paul W.
Heldman, Esq., Vice President, Secretary and General Counsel of the Company,
and for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Mr.
Heldman may rely as to matters of New York law upon the opinion of Fried,
Frank, Harris, Shriver & Jacobson, and Fried, Frank, Harris, Shriver &
Jacobson may rely as to matters of Ohio law upon the opinion of Mr. Heldman.
As of March 31, 1997, Mr. Heldman owned approximately 10,219 shares of the
Company's Common Stock and had options to acquire an additional 120,000
shares. Fried, Frank, Harris, Shriver & Jacobson from time to time perform
legal services for the Company.
S-22
<PAGE>
THE KROGER CO.
DEBT SECURITIES
----------------
The Kroger Co. (together with its consolidated subsidiaries, the "Company")
may offer for sale from time to time, in one or more series up to $744,226,000
aggregate principal amount of its debt securities (the "Debt Securities") on
terms determined at the time of sale. The specific designation, aggregate
principal amount, authorized denominations, purchase price, initial public
offering price, maturity, rate (which may be fixed or variable) and time of
payment of any interest, any redemption terms or other specific terms and any
listing on a securities exchange of any Debt Securities offered, in respect of
which this Prospectus is being delivered, will be set forth in the
accompanying Prospectus Supplement (the "Prospectus Supplement"), together
with the terms for the offering of the Debt Securities. At the option of the
Company, Debt Securities may be issued as Senior Debt Securities or as
Subordinated Debt Securities. This Prospectus may not be used to consummate
the sale of Debt Securities unless accompanied by a Prospectus Supplement.
The Debt Securities may be sold in one or more transactions directly,
through agents designated from time to time, or through underwriters or
dealers, which may be a group of underwriters represented by underwriters'
representatives. If any agents of the Company or any underwriters are involved
in the sale of the Debt Securities, the names of such agents or underwriters,
the principal amount, if any, to be purchased by the underwriters and any
applicable commissions or discounts will be set forth in the Prospectus
Supplement. The net proceeds to the Company from each sale will also be set
forth in the Prospectus Supplement. As used herein, Debt Securities shall
include securities denominated in United States dollars or, at the option of
the Company if so specified in the Prospectus Supplement, in any other
currency or in composite currencies or in amounts determined by reference to
an index.
SEE "RISK FACTORS" AT PAGE 3 HEREIN FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE DEBT SECURITIES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS APRIL 18, 1997
<PAGE>
AVAILABLE INFORMATION
The Kroger Co. (together with its consolidated subsidiaries, the "Company")
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed with the Commission can be inspected and copied at the
Commission's public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies
of such material can be obtained by mail from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such reports, proxy statements and other information also
can be inspected at the offices of the New York Stock Exchange, Inc. ("NYSE"),
20 Broad Street, New York, New York 10005.
The Company has filed a registration statement on Form S-3 (herein, together
with all amendments and exhibits, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits filed as a part thereof. Statements contained
herein concerning any document filed as an exhibit are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such references.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the fiscal year ended December 30, 1995,
as amended.
2. Quarterly Report on Form 10-Q for the quarter ended March 23, 1996.
3. Reports on Form 8-K dated January 25, 1996 and April 17, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of the Registration Statement and
prior to the termination of the offering of the Debt Securities shall be
deemed to be incorporated herein by reference and to be a part hereof from the
respective dates of filing of such documents.
Any statement contained in a document incorporated or deemed incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus and the Registration Statement of which it is a part to the
extent that a statement contained herein or in any other subsequently filed
document which is also incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or such Registration Statement.
The Company will provide without charge to each person, including a
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to The Kroger Co.,
1014 Vine Street, Cincinnati, Ohio 45202, Attention: Paul W. Heldman, (513)
762-4000.
2
<PAGE>
RISK FACTORS
The following factors, in addition to other information set forth in this
Prospectus, should be considered carefully in evaluating the Company and its
business before acquiring any Debt Securities offered by this Prospectus.
The Indentures, as hereinafter defined, will not provide any protection to
the Holders of the Debt Securities in the event of a decline in credit quality
resulting from takeovers, recapitalizations or similar restructurings.
SUBSTANTIAL INDEBTEDNESS
At December 28, 1996, the Company had $3.7 billion of indebtedness
outstanding, including $1,001.4 million outstanding under the Senior
Competitive Advance and Revolving Credit Facility Agreement (the "Credit
Agreement"), dated as of July 19, 1994, as amended, among the Company and The
Chase Manhattan Bank (formerly Chemical Bank) and Citibank, N.A., as
administrative agents, and the lenders named therein (collectively, the
"Senior Lenders") (with an additional $739.5 million available for borrowing
under the Working Capital Facility thereof). This degree of leverage has
important consequences to investors in the Debt Securities. The Company has
significant interest payment and principal repayment obligations and the
ability of the Company to satisfy those interest and principal obligations is
subject to prevailing economic, financial and business conditions and to other
factors beyond the Company's control. A significant portion of the Company's
indebtedness bears interest at floating rates causing the Company's results of
operations to be sensitive to prevailing interest rates.
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT AND OTHER AGREEMENTS
The Credit Agreement contains numerous restrictive covenants which, among
other things, restrict the ability of the Company to dispose of assets, incur
debt, pay dividends, and make certain investments or acquisitions and which
otherwise restrict corporate activities. In addition, the Company is required
to maintain specified financial ratios and levels, including fixed charge
coverage and total debt ratios. The ability of the Company to comply with
those provisions depends on its future performance, which is subject to
prevailing economic, financial and business conditions and to other factors
beyond the Company's control.
The indentures relating to the Company's outstanding public debt securities
place limitations on, among other things, the Company's ability to incur
indebtedness, pay dividends, acquire assets and enter into leases and sale and
leaseback transactions. The indentures, however, do not contain any covenant
requiring the Company to meet or maintain on a day-to-day basis any specific
financial test or ratio.
LABOR AGREEMENTS
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 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 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.
3
<PAGE>
LEGAL PROCEEDINGS
There are pending against the Company various claims and lawsuits arising in
the normal course of business, including suits charging violations of certain
antitrust and civil rights laws. Some of these suits purport or have been
determined to be class actions and/or seek substantial damages. Any damages
that may be awarded in antitrust cases will be automatically trebled. Although
it is not possible at this time to evaluate the merits of these claims and
lawsuits, nor their likelihood of success, the Company is of the opinion that
any resulting liability will not have a material adverse effect on the
Company's results of operations or financial position.
THE COMPANY
The Company was founded in 1883, incorporated in 1902, and maintains its
principal executive offices in Cincinnati, Ohio. The Company is the nation's
largest supermarket operator measured by total sales for 1995. At December 30,
1995, the Company operated 1,325 supermarkets in 24 states and 694 convenience
stores in 15 states. Additionally the Company had 125 franchised convenience
stores in 4 states. The Company also operates food processing facilities which
enable the Company's stores to offer quality, low-cost private label
perishable and non-perishable products, and an efficient warehouse and
distribution system which supplies products to its stores.
The Company's principal executive offices are located at 1014 Vine Street,
Cincinnati, Ohio 45202, and its telephone number at that address is (513) 762-
4000.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table presents the consolidated ratio of earnings to fixed
charges for the Company. For purposes of determining the ratio of earnings to
fixed charges, "earnings" includes earnings before tax expense, cumulative
effect of change in accounting for income taxes and extraordinary loss, plus
fixed charges (excluding capitalized interest) and "fixed charges" consists of
interest (including capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense which the Company
believes to be representative of interest.
<TABLE>
<CAPTION>
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)
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
2.2 2.0 1.8 1.5 1.3
</TABLE>
USE OF PROCEEDS
The Company will apply the net proceeds from the sale of the Debt Securities
initially to repay amounts outstanding under the Facility (as hereafter
defined) and thereafter, from time to time will use Facility borrowings to
repurchase or redeem outstanding indebtedness of the Company, or for other
general corporate purposes.
4
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
GENERAL
The following constitutes only a summary of the principal terms and
conditions of the Credit Agreement, and is qualified in its entirety by the
actual terms of the Credit Agreement, which was filed as an exhibit to the
Company's Form 8-K, dated July 20, 1994 and thereafter was amended on July 20,
1995, on November 17, 1995, on April 16, 1996 and on June 14, 1996. Whenever
particular provisions or defined terms of the Credit Agreement are referred
to, such provisions or defined terms are incorporated herein by reference as
part of the statements made herein. For purposes of this description of the
Credit Agreement, the term "Company" refers only to The Kroger Co. and does
not include The Kroger Co.'s consolidated subsidiaries.
The Credit Agreement provides for a $1.750 billion Senior Competitive
Advance and Revolving Credit Facility Agreement (the "Facility").
COMMITMENT REDUCTIONS
The Credit Agreement expires on July 20, 2002 and is not otherwise subject
to amortization.
INTEREST RATES
Borrowings under the Facility bear interest at the option of the Company at
a rate equal to either (i) the highest, from time to time, of (A) the average
of the publicly announced prime rate of Chemical Bank and Citibank, N.A., (B)
1/2% over a moving average of secondary market morning offering rates for 3
month certificates of deposit adjusted for reserve requirements, and (C) 1/2%
over the federal funds rate (the "Base Rate") plus the Applicable Percentage
or (ii) an adjusted Eurodollar rate based upon the London Interbank Offered
Rate ("Eurodollar Rate") plus the Applicable Percentage. The Applicable
Percentage is zero for the Base Rate. The Applicable Percentage for Eurodollar
Rate advances is 0.3125% as of March 23, 1996.
COLLATERAL
The Company's obligations under the Facility originally were collateralized
by a pledge of a substantial portion of the Company's and certain of its
Subsidiaries' assets, including substantially all of the Company's and such
Subsidiaries' inventory and equipment and the stock of all Subsidiaries, which
collateral also secured the Company's obligations under its Secured
Debentures. On April 29, 1996, pursuant to the terms of the Credit Agreement,
the Company elected to release all Collateral.
PREPAYMENT
The Company may prepay the Facility, in whole or in part, at any time,
without a prepayment penalty.
CERTAIN COVENANTS
The Credit Agreement contains covenants which, among other things, (i)
restrict investments, capital expenditures, and other material outlays and
commitments relating thereto, (ii) restrict the incurrence of debt, including
the incurrence of debt by subsidiaries, (iii) restrict dividends and payments,
prepayments, and repurchases of capital stock, (iv) restrict mergers and
acquisitions and changes of business or conduct of business, (v) restrict
transactions with affiliates, (vi) restrict certain sales of assets, (vii)
restrict changes in accounting treatment and reporting practices except as
permitted under generally accepted accounting principles, (viii) require the
maintenance of certain financial ratios and levels, including fixed charge
coverage ratios, total debt ratios and senior debt ratios and (ix) require the
Company to maintain interest rate protection providing that at least 50% of
the Company's indebtedness for borrowed money is maintained at a fixed rate of
interest. See "Risk Factors -- Restrictions Imposed by the Credit Agreement
and Other Agreements."
The following is a summary of certain of the covenants contained in the
Credit Agreement.
5
<PAGE>
Maintenance of Fixed Charge Coverage Ratio. The Company is required to
maintain a ratio, for the Rolling Period in respect of each Fiscal Quarter,
determined as of the last day of each Fiscal Quarter of (i) the sum of (a)
Consolidated EBITDA for such Rolling Period and (b) Consolidated Rental
Expense for such Rolling Period to (ii) the sum of (a) Consolidated Cash
Interest Expense for such Rolling Period and (b) Consolidated Rental Expense
for such Rolling Period of not less than 1.7:1.
The Company's ratio of Consolidated EBITDA Available for Fixed Charges to
Consolidated Fixed Charges for the Rolling Period ended March 23, 1996 was
2.46:1.
Maintenance of Net Total Debt/Consolidated EBITDA Ratio. Following the
release of the security interest in all the Collateral the Company is required
to maintain a ratio, determined as of the last day of each Fiscal Quarter for
the Rolling Period ending on such day, of (i) Net Total Debt on such day to
(ii) the sum of (a) Consolidated EBITDA for such Rolling Period and (b) from
and after the making of certain investments or acquisitions, the Acquired
EBITDA for any Acquired Entity so invested in or acquired with respect to any
Acquired Entity Fiscal Quarter ending during such Rolling Period of no greater
than 3.65 to 1.
The Ratio at March 23, 1996 was 3.05:1.
Maintenance of Net Senior Debt/Consolidated EBITDA Ratio. Following the
release of the security interest in all the Collateral the Company is required
to maintain a ratio, determined as of the last day of each Fiscal Quarter for
the Rolling Period ending on such day, of (i) Net Senior Debt to (ii) the sum
of (a) Consolidated EBITDA for such Rolling Period and (b) from and after the
making of certain investments or acquisitions, the Acquired EBITDA for any
Acquired Entity so invested in or acquired with respect to any Acquired Entity
Fixed Quarter ending during such Rolling Period of no greater than 3.0 to 1.
This covenant shall cease to be applicable upon achievement of the Investment
Grade Rating Condition.
The Ratio at March 23, 1996 was 2.19:1.
Interest Rate Protection. The Company is required to obtain interest rate
protection providing that at least 50% of the Company's indebtedness for
borrowed money is maintained at a fixed rate of interest.
Debt. The Company may not create or suffer to exist, or permit any of its
Subsidiaries to create or suffer to exist any Debt except, among other things,
(i) Debt under the Credit Agreement; (ii) certain designated Debt existing on
July 19, 1994; (iii) Debt secured by permitted liens; (iv) trade accounts
payable in the ordinary course of business and accounted for as current
accounts payable; (v) Commercial Paper issued by the Parent Borrower; (vi)
Debt of the Parent Borrower incurred to prepay, redeem, defease or repurchase
existing Debt of the Parent Borrower or any of the Subsidiaries so long as (a)
such Debt so incurred is subordinated in right of payment to, or pari passu in
right of payment with, the Debt being prepaid, redeemed, defeased or
repurchased and (b) the average life to maturity of such Debt so incurred is
no earlier than the date that is three months following the Termination Date;
provided, however, that up to $625,000,000 of such Debt so incurred may have
an average life to maturity shorter than the date that is three months
following the Termination Date so long as (A) such Debt does not mature before
June 15, 1999, and (B) such Debt is incurred to prepay, redeem, defease or
repurchase Debt that matures earlier than the date that is three months
following the Termination Date and of the $625,000,000 of such Debt, up to
$150,000,000 (or $300,000,000 at any time following the occurrence of an
Investment Grade Rating Condition) may be senior in right of payment to the
Debt being prepaid, redeemed, defeased or repurchased provided that such Debt
is unsecured; (vii) Capital Lease Obligations; (viii) Debt incurred in
connection with the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; (ix)
Debt incurred or assumed in connection with any investment or acquisition
permitted by the Credit Agreement; (x) certain debt owed to the Parent
Borrower by Subsidiaries; (xi) Debt secured by mortgages on (a) any
6
<PAGE>
property purchased, acquired or developed between January 21, 1992, and the
Closing Date or (b) any property purchased, acquired or developed with Real
Estate Capital Expenditures, in each case so long as the aggregate amount of
the Debt secured by such mortgages does not exceed 100% of the Fair Market
Value (determined at the time of such transaction) of such property; (xii)
Debt incurred by the Parent Borrower or any of its Subsidiaries in connection
with any Receivables Securitization; (xiii) Debt incurred by the Parent
Borrower in connection with Interest Rate Agreements; (xiv) Debt of the Parent
Borrower not referred to in paragraphs (i) through (xiii) above or in
paragraph (xv) below so long as the average life to maturity of such Debt is
no earlier than the date that is three months following the Termination Date;
and (xv) Debt of the Parent Borrower or any Subsidiary not referred to in
paragraphs (i) through (xiv) above in an aggregate amount outstanding at any
time not in excess of $100,000,000.
Capital Expenditures. Prior to the occurrence of the Investment Grade Rating
Condition the Company may not make, and will not permit any of its
Subsidiaries to make, any Capital Expenditures in excess of $650,000,000 (the
"Base Capital Expenditure Amount") for each Fiscal Year; provided, however,
that if in any Fiscal Year the amount specified exceeds the amount of Base
Capital Expenditures actually made by the Company and its Subsidiaries in such
Fiscal Year, the Company and its Subsidiaries shall be entitled to make
additional Capital Expenditures in the next succeeding Fiscal Year equal to
the amount of such excess not to exceed 45% of the Base Capital Expenditure
Amount; provided further, however, that the Company and its Subsidiaries shall
be permitted to make additional Capital Expenditures in any Fiscal Year
("Additional Capital Expenditures") in an aggregate amount with respect to the
Parent Borrower and its Subsidiaries equal to a percentage of Consolidated
Free Cash Flow for the immediately preceding Fiscal Year, such percentage with
respect to any Fiscal Year to be equal to (a) 100% in the event that the
Parent Borrower's Consolidated Ratio of Net Total Debt to Consolidated EBITDA
for the immediately preceding Fiscal Year is 3.0 to 1 or lower; (b) 75% in the
event that the Parent Borrower's Consolidated Ratio of Net Total Debt to
Consolidated EBITDA for the immediately preceding Fiscal Year is 3.5 to 1 or
lower; and (c) 50% in the event that the Parent Borrower's Consolidated Ratio
of Net Total Debt to Consolidated EBITDA for the immediately preceding Fiscal
Year is lower than the amount set forth below with respect to such preceding
Fiscal Year:
<TABLE>
<CAPTION>
PRECEDING
FISCAL RATIO OF NET TOTAL DEBT TO CONSOLIDATED
YEAR EBITDA FOR IMMEDIATELY PRECEDING FISCAL YEAR
---------- --------------------------------------------
<S> <C>
1995...................... 4.20 to 1.00
1996...................... 4.10 to 1.00
1997...................... 4.00 to 1.00
1998...................... 3.90 to 1.00
1999...................... 3.80 to 1.00
2000...................... 3.80 to 1.00
</TABLE>
The entire amount of Additional Capital Expenditures that are permitted to
be made in any Fiscal Year but are not made in such Fiscal Year may be carried
forward to, and made in the two succeeding Fiscal Years.
Dividends. Under the Credit Agreement, the Company is restricted from making
or declaring cash dividends on the Common Stock.
CERTAIN DEFINITIONS
"Applicable Percentage" means at any time, with respect to Adjusted
Eurodollar Rate Advances, the Facility Fees, Standby Letters of Credit and
Documentary Letters of Credit, the applicable
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<PAGE>
percentage set forth below based upon (a) the Senior Debt Ratings at such time
or (b) the Applicable Percentage Ratio at such time:
<TABLE>
<CAPTION>
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 LEVEL 6
----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Moody's/S&P or.......... Baa1 or Baa2 and Baa2 or BBB Baa3 and Baa3 or Lower than
better or BBB BBB- BBB- or equal to
BBB+ or Ba1 and
better lower than
or equal to
BB+
Applicable Percentage 5.25 to 1.0 4.75 to 1.0 4.0 to 1.0 3.5 to 1.0 3.0 to 1.0 Lower than
Ratio.................. or greater or greater or greater or greater or greater 3.0 to 1.0
(spreads expressed in basis points per annum)
Adjusted Eurodollar Rate
Advances............... 12.5 20.0 22.5 31.25 40.0 50.0
</TABLE>
The Applicable Percentage for Base Rate Advances is zero.
The Applicable Percentage as of March 23, 1996 is determined in accordance
with Level 4.
"Applicable Percentage Ratio" means the ratio (determined as of the last day
of each Fiscal Quarter for the Rolling Period ending on such day) of (i)
Consolidated EBITDA for such Rolling Period to (ii) Consolidated Total
Interest Expense for such Rolling Period.
"Capital Expenditures" of any Person means, for any period, all expenditures
of such Person during such period (whether paid in cash or accrued as
liabilities during such period) which, in conformity with generally accepted
accounting principles, are required to be included in or reflected by the
property, plant or equipment or similar fixed asset accounts on the balance
sheet of such Person and certain investments permitted under the Credit
Agreement, including equipment which is purchased simultaneously with the
trade-in of existing equipment owned by such Person to the extent of the gross
amount of the purchase price of such purchased equipment less the book value
of the equipment being traded in at such time, but excluding, among other
things, (i) expenditures made in connection with the replacement or
restoration of assets, to the extent such replacement or restoration is
financed out of (a) insurance proceeds paid on account of the loss of or
damage to the assets so replaced or restored or (b) awards of compensation
arising from the taking by condemnation or eminent domain of the assets so
replaced, (ii) any portion of Capital Lease Obligations which is capitalized
on such person's balance sheet and (iii) interest capitalized during
construction.
"Consolidated Cash Interest Expense" means, for any period, interest expense
net of interest income, whether paid or accrued (including the interest
component of Capital Lease Obligations) on all debt of the Company and its
Subsidiaries on a Consolidated basis for such period, including, without
limitation (i) cash dividends paid in respect of preferred stock issued by the
Company, (ii) commissions and other fees and charges payable in connection
with Letters of Credit, (iii) net payments payable in connection with certain
interest rate protection contracts and (iv) interest capitalized during
construction, but excluding, however, (v) interest expense not payable in cash
(including amortization of discount and deferred debt expenses), all as
determined in conformity with GAAP.
"Consolidated EBITDA" means, for any period, on a Consolidated basis for the
Company and its Subsidiaries, the sum for such period of (i) Consolidated Net
Income, plus (ii) depreciation and amortization expense, plus (iii) interest
expense net of interest income, plus (iv) federal and state income taxes as
determined in accordance with GAAP, plus (v) extraordinary losses (and any
unusual losses in excess of $1,000,000 arising in or outside of the ordinary
course of business not included in
8
<PAGE>
extraordinary losses determined in accordance with GAAP which have been
included in the determination of Consolidated Net Income), plus (vi) LIFO
charges included in the calculation of Consolidated Net Income, minus (vii)
extraordinary gains (and any unusual gains in excess of $1,000,000 arising in
or outside of the ordinary course of business not included in extraordinary
losses determined in accordance with GAAP which have been included in the
determination of Consolidated Net Income), and minus (viii) LIFO credits that
have been included in the calculation of Consolidated Net Income.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period, before the payments
of dividends on all capital stock, determined in accordance with GAAP.
"Consolidated Rental Expense" means, for any period, the aggregate rental
expense (including any contingent or percentage rental expense) of the Parent
Borrower and its Subsidiaries on a Consolidated basis for such period
(excluding real estate taxes and common area maintenance charges) in respect
of all rent obligations under all operating leases for real or personal
property minus any rental income of the Parent Borrower and its Subsidiaries
on a Consolidated basis for such period, all as determined in conformity with
GAAP.
"Consolidated Total Interest Expense" means, for any period, interest
expense net of interest income, whether paid or accrued (including the
interest component of Capital Lease Obligations) on all Debt of the Parent
Borrower and its Subsidiaries on a Consolidated basis for such period,
including (i) commissions and other fees and charges payable in connection
with Letters of Credit, (ii) net payments payable in connection with all
Interest Rate Agreements, (iii) interest capitalized during construction and
(iv) cash dividends paid in respect of any preferred stock issued by the
Parent Borrower, but excluding, however, amortization of deferred debt
expense, all as determined in conformity with GAAP.
"Debt" of any Person means, without duplication, (i) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property
or services (including all obligations, contingent or otherwise, of such
Person in connection with the Letters of Credit, Auction Bid LOCs, letter of
credit facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange into debt
securities, convert into debt securities or otherwise acquire for value (a)
any capital stock of such Person or (b) any warrants, rights or options to
acquire such capital stock, now or hereafter outstanding), (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), (iv) all Capital Lease Obligations of
such Person, (v) all Debt referred to in clause (i), (ii), (iii) or (iv) above
secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any lien, security interest or
other charge or encumbrance upon or in property (including accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Debt, (vi) all Guaranteed Debt of
such Person and (vii) any preferred stock of such Person that is classified as
a liability on such Person's Consolidated balance sheet.
"Funded Debt" means the Debt resulting from the Advances under the Credit
Agreement and all other Debt of the Parent Borrower or its Subsidiaries that
(on the date of its incurrence or issuance) matures more than one year from
the date of determination or matures within one year from such date but is
renewable or extendible, at the option of the debtor, to a date more than one
year from such date or arises under a revolving credit or similar agreement
that obligates the lender or lenders to extend credit during a period of more
than one year from such date (in each case including amounts of Funded Debt
required to be paid or prepaid within one year from the date of calculation).
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<PAGE>
"Guaranteed Debt" of any Person means all Debt referred to in clause (i),
(ii), (iii), (iv) or (v) of the definition of the term "Debt" in this Section
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement (i) to
pay or purchase such Debt or to advance or supply funds for the payment or
purchase of such Debt, (ii) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Debt or to assure the holder of
such Debt against loss, (iii) to supply funds to, or in any other manner
invest in, the debtor (including any agreement to pay for property or services
irrespective of whether such property is received or such services are
rendered) or (iv) otherwise to assure a creditor against loss, but excluding
leases at a rental at least as favorable to the Parent Borrower as could be
obtained in an arm's-length transaction with a party that is not an Affiliate.
"Investment Grade Rating Condition" means that the Senior Debt Ratings of
the Company's Debt are BBB- or better in the case of Standard & Poor's
Corporation or Baa3 or better in the case of Moody's Investors Service, Inc.
"Net Senior Debt" means, on a Consolidated basis for the Company and its
Subsidiaries as of any date, Net Total Debt as of such date minus the sum as
of such date of (i) the aggregate outstanding amount of any Subordinated Debt
of the Company or any of the Subsidiary Guarantors, (ii) the capitalized
amount of any Capitalized Lease Obligations of the Company or any of its
Subsidiaries and (iii) the aggregate outstanding face amount of any preferred
stock of the Company that is classified as a liability on the Company's
Consolidated balance sheet.
"Net Total Debt" means, on a Consolidated basis for the Company and its
Subsidiaries as of any date, (i) the sum as of such date of (a) the aggregate
outstanding amount of Funded Debt including current maturities thereof, (b)
the aggregate outstanding amount of Commercial Paper and (c) the aggregate
outstanding amount of Subsidiary Commercial Paper minus (ii) the sum as of
such date of (a) the aggregate outstanding face amount of letters of credit
included in Funded Debt, (b) the aggregate outstanding amount of Debt
represented by certain investments made by the Parent Borrower and (c) the
aggregate amount of Permitted Investments in excess of $100 million.
"Rolling Period" means, in respect of any Fiscal Quarter, such Fiscal
Quarter and the three preceding Fiscal Quarters.
"Subordinated Debt" means any Indebtedness which is subordinate to the
Obligations under the Credit Agreement.
EVENTS OF DEFAULT
The Credit Agreement provides that various events shall be "Events of
Default," upon the occurrence of which the Senior Lenders may suspend or cease
making loans or terminate the Facility and declare all amounts outstanding
under the Credit Agreement immediately due and payable, as described below.
Events of Default include, among other things, (i) failure to pay, when due,
any principal payable under the Credit Agreement or the failure to pay any
interest or other amount under
the Credit Agreement after the same becomes due and such default continues
unremedied for three business days after written notice from either
Administrative Agent, (ii) material breach of any representation or warranty
in the Credit Agreement or related documents, (iii) failure to comply with any
of the covenants of the Credit Agreement or related documents after specified
grace periods, (iv) failure to pay, or default in performance permitting
acceleration under, certain of the Company's other indebtedness, (v)
bankruptcy or insolvency of the Company or a Subsidiary or failure to
discharge certain judgments of the Company or any Subsidiary, (vi) the Credit
Agreement or security interests thereunder in Collateral with a value in
excess, individually or in the aggregate, of $30,000,000 ceasing to be in full
force and effect, (vii) certain events occurring with respect to the Company's
pension plans potentially giving rise to liability under ERISA, and (viii) the
occurrence of a "Change of Control" of the Company. A "Change of Control" is
defined in the Credit Agreement as (A) the acquisition by any Person or group
(other than the trusts for the Company's employee benefit plans) of securities
representing 20% or more of the voting Power of the Company or (B) during any
24-month period,
10
<PAGE>
individuals who were directors of the Company at the beginning of such period
(together with new directors approved by such directors) ceasing to constitute
at least 75% of the Board of Directors of the Company.
The Credit Agreement provides that upon the occurrence of an Event of
Default, the Administrative Agents (i) shall at the request, or may with the
consent, of the Majority Lenders by notice to the Company declare the
obligations of each Lender to make Advances to be terminated, whereupon the
same shall forthwith terminate, (ii) shall at the request, or may with the
consent, of any Issuing Bank or of the Majority Lenders by notice to the
Company declare the obligation of any Issuing Bank to issue Letters of Credit
to be terminated, whereupon the same shall forthwith terminate, and (iii)
shall at the request, or may with the consent, of the Majority Lenders declare
the Advances, all interest thereon and all other amounts payable under the
Credit Agreement to be forthwith due and payable, whereupon the Advances, all
such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest, prior notice of intention to
accelerate or any other notice, all of which are expressly waived by the
Company.
DESCRIPTION OF DEBT SECURITIES
Offered Debt Securities (as defined below) will constitute either senior or
subordinated debt of the Company and will be issued, in the case of Offered
Debt Securities that will be senior debt ("Senior Debt Securities"), under an
Indenture (the "Senior Indenture"), between the Company and a trustee to be
selected by the Company (the "Senior Trustee"), and, in the case of Offered
Debt Securities that will be subordinated debt ("Subordinated Debt
Securities"), under an Indenture (the "Subordinated Indenture"), between the
Company and a trustee to be selected by the Company (the "Subordinated
Trustee"). The Senior Indenture and the Subordinated Indenture are sometimes
hereinafter referred to individually as an "Indenture" and collectively as the
"Indentures", and the Senior Trustee and the Subordinated Trustee are
hereinafter referred to as the "Trustee". The statements under this caption
relating to the Debt Securities and the Indentures are summaries and do not
purport to be complete. Such summaries make use of terms defined in the
Indentures and are qualified in their entirety by express reference to the
Indentures and the cited provisions thereof, the forms of which are filed as
exhibits to the Registration Statement. For purposes of this description of
the Debt Securities the term "Company" refers only to The Kroger Co. and does
not include The Kroger Co.'s consolidated subsidiaries.
The particular terms of each issue of Debt Securities (the "Offered Debt
Securities"), as well as any modifications or additions to the following
general terms which may be applicable in the case of such Offered Debt
Securities, will be described in the Prospectus Supplement relating to such
Offered Debt Securities. Accordingly, for a description of the terms of a
particular issue of Offered Debt Securities, reference must be made both to
the Prospectus Supplement relating thereto and the following description.
GENERAL
The Debt Securities will represent general unsecured senior or subordinated
obligations of the Company. The Debt Securities may be issued in one or more
series with the same or various maturities. Capitalized terms used herein
shall have the meanings established in the Indenture unless otherwise defined
herein.
The Debt Securities relating to this Prospectus will be issued from time to
time up to an aggregate principal amount of $500,000,000 or the equivalent
thereof. Reference is made to the Prospectus Supplement for the following
terms of the Offered Debt Securities: (i) the title, aggregate principal
amount and authorized denominations of the Offered Debt Securities; (ii) the
percentage of their
11
<PAGE>
principal amount at which such Offered Debt Securities will be issued; (iii)
the date or dates on which the Offered Debt Securities will mature; (iv) the
rate or rates (which may be fixed or variable) per annum, if any, at which the
Offered Debt Securities will bear interest and the date from which such
interest may accrue; (v) the times and places at which principal and any such
interest will be payable; (vi) any redemption or sinking fund provisions;
(vii) the currency of payment of principal of, premium, if any, and interest
on the Offered Debt Securities; (viii) any index or other basis used to
determine the amount of payments of principal of and interest on the Offered
Debt Securities; (ix) whether the Offered Debt Securities of any series will
be represented by a single global note registered in the name of a
depositary's nominee and, if so, the depositary for and the method of
transferring beneficial interests in the global note; (x) whether the Offered
Debt Securities will be issuable in registered form or bearer form or both
and, if Offered Debt Securities in bearer form are issuable, restrictions
applicable to the exchange of one form for another and to the offer, sale and
delivery of Offered Debt Securities in bearer form; (xi) ranking as
Subordinated Debt Securities, if applicable, and the terms of any such
subordination; and (xii) any other terms relating to the Offered Debt
Securities not inconsistent with the Indentures, including any terms which may
be required by or advisable under United States laws or regulations or
advisable in connection with the marketing of Offered Debt Securities.
Offered Debt Securities may be presented for transfer in the manner, at the
places and subject to the restrictions set forth in the Offered Debt
Securities and the Prospectus Supplement. Such services will be provided
without charge, other than any tax or other governmental charge payable in
connection therewith, but subject to the limitations provided in the
Indentures. Offered Debt Securities in bearer form and the coupons, if any,
appertaining thereto will be transferable by delivery.
The Indentures under which certain of the Company's outstanding indebtedness
was issued restrict the Company's ability to redeem, defease or otherwise
acquire the Debt Securities.
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount below their stated
principal amount. Federal income tax consequences and other considerations
applicable thereto will be described in the Prospectus Supplement relating
thereto.
EVENTS OF DEFAULT AND NOTICE THEREOF
The Indentures will define "Events of Default" with respect to any series of
Debt Securities as being any one of the following events and such other events
as may be established for a particular series of Debt Securities: (a) failure
to pay interest on Debt Securities of such series for 30 days after it becomes
due; (b) failure to pay principal (or premium or sinking fund payment, if any)
on Debt Securities of such series when due at maturity, upon redemption, by
declaration or otherwise; (c) failure to perform any other covenants for 60
days after notice (other than a covenant included in the Indentures solely for
the benefit of Debt Securities of any series other than such Debt Securities);
(d) a default under any indebtedness for borrowed money in excess of
$30,000,000 constituting a failure to pay when due or resulting in such
indebtedness becoming due prior to maturity; (e) certain events of bankruptcy,
insolvency or reorganization; and (f) any other Event of Default provided with
respect to Debt Securities of such series. (Section 501.) No Event of Default
(except an Event of Default described in (c), (d) or (e) above) with respect
to a particular series of Debt Securities issued under the Indenture
necessarily constitutes an Event of Default with respect to any other series
of Debt Securities issued thereunder.
Each Indenture will provide that the Trustee shall, within 90 days after the
occurrence of a default with respect to any series of Debt Securities or all
Debt Securities, give to the holders of such series of Debt Securities or all
Debt Securities, as the case may be, notice of all uncured defaults known to
it (the term "default" to include the events specified above without grace
periods); provided, that except in the case of default in the payment of
principal (or premium or sinking fund payment, if any) or
12
<PAGE>
interest on any series of the Debt Securities, the Trustee shall be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the interest of the holders of the Debt Securities of
such series. (Section 602.)
The Company will be required to furnish to the Trustee annually after the
first issue of the Debt Securities under the Indenture a statement of certain
officers of the Company to the effect that to the best of their knowledge the
Company is not in default in the performance and observance of the terms of
the Indenture or, if they have knowledge that the Company is in default,
specifying such default. (Section 1004.)
If an Event of Default described in clause (a) or (b) above with respect to
Debt Securities of any series at the time Outstanding or an Event of Default
specified pursuant to clause (f) with respect to Debt Securities of a
particular series occurs and is continuing, then in every such case, unless
the principal of all such Debt Securities shall have become due and payable,
the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series may in writing to the Company and the
Administrative Agents declare the principal amount (or, if the Debt Securities
of that series are Original Issue Discount Securities (as defined in the
Indenture), such portion of the principal amount as may be specified in the
terms of that series) of all of the Debt Securities of that series, to be due
and payable five business days after the receipt by the Company and the
Administrative Agents of such written notice. If an Event of Default described
in clause (c), (d) or (e) above occurs and is continuing, then in every such
case the Trustee or the Holders of not less than 25% in principal amount of
all the Debt Securities then Outstanding may in writing to the Company and the
Administrative Agents declare the principal amount (or, if any such Debt
Securities are Original Issue Discount Securities, such portion of the
principal amount as may be specified in the terms of that series) of all of
the Debt Securities to be due and payable five business days after the receipt
by the Company and the Administrative Agents of such written notice; provided,
that each of the two preceding provisions shall not restrict the availability
of other rights or remedies that the Trustee or the holders may have. However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series (or of all Outstanding Securities, as the case may
be) has been made, but before the maturity thereof, the Holders of a majority
in principal amount of Outstanding Securities of such series (or of all
Outstanding Securities, as the case may be) may, subject to certain
conditions, rescind and annul such acceleration if all Events of Default,
other than the non-payment of accelerated principal (or specified portion
thereof) with respect to Debt Securities of such series (or of all Outstanding
Securities, as the case may be) have been cured or waived as provided in the
Indenture. (Section 502.)
Each Indenture also provides that the Holders of not less than a majority in
principal amount of the Debt Securities of a series (or of all Outstanding
Securities, as the case may be) may, subject to certain limitations, waive
certain defaults. Subject to certain limitations, the Holders of not less than
a majority of the principal amount of the Debt Securities of any series may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (Sections 512 and 513.) Each Indenture will provide that in case an
Event of Default shall occur (which shall not have been cured or waived), the
Trustee will be required to exercise such of its rights and powers under the
Indenture and to use the degree of care and skill in their exercise that a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs. (Section 601.) Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any of the Holders of the Debt Securities unless
they shall have offered to the Trustee reasonable security or indemnity.
(Section 603.)
Reference is made to the Prospectus Supplement relating to any series of
Offered Debt Securities which are Original Issue Discount Securities for the
particular provisions relating to acceleration of a portion of the principal
amount of such Original Issue Discount Securities upon the occurrence of an
Event of Default and the continuation thereof.
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<PAGE>
MODIFICATION OF THE INDENTURE
Each Indenture will provide that with certain exceptions, the Indenture, the
rights and obligations of the Company and the rights of the holders of the
Debt Securities may be modified by the Company and the Trustee with the
consent of the holders of not less than 50% in aggregate principal amount of
all series of Debt Securities directly affected by such modification; but no
such modification may be made, without the consent of each holder of such Debt
Securities affected thereby, which would (i) change the stated maturity of any
Debt Security, or any installment of interest, if any, on any such Debt
Security, or reduce the principal amount thereof, or reduce any premium
payable upon the redemption thereof, or reduce the rate of interest thereon,
or reduce the principal amount payable on acceleration with respect to an
Original Issue Discount Security, or change the place or currency of payment
of principal or any premium or interest on any such Debt Security; (ii) reduce
the above-stated percentage of Debt Securities, the consent of the holders of
which is required to modify or alter the Indenture; (iii) impair the right to
institute suit for the enforcement of any payment of the principal of, and
premium, if any, and interest on any such Debt Security; (iv) modify the
foregoing requirements except to increase the percentage of outstanding Debt
Securities or to provide that certain other provisions cannot be modified or
waived without the consent of the holders of all outstanding Debt Securities;
or (v) modify the provisions of the Subordinated Indenture with respect to the
subordination of the Subordinated Debt Securities in a manner adverse to the
holders of such Debt Securities. (Section 902.) The Company may set a record
date for any Act of the holders with respect to consenting to any amendment.
(Section 104.)
THE TRUSTEES
Each Indenture contains limitations on the right of the Trustee, as a
creditor of the Company, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. In addition, the Trustee may be deemed to have a conflicting
interest and may be required to resign as Trustee if at the time of a default
under the Indenture it is a creditor of the Company.
As of the date hereof, the Company has not selected a Trustee for either the
Senior Indenture or the Subordinated Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Prospectus Supplement will contain provisions regarding the ability of
the Company to consolidate or merge with or into, or convey, transfer or lease
its properties or assets to any Person.
CERTAIN DEFINITIONS
"Indebtedness" means (without duplication), with respect to any Person, (i)
every obligation of such Person for money borrowed, (ii) every obligation of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) every obligation of such Person issued or assumed as the
deferred purchase price of property, every conditional sale obligation and
every obligation under any title retention agreement, in each case if on terms
permitting any portion of the purchase price to be paid beyond one year from
the date of purchase (but excluding trade accounts payable arising in the
ordinary course of business which are not overdue by more than 90 days or
which are being contested in good faith), (iv) every obligation of such Person
issued or contracted for as payment in consideration of the purchase by such
Person or an Affiliate of such Person of the stock or substantially all of the
assets of another Person or a merger or consolidation to which such Person or
an Affiliate of such Person was a party, (v) every obligation of the type
referred to in clauses (i) through (iv) of other Persons and all dividends of
other Persons for the payment of which, in either case, such Person is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, and (vi) every obligation of the type referred to in clauses (i)
through (v) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
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amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured. "Indebtedness,"
however, does not include any obligation of any Person under any interest rate
swap, cap, collar or similar arrangement.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
If Subordinated Debt Securities are issued, a Prospectus Supplement relating
thereto will describe the terms whereby such Subordinated Debt Securities will
be made subordinate and subject in right of payment to the prior payment in
full of senior indebtedness of the Company, and such description will include
a definition of what constitutes "senior indebtedness" of the Company.
PLAN OF DISTRIBUTION
The Company may offer the Debt Securities directly to purchasers or to or
through underwriters, dealers or agents. Any such underwriter(s), dealer(s) or
agent(s) involved in the offer and sale of the Debt Securities in respect of
which this Prospectus is delivered will be named in the Prospectus Supplement.
The Prospectus Supplement with respect to such Debt Securities will also set
forth the terms of the offering of such Debt Securities, including the
purchase price of such Debt Securities and the proceeds to the Company from
such sale, any underwriting discounts and other items constituting
underwriters' compensation, any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers and any
securities exchanges on which such Debt Securities may be listed.
The distribution of the Debt Securities may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Prospectus Supplement
will describe the method of distribution of the Debt Securities.
If underwriters are used in an offering of Debt Securities, the name of each
managing underwriter, if any, and any other underwriters and the terms of the
transaction, including any underwriting discounts and other items constituting
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement relating to such offering and the Debt Securities will
be acquired by the underwriters for their own accounts and may be resold from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time
of sale. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time. It
is anticipated that any underwriting agreement pertaining to any Debt
Securities will (1) entitle the underwriters to indemnification by the Company
against certain civil liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters may be required to make in
respect thereof, (2) provide that the obligations of the underwriters will be
subject to certain conditions precedent and (3) provide that the underwriters
will be obligated to purchase all Debt Securities offered in a particular
offering if any such Debt Securities are purchased.
If a dealer is used in an offering of Debt Securities, the Company will sell
such Debt Securities to the dealer, as principal. The dealer may then resell
such Debt Securities to the public at varying prices to be determined by such
dealer at the time of resale. The name of the dealer and the terms of the
transaction will be set forth in the Prospectus Supplement relating thereto.
If any agent is used in an offering of Debt Securities, the agent will be
named, and the terms of the agency will be set forth, in the Prospectus
Supplement relating thereto. Unless otherwise indicated in such Prospectus
Supplement, an agent will act on a best efforts basis for the period of its
appointment.
15
<PAGE>
Dealers and agents named in a Prospectus Supplement may be deemed to be
underwriters (within the meaning of the Securities Act) of the Debt Securities
described therein and, under agreements which may be entered into with the
Company, may be entitled to indemnification by the Company against certain
civil liabilities under the Securities Act. Underwriters, dealers and agents
may be customers of, engage in transactions with, or perform services for, the
Company in the ordinary course of business.
Offers to purchase Debt Securities may be solicited, and sales thereof may
be made, by the Company directly to institutional investors or others, who may
be deemed to be underwriters within the meaning of the Securities Act with
respect to any resales thereof. The terms of any such offer will be set forth
in the Prospectus Supplement relating thereto.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other agents of the Company to solicit offers by certain
institutional investors to purchase Debt Securities from the Company pursuant
to contracts providing for payment and delivery at a future date.
Institutional investors with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all
cases such purchasers must be approved by the Company. The obligations of any
person under any such contract will not be subject to any conditions except
that (1) the purchase of the Debt Securities shall not at the time of delivery
be prohibited under the laws of any jurisdiction to which such purchaser is
subject and (2) if the Debt Securities are also being sold to underwriters,
the Company shall have sold to such underwriters the Debt Securities not
subject to delayed delivery. Underwriters and other agents will not have any
responsibility in respect of the validity or performance of such contracts.
The anticipated date of delivery of Debt Securities will be set forth in the
Prospectus Supplement relating to each offering.
VALIDITY OF DEBT SECURITIES
The validity of the Debt Securities will be passed upon for the Company by
Paul W. Heldman, Esq., Vice President, Secretary and General Counsel of the
Company. In rendering his opinions on the validity of the Debt Securities, Mr.
Heldman will express no opinion as to the applicability of any federal or
state law relating to fraudulent transfers. As of March 31, 1996, Mr. Heldman
owned approximately 10,550 shares of the Company's Common Stock and had
options to acquire an additional 113,352 shares.
EXPERTS
The consolidated financial statements and financial statement schedules of
The Kroger Co. as of December 30, 1995 and December 31, 1994 and for each of
the three fiscal years in the period ended December 30, 1995, which appear in
the Company's Annual Report on Form 10-K for the fiscal year ended December
30, 1995, incorporated by reference in this Prospectus, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P. independent
certified public accountants, given on the authority of that firm as experts
in accounting and auditing.
Documents incorporated herein by reference in the future will include
financial statements, related schedules (if required) and auditors' reports
which financial statements and schedules will have been audited to the extent
and for the periods set forth in such reports by the firm or firms rendering
such reports and, to the extent so audited and consent to incorporation by
reference is given, will be incorporated herein by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting
and auditing.
16
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PRO-
SPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CRE-
ATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... S-2
The Company................................................................ S-3
Recent Developments........................................................ S-3
Use of Proceeds............................................................ S-3
Capitalization............................................................. S-4
Summary Historical Consolidated
Financial Data............................................................ S-5
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................................ S-7
Description of the Notes................................................... S-14
Underwriting............................................................... S-21
Validity of the Notes...................................................... S-22
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Risk Factors............................................................... 3
The Company................................................................ 4
Consolidated Ratio of Earnings to Fixed Charges............................ 4
Use of Proceeds............................................................ 4
Description of the Credit Agreement........................................ 5
Description of Debt Securities............................................. 11
Plan of Distribution....................................................... 15
Validity of Debt Securities................................................ 16
Experts.................................................................... 16
</TABLE>
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$200,000,000
THE KROGER CO.
% SENIOR NOTES DUE 2007
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KROGER
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GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
CITICORP SECURITIES, INC.
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