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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File No. 1-303
December 30, 1995
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
Address Telephone Number
- ------- ----------------
1014 Vine St. (513) 762-4000
Cincinnati, Ohio 45202
Securities registered pursuant to section 12 (b) of the Act:
Name of Exchange on
Title of Class which Registered
- -------------- ----------------------------
Common $1 par value New York Stock Exchange
124,634,336 shares outstanding on
March 15, 1996
9% Senior Subordinated Notes New York Stock Exchange
due 1999, face $1000
125,000 notes outstanding
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____X____ No ________.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Common Stock of The Kroger Co. held by
nonaffiliates as of February 12, 1996: $4,432,772,651
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act
on or before April 28, 1996 incorporated by reference into Parts II and III
of Form 10-K.
PART I
ITEM 1. BUSINESS
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. The retail food
business in which the Company is engaged is highly competitive. The Company had
approximately 205,000 full and part-time employees on December 30, 1995 and
operated 1,325 supermarkets in 24 states.
At December 30, 1995, the Company had 694 Company owned and directly operated
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 a warehouse and distribution
system which supplies products to its stores.
FOOD OPERATIONS
As of December 30, 1995, the Company operated 1,325 supermarkets, the locations
of most of which are leased. Of this number, 1,080 supermarkets were operated
under the Kroger name principally in the Midwest, South, Southeast, and
Southwest in sixteen states (the "Kroger Supermarkets"). Dillon Companies, Inc.
("Dillon"), a wholly-owned subsidiary of the Company, operated 245 supermarkets
in nine states, directly or through wholly-owned subsidiaries ("Dillon
Supermarkets"). The Dillon Supermarkets are principally located in Colorado,
Kansas, Arizona and Missouri, and operated under the names "Dillon Food Stores,"
"King Soopers," "Fry's Food Stores," "Gerbes Supermarkets," "City Market," and
"Sav-Mor."
Foodland Distributors is a joint wholesaling venture formed in 1984 by the
Company and SUPERVALU Inc., which sells a full line of grocery and general
merchandise products and support services to independent and chain store
retailers, including Kroger, in Michigan.
The Kroger and Dillon Supermarkets sell national and regional brand food and
grocery products as well as private label products. Over one-half of these
private label items are manufactured by the Company. The remainder are
manufactured by outside vendors to Kroger specifications. The Dillon
Supermarkets also offer private label items supplied by Topco Associates (a
private label buying group) and private label merchandise supplied by local
cooperatives and wholesalers.
The Company's primary focus is on the combination food and drug store format,
which offers a pharmacy plus a variety of service-oriented specialty departments
in addition to the more traditional presentation of supermarkets. Combining a
food store with a pharmacy, a typical combination store offers more than 40,000
individual items in a modern format. Specialty departments, including floral,
service meat, seafood, pharmacy, expanded health and beauty care, video rental,
book stores, cosmetics, photo finishing, deli, bakery, cheese and seasonal
nonfood general merchandise, provide shoppers with a convenient one-stop
shopping opportunity.
The Company's combination stores generally range from 40,000 to 80,000 square
feet in size with an average size of 52,118 square feet. At December 30, 1995,
combination stores accounted for 60% of the store base, 73% of supermarket
square footage, and 74% of food store sales. These figures compare with 48% of
the store base, 62% of supermarket square footage, and 61% of food store sales
at year end 1988.
The Company's superstores, which have no pharmacy, limited specialty
departments, and fewer square feet, continue to be an important component of the
Company's store mix. At December 30, 1995, superstores represented 33% of the
store base, but only 24% of the square footage and 23% of the food store sales.
Superstores average 31,343 square feet in size.
Conventional stores are the oldest store format and offer few, if any, specialty
departments. Conventional stores are substantially smaller in total square
footage, averaging 17,385 square feet, and contributed 3% of total supermarket
sales in 1995.
CONVENIENCE STORES
At December 30, 1995, the Company's Dillon convenience store group operated,
directly or through franchise agreements, 819 convenience stores in 15 states as
follows:
No. Stores
Chain Company Owned Franchise Sq. Feet States of Operation
- ------------- ------------ ---------- -------- -------------------
Kwik Shop 175 10 481,000 Iowa, Kansas, Nebraska,
Oklahoma, Illinois
Quik Stop 115 258,000 California
Turkey Hill 223 549,000 Pennsylvania
Loaf 'N Jug 79 244,000 Colorado, New Mexico,
Oklahoma
Mini Mart 110 272,000 Colorado, Montana, Nebraska,
North Dakota, South Dakota,
Wyoming
Tom Thumb 107 285,000 Alabama, Florida
--- --- ---------
694 125 2,089,000
Dillon convenience stores averaged 2,551 square feet at December 30, 1995. The
average store employs six to seven employees, with one or two employees on duty
at any given time.
Each week, an average of 1,467 customers visit a typical Dillon convenience
store to purchase gasoline and 5,157 customers visit to purchase groceries.
Each gasoline customer spends an average of $9.55 per visit and each inside
store customer spends an average of $2.19 per visit. The average convenience
store carries 3,000 items. About 62% of a convenience store's non-gasoline
sales are generated by five product categories: soft drinks, beer, snacks, candy
and tobacco products.
Each convenience store division is independently run and requires little general
or administrative corporate support. The convenience store group has grown
primarily by acquisition.
MANUFACTURING OPERATIONS
The Company's 37 food processing facilities supply private label products to the
Company's supermarkets. The Company's dairy divisions provide private label
milk, ice cream, cheese, cultured products, bottled water and juice. The
Company's bakeries provide a wide variety of bread, rolls and sweet goods. The
Company's grocery products divisions produce deli items, spices, salad
dressings, jellies, peanut butter, and a host of other grocery items.
OTHER
The Company plans to incur approximately $35 million in additional capital
expenditures during the period 1996-1998 to convert chlorofluorocarbon systems
and to replace gasoline underground storage tanks at certain locations in order
to comply with scheduled changes in Environmental Protection Agency standards.
The expenditures are capital in nature and are not the result of environmental
uncertainties or cleanup activities.
ITEM 2. PROPERTIES
As of December 30, 1995, the Company operated more than 2,200 owned or leased
supermarkets, convenience stores, distribution warehouses and food processing
facilities, through store marketing areas, subsidiaries or affiliates. These
facilities are located principally in the Midwest, South, Southeast and
Southwest. A majority of the properties used in the conduct of the Company's
business are leased.
Store equipment, fixtures and leasehold improvements, as well as processing and
manufacturing equipment, are generally owned by the Company. The total cost of
the Company's owned assets and capitalized leases at December 30, 1995 was
$5.145 billion while the accumulated depreciation was $2.482 billion.
Leased premises generally have base terms ranging from ten to twenty-five years
with renewal options for additional periods. Some options provide the right to
purchase the property after conclusion of the lease term. Store rentals are
normally payable monthly at a stated amount or at a guaranteed minimum amount
plus a percentage of sales over a stated dollar volume. Rentals for the
distribution, processing and miscellaneous facilities generally are payable
monthly at stated amounts. For additional information on leased premises, see
"Leases" in the Notes to Consolidated Financial Statements.
2
ITEM 3. 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
financial position.
Fry's Food Stores of Arizona, Inc. ("Fry's"), a subsidiary of the Company, is
currently a defendant and cross-defendant in actions pending in the U.S.
District Court for the Southern District of Florida entitled Harley S. Tropin v.
Kenneth Thenen, et. al., No. 93-2502-CIV-MORENO and Walco Investments, Inc., et.
al. v. Kenneth Thenen, et. al., No. 93-2534-CIV-MORENO. The plaintiff and cross-
claimants in these actions seek unspecified damages against numerous defendants
and cross-defendants, including Fry's. Plaintiffs and cross-claimants allege
that a former employee of Fry's supplied false information to third parties in
connection with purported sales transactions between Fry's and affiliates of
Premium Sales Corporation or certain limited partnerships. Claims have been
alleged against Fry's for breach of implied contract, aiding and abetting and
conspiracy, conversion and civil theft, negligent supervision, fraud, and
violations of 18 U.S.C. (S)(S) 1961 and 1962 (d) and Chapter 895, Florida
Statutes. Fry's believes that it has substantial meritorious defenses to the
claims alleged against it, and Fry's intends to defend the litigation
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Price Range
---------------------------------------------
1995 1994
-------------------- --------------------
Quarter High Low High Low
- ------- ------ ------ ------ ------
1st 27-7/8 23-3/8 25-7/8 19-3/8
2nd 28 25 25-3/8 21-1/8
3rd 34-3/4 26-1/2 26-7/8 23
4th 37-3/4 31-7/8 26-7/8 21-3/4
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1995: 49,970
Number of shareowners at March 15, 1996 49,517
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past two fiscal
years. See Quarterly Data Note to Consolidated Financial Statements.
3
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
------------------------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2, DECEMBER 28,
1995 1994 1994 1993 1991
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales from continuing operations........ $23,937,795 $22,959,122 $22,384,301 $22,144,588 $21,350,530
Earnings from continuing operations
before extraordinary loss and
cumulative effect of change in
accounting(A).......................... 318,866 268,903 170,805 101,160 100,694
Extraordinary loss (net of income
tax credit)(B) ........................ (16,053) (26,707) (23,832) (107,103) (20,839)
Cumulative effect of change in accounting
(net of income tax credit)(C).......... (159,193)
Net earnings (loss)(A).................. 302,813 242,196 (12,220) (5,943) 79,855
Earnings (loss) per share
Earnings from continuing operations
before extraordinary loss(A).......... 2.50 2.19 1.50 1.11 1.12
Extraordinary loss(B).................. (12) (.21) (.19) (1.17) (.23)
Cumulative effect of change in
accounting(C)......................... (1.28)
Net earnings (loss)(A)................. 2.38 1.98 .03 (.06) .89
Total assets............................ 5,044,717 4,707,674 4,480,464 4,303,084 4,114,351
Long-term obligations, including
obligations under capital leases....... 3,489,728 3,889,194 4,135,013 4,472,978 4,407,764
Shareowners' deficit.................... (1,603,013) (2,153,684) (2,459,642) (2,700,044) (2,749,183)
Cash dividends per common share......... (D) (D) (D) (D) (D)
- -----------------------------------------------------------------------------------------------------------
(A) See Other Charges and Credits in the Notes to Consolidated Financial
Statements for information pertaining to 1994 and 1993.
(B) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(C) See Postretirement Health Care and Life Insurance Benefits in the Notes to
Consolidated Financial Statements.
(D) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
Total sales for the fourth quarter of 1995 were $5.9 billion compared to $5.6
billion in the fourth quarter of 1994, a 4.9% increase. Sales for the full year
increased 4.3%. Food stores sales for the fourth quarter 1995 were 5.3% ahead of
the fourth quarter 1994 and 4.9% ahead for the year. A review of sales by lines
of business for the three years ended December 30, 1995, is as follows:
1995 1994 1993
% OF 1995 --------------- --------------- ----------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
Food Stores.............. 93.9% $22,488 +4.9% $21,442 +4.9% $20,443 +1.1%
Convenience Stores....... 3.6% 850 -5.4% 898 -5.6% 951 +3.9%
Other sales.............. 2.5% 600 -3.1% 619 -37.5% 990 -3.9%
------ ------- ------- -------
Total sales.............. 100.0% $23,938 +4.3% $22,959 +2.6% $22,384 +1.1%
Sales in identical food stores, stores that have been in operation and have not
been expanded or relocated for one full year, increased 1.6% in the fourth
quarter and 1.4% for the full year. The increase in food stores' sales can be
attributed primarily to inflation of less that 1%, the opening or expansion of
83 food stores, and higher average sales per customer. Higher sales per customer
are the result of the Company's focus on the combination food and drug store,
combining a food store with a pharmacy and numerous specialty departments such
as floral, video rental, book stores, etc. The emphasis and on-going development
of this "one-stop shopping" convenience format tailored to each market is where
the Company's emphasis will be placed for future sales growth.
Convenience stores' sales decreased 5.4% for the year and 7.1% during the fourth
quarter. The decline was a result of the January 1995 sale of the Company's Time
Savers Stores, Inc. subsidiary which operated 116 stores. Adjusting 1994
convenience store sales to exclude Time Savers sales would result in a 5.3%
increase for the quarter and a 7.6% increase for the year. The full year 1995
sales for the remaining six company convenience store group were enhanced by
strong identical in-store sales and an increase in gasoline retail prices. In-
store sales in identical convenience stores increased 1.6% in the fourth quarter
1995 and 2.6% for the full year. Gasoline sales at identical convenience stores
decreased 1.4% in the fourth quarter 1995 on a .8% increase in gallons sold, and
gasoline sales increased 3.2% for the year on a .4% increase in gallons sold.
Other sales primarily consist of outside sales by the Company's manufacturing
divisions. In the first quarter of 1994, sales of general merchandise to Hook-
Superx, Inc. (HSI) were $48.4 million and were included in other sales.
Purchases were discontinued by HSI in the first quarter of 1994. Adjusting other
sales to eliminate sales to HSI would produce an increase of 5.1% for the full
year. The fourth quarter increase in other sales as compared to 1994's fourth
quarter was 12.4%.
Total sales for the fourth quarter and year-to-date increased 5.4% and 5.0%,
respectively, after adjusting for the other sales to HSI, and the exclusion of
sales from Time Savers Stores, Inc.
Total food store square footage increased 4.6%, 4.7% and 3.2% in 1995, 1994, and
1993, respectively. The Company expects to increase retail food store square
footage by approximately 6-7% in both 1996 and 1997. Convenience store square
footage decreased 10.6% in 1995, increased .4% in 1994, and declined .7% in
1993. Convenience store square footage increased 1.7% in 1995 after adjusting
for the disposition of Time Savers Stores, Inc.
Sales per average square foot for the last three years were:
TOTAL SALES PER
AVERAGE SQUARE FOOT
------------------------------
1995 1994 1993
------------------------------
Food Stores...................................... $405 $402 $398
Convenience Stores............................... $444 $412 $405
5
Sales per average square foot for convenience stores for 1994 and 1995 exclude
stores that are operated by franchisees.
The Company produced record sales in 1995 despite increased competition from
other food retailers, supercenters, mass merchandisers, and restaurants. Markets
that experienced strong competitive pressures in the recent past, such as
Detroit and other Michigan cities; Columbus, Ohio; and Indianapolis, Indiana;
produced outstanding comparable results. Other markets faced new competitive
challenges in 1995, such as Denver, Colorado; Phoenix, Arizona; and Atlanta,
Georgia. The Company's wide regional diversity allowed it to withstand these
challenges and to produce record results.
The sales improvement in 1994 was the result of new square footage combined with
the increased productivity of existing stores. Factors that affected 1994 sales
had already begun to affect sales in 1993. Sales in 1993 showed an improvement
over 1992 in part due to the rebounding of the Michigan market that sustained a
prolonged labor strike in 1992, increased price competitiveness of the Company,
and private label popularity.
The Company's future food store strategy is to invest in existing Kroger markets
or adjacent geographic regions where the Company has a strong franchise and can
leverage marketing, distribution, and overhead dollars. It is anticipated that
this strategy will produce a negative effect on identical sales but will create
another year of improved total sales in 1996. Consistent increases from the
Company's existing store base combined with incremental contributions from the
capital spending program are expected.
EBITD
The Company's Senior Competitive Advance and Revolving Credit Facility
Agreement, as amended, (the "Credit Agreement"), and the indentures underlying
approximately $1.2 billion of publicly issued debt contain various restrictive
covenants, many of which are based on earnings before interest, taxes,
depreciation, LIFO charge, unusual and extraordinary items ("EBITD"). These
covenants are based, among other things, upon generally accepted accounting
principles ("GAAP") as applied on a date prior to January 3, 1993. The ability
to generate EBITD at levels sufficient to satisfy the requirements of these
agreements is a key measure of the Company's financial strength. The
presentation of EBITD is not intended to be an alternative to any GAAP measure
of performance but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At December 30, 1995 the Company was
in compliance with all covenants of its Credit Agreement. The Company believes
it has adequate coverage of its debt covenants to continue to respond
effectively to competitive conditions.
EBITD, which does not include the effect of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions", the Company's 1994 special contribution to The Kroger Co.
Foundation, or the 1994 charge related to the disposition of the San Antonio
stores, increased 9.2% in 1995 to $1.163 billion compared to $1.065 billion in
1994 and $977 million in 1993. EBITD growth was generated by identical stores'
sales gains, higher gross profit margins generated by improved procurement
costs, and reduced operating, general and administrative expenses as a percent
of sales. The Company's strong storing program continued to produce incremental
EBITD increases as well. EBITD increases in 1994 and 1993 were due in large part
to increased sales combined with an improved gross profit rate.
6
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:
1995 1994 1993
-------------------------
Merchandise costs as reported............... 75.60% 75.81% 76.43%
LIFO charge (credit)........................ .05% .07% (.02%)
------ ------ ------
Merchandise costs as adjusted............... 75.55% 75.74% 76.45%
The Company's FIFO merchandise costs decreased for the third consecutive year.
The Company reduced the cost of products during 1995 through its investment in
technology focusing on improved store operation, procurement, and distribution
practices. Transportation and warehousing costs as a percent of sales declined
from 1994's rates. These cost reductions have allowed the Company to pass on
some of these lower costs to the customer and to make the Company's merchandise
more price competitive and attractive to customers. The gross profit rate was
favorably influenced by the Company's advances in consolidated distribution and
coordinated purchasing, reduced transportation costs, and strong private label
sales. Merchandise costs were unfavorably affected by the increase in the LIFO
charge in 1994 as compared to 1993. Merchandise costs also were favorably
affected by the discontinuance of low-margin sales to HSI in the first quarter
of 1994. Merchandise costs as a percent of sales adjusted for these sales
declined to 75.76% in 1994 from 75.97% in 1993.
The Company expects the cost of product to improve in the future as the Company
continues to use technology, outsourcing, and a variety of store level
efficiency enhancements to drive down costs.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in 1995,
1994 and 1993 were 18.41%, 18.42% and 17.98%, respectively. Excluding the effect
of sales to HSI from 1994 and 1993, operating, general and administrative costs
were 18.41%, 18.45% and 18.37% in 1995, 1994 and 1993, respectively.
The decline in the operating, general and administrative expense rate was the
result of decreases in incentive pay, utility expense, and total employee costs
as a percent of sales. Operating, general and administrative expenses were
adversely affected by increases in credit card fees and store supplies,
reflecting increased prices for paper and plastic commodities.
The Company's goal for 1996 is to reduce operating, general and administrative
expense rates. Increased sales volume combined with investments in new
technologies and logistics programs to improve efficiencies and lower costs
while maintaining customer service, should help achieve this goal. In 1996, the
Company plans on opening or expanding 115 to 120 stores compared to 83 in 1995.
This expansion program will adversely affect operating, general and
administrative rates as upfront costs associated with the opening of new stores
are incurred.
INCOME TAXES
The effective income tax rates were 37.4%, 36.2% and 39.8% for 1995, 1994 and
1993, respectively. The income tax rate in 1995 was favorably affected by state
income tax refunds. Income tax expense for 1994 includes a $5.9 million benefit
from the donation to The Kroger Co. Foundation of an asset that had a market
value above the book value. Income tax expense for 1993 includes a $4.2 million
charge to increase deferred taxes for the change in the federal income tax rate.
7
NET EARNINGS (LOSS)
Net earnings (loss) totaled $302.8 million in 1995 compared to $242.2 million in
1994 and $(12.2) million in 1993. Earnings in 1995 compared to 1994 and 1993
were affected by: (i) a 1994 pre-tax charge of $4.4 million offset by a $5.9
million tax credit in connection with the Company's contribution to The Kroger
Co. Foundation, (ii) a $25.1 million pre-tax charge in 1994 to recognize future
lease commitments and losses on equipment related to certain San Antonio stores
sold to Megafoods, Inc., which declared bankruptcy during 1994, (iii) a $25.1
million 1994 pre-tax gain on the disposition of the Company's investment in HSI
after providing for certain tax indemnities related to HSI, (iv) a 1993 charge
against earnings of $248.7 million before taxes, $159.2 million after tax, for
the cumulative effect, along with an additional $15.2 million, $17.7 million and
$19.5 million in 1995, 1994 and 1993, respectively, for the current year's
effect of a change in accounting for retiree health benefits, (v) an after tax
extraordinary loss from the early retirement of debt in 1995 of $16.1 million
compared to $26.7 million in 1994 and $23.8 million in 1993, (vi) a pre-tax LIFO
charge in 1995 of $14.1 million versus a charge of $16.2 million in 1994 and a
credit of $3.2 million in 1993, (vii) a $22.7 million charge ($15 million after
tax) during 1993 in connection with the disposition of the San Antonio stores,
(viii) net interest expense in 1995 of $312.7 million versus $327.6 million in
1994 and $390.0 million in 1993, and (ix) depreciation expense of $311.3
million, $277.8 million and $263.8 million in 1995, 1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management and Interest Expense
Net interest expense declined to $312.7 million in 1995 as compared to $327.6
million in 1994 and $390.0 million in 1993.
Reduced borrowing requirements in 1995 caused by strong cash flow and lower
working capital needs combined with the September 1995 conversion of the
remaining outstanding principal balance of the Company's $200 million 6 3/8%
Convertible Junior Subordinated Notes led to a reduction in interest expense and
debt balances. Additionally, the Company repurchased and retired $283.0 million
of high yield senior and subordinated debt which was financed by cash generated
from operations and lower cost bank debt. Interest expense was adversely
affected in 1995 by an increase in market rates. In 1994 the Company repurchased
or redeemed $559.5 million of high rate senior and subordinated debt; a portion
of these retirements were financed by $111.4 million of new subordinated debt
and $132.3 million in additional bank borrowings. In 1993, the proceeds from
$569.7 million of new senior and subordinated debt issues and from the issuance
of 13,275,000 shares of common stock which netted $203.5 million, were used in
combination with other sources of cash to repurchase or redeem $1.0 billion of
high cost subordinated debt. (See "Repurchase and Redemption of Debt")
The Company's Credit Agreement provides a $1.75 billion revolving credit
facility through July 20, 2002. The average interest rate on the Company's bank
debt, which totaled $1,008.2 million at year-end 1995 versus $979.3 million at
year-end 1994 was 6.84% compared to 5.57% in 1994 and 4.57% in 1993. The
increase is due to higher market interest rates that were not entirely offset by
lower borrowing spreads on the Company's Credit Agreement. The Company's rate on
the bank debt is variable.
The Company currently expects 1996 net interest expense, estimated using year-
end 1995 rates, to total approximately $300 million. A 1% change upward in
market rates would increase this estimated expense by approximately $4.6
million. A 1% decrease in market rates would reduce the estimated expense by
approximately $8.9 million.
Long-term debt, including capital leases and current portion thereof, decreased
$382 million to $3.524 billion at year-end 1995 from $3.906 billion at year-end
1994. The Company purchased a portion of the debt
8
issued by the lenders of certain of its structured financings, which cannot be
retired early, in an effort to effectively further reduce the Company's interest
expense. Excluding the debt incurred to make these purchases, which are
classified as investments, the Company's long-term debt would be $59.0 million
less or $3.465 billion at year-end 1995 compared to $3.837 billion at year-end
1994.
Required principal repayments over the next five years decreased to $429.2
million at year-end 1995 versus $670.7 million and $1.048 billion at year-end
1994 and 1993, respectively. Scheduled debt maturities for the five years
subsequent to 1995, 1994 and 1993 were:
1995 1994 1993
-------------------------------
(IN THOUSANDS)
Year 1.................................. $ 24,939 $ 7,926 $ 63,053
Year 2.................................. 11,838 14,341 111,010
Year 3.................................. 16,839 12,875 117,434
Year 4.................................. 337,419 15,507 146,784
Year 5.................................. 38,212 620,012 609,769
In 1995, Year 4 maturities include the remaining $139.2 million of 10% Senior
Subordinated Notes, and $125.0 million of 9% Senior Subordinated Notes.
In 1994, Year 5 maturities include $125 million of 9% Senior Subordinated Notes,
$200 million of 6=3/8% Convertible Junior Subordinated Notes, and $222.6 million
of 10% Senior Subordinated Notes. In 1995 the Company issued a redemption notice
to the holders of the remaining outstanding balance of the 6=3/8% Convertible
Junior Subordinated Notes. All of the holders elected to convert the notes into
approximately 10.7 million shares of common stock.
Year 5 maturities for 1993 include the entire $362.0 million outstanding under
the Company's Working Capital Facility under the predecessor to the Company's
current Credit Agreement, $68.0 million of Facility D under its predecessor
Credit Agreement, and the remaining 11=1/8% Senior Notes outstanding at January
1, 1994 of $138.4 million, which were redeemed on March 15, 1994.
The Company currently has in place various interest rate hedging agreements with
notional amounts aggregating $3.165 billion. The effect of these agreements is
to: (i) fix the rate on $425 million floating rate debt, with $200 million of
swaps expiring in May 1996, $100 million expiring in December 1998, and the
remaining $125 million expiring in January 1999, for which the Company pays an
average rate of 6.34% and receives 6 month LIBOR; (ii) fix the rate on $530
million floating rate debt incurred to purchase the Company's high-rate public
bonds in the open market to match the original maturity of the debt purchased,
borrowing at an effective rate that is lower than the yield to maturity of the
repurchased debt and paying an average rate of 7.52% on these agreements which
will expire $75 million in 2000, $395 million in 2001, and $60 million in 2002;
(iii) swap the contractual interest rate on $350 million of seven and ten year
debt instruments into floating-rate instruments, for which the Company pays 6
month LIBOR and receives an average rate of 7.04%, with $100 million of these
contracts expiring in May 1999 and the remaining $250 million expiring in August
2002, and concurrently, fixing the rate on $300 million of floating rate debt,
with $100 million of swaps expiring in August 1996, $100 million in May 1997,
and $100 million in August 1998, for which the Company pays an average rate of
6.38%; effectively changing a portion of the Company's interest rate exposure
from seven to ten years to three to five years; (iv) swap the contractual
interest rate on $735 million of four, seven and ten year fixed-rate instruments
into floating-rate instruments, for which the Company pays 6 month LIBOR and
receives an average rate of 5.99%, with $75 million of these swaps expiring in
February 1998, $75 million expiring in March 1998, $50 million expiring in
October 1999, $100 million expiring in November 1999, $50 million expiring in
July 2000, $110 million expiring in November 2000, $125 million expiring in
January 2001, and $150 million expiring in July 2003; and (v) cap six month
LIBOR on $825 million for an original term of one to five years at rates between
5.0% and 6.0%, with $275 million expiring in the first quarter of 1996, $50
million of the caps expiring in each of July 1997 and July 1998,
9
$100 million expiring in December 1997, $100 million expiring in each of January
1997 and January 1998, and the remaining $150 million expiring in January 1999.
Interest expense was increased $2.7 million in 1995 and reduced $13.4 million
and $11.9 million in 1994 and 1993, respectively, as a result of the Company's
hedging program.
To meet any short-term liquidity needs, the Company's Credit Agreement provides
for borrowings of up to $1.75 billion. The Company's borrowings under the Credit
Agreement are permitted to be in the form of commercial paper. At December 30,
1995, the Company had $221.7 million of commercial paper outstanding of the
$1.008 billion in total bank borrowings. At year-end 1995, after deducting
amounts set aside as backup for the Company's unrated commercial paper program,
$552.0 million was available under the Company's Credit Agreement to meet short-
term liquidity needs. There are no principal payments required under the Credit
Agreement until its expiration on July 20, 2002.
COMMON STOCK
On September 5, 1995 the Company issued approximately 10.7 million shares of
common stock in connection with the redemption of its 6-3/8% Convertible Junior
Subordinated Notes and the election by holders to convert their Notes to stock.
REPURCHASE AND REDEMPTION OF DEBT
During 1995 the Company issued a notice in which it elected to redeem the
remaining outstanding amount of its 6-3/8% Convertible Junior Subordinated
Notes. The holders elected thereupon to convert their Notes into 10.7 million
shares of common stock. The Company also repurchased, on the open market, $29.1
million of its 9-1/4% Senior Secured Debentures and $253.9 million of its
various senior subordinated debt issues. The repurchases were effected using
additional bank borrowings, cash from operations, proceeds from the sale of
assets, and working capital improvements. The outstanding balances of these debt
issues at December 30, 1995, were $857.1 million for the Senior Subordinated
Debt issues and $131.0 million for the 9-1/4% Senior Secured Debentures.
During 1994 the Company redeemed the remaining outstanding amounts of its 11-
1/8% Senior Notes, its 8-3/4% Senior Subordinated Reset Notes, and its 8-1/4%
Convertible Junior Subordinated Debentures. The Company also repurchased $144.8
million of its various senior subordinated debt issues and $39.9 million of its
9-1/4% Senior Secured Debentures. The redemptions and repurchases were affected
using funds from asset sales, the sale of treasury stock to employee benefit
plans, proceeds from new financings, excess cash from operations and additional
bank borrowings. The outstanding balances of these debt issues at December 31,
1994, were $1.105 billion for the Senior Subordinated Debt issues and $160.2
million for the 9-1/4% Senior Secured Debentures.
During 1993 the Company repurchased $300.6 million face amount of Junior
Subordinated Discount Debentures with an accreted value of $285.1 million, $71.2
million Senior Subordinated Debentures, $111.6 million Senior Notes, and $33.5
million Senior Subordinated Reset Notes. Additionally, the Company redeemed the
remaining $498.2 million Junior Subordinated Discount Debentures.
CAPITAL EXPENDITURES
Capital expenditures totaled $726.1 million for 1995, a 36% increase over 1994's
total of $534.0 million. Capital outlays in 1993 were $376.1 million. During
1995 the Company opened, acquired or expanded 83 food stores and 19 convenience
stores compared to 82 food stores and 17 convenience stores in 1994 and 46 food
stores and 10 convenience stores in 1993. The Company also completed 62 food
store and 12 convenience store remodels during 1995. During 1995, 32 food stores
were closed or sold. The Company closed 13 convenience stores during 1995 and
completed the sale of its 116 store Time Savers convenience store subsidiary.
10
Capital expenditures in 1995 include $492.7 million of construction-in-progress
at year-end compared to $284.9 million at year-end 1994; a 73% increase. This
increase reflects the Company's strategy of growth through expansion as well as
the Company's emphasis, whenever possible, on self-development of store
projects, which take many months to complete. The Company prefers self-
development rather than build-to-suit leases because of the Company's favorable
borrowing rates. The annual occupancy cost for a company-owned store is
approximately $1 per square foot less expensive than for a leased store. In 1995
the Company opened or expanded 23 more Company owned stores and properties than
in 1994.
The Company expects 1996 capital expenditures, including additional Company
owned real estate, logistics projects, and continuing technology investments, to
total approximately $800-$850 million. Food store square footage is expected to
increase 6-7% by the opening, expansion or acquisition of approximately 115 food
stores. The Company also expects to complete within-the-wall remodels of 50-60
food stores. The increased square footage is planned for existing Company
markets where the Company has an established market position and an existing
administrative and logistical network. The Company's ability to execute its
capital expenditure plan will depend, in part, on its ability to generate
continued EBITD growth.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1995 the Company generated $798.5 million in cash from operating
activities compared to $750.3 million in 1994 and $617.3 million in 1993. The
increase from 1994 is primarily due to an increase in net earnings before
extraordinary losses of $50.0 million. Additionally, non-cash charges against
operating income for depreciation and amortization increased $31.4 million and
non-operating gains included in net earnings decreased $21.8 million. Offsetting
these net increases in cash from operating activities was a decrease of $52.9
million in cash from changes in operating assets and liabilities. This decrease
was primarily the result of a net increase in long-term liabilities of only
$12.6 million as compared to $58.0 million in 1994. The increase in 1994 from
1993 is due to an increase in net earnings before extraordinary loss of $98.1
million and an increase in cash from changes in operating assets and liabilities
of $195.9 million as compared to $105.5 million in 1993.
Investing activities used $665.6 million compared to $546.5 million of cash used
in 1994 and $368.3 million of cash used in 1993. The increase in the use of cash
in 1995 is due to an expansion in the level of capital expenditures over 1994 of
$192.2 million, and a decline of $22.8 million in the source of cash from sales
of assets. Offsetting these uses of cash was a $73.2 million net decrease in the
use of cash for the purchase of investments and a $22.6 million reduction in
additions to property held for sale. The increase in 1994 from 1993 was due to
additional capital expenditures of $157.8 million, an increase of $43.5 million
in the use of cash for investments and $8.8 million for 1994 additions to
property held for sale, offset by a net increase of $32.0 million in the source
of cash from sales of assets. The increase in investments in 1994 was primarily
due to the purchase of debt issued by a lender of certain of the Company's
structured financings. (See Liquidity and Capital Resources)
Cash used by financing activities in 1995 totaled $160.2 million compared to
$297.8 million and $231.7 million in 1994 and 1993, respectively. The decrease
in the use of cash during 1995 as compared to 1994 is due to a 1995 net debt
reduction of $191.0 million versus 1994's net debt reduction of $304.1 million.
Additionally, $18.6 million less cash was needed for debt prepayments and
finance charges and an additional $18.6 million was provided by book overdrafts.
Offsetting these items was a $12.3 million reduction in cash provided from the
sale of stock and related transactions. The increase in 1994 from 1993 is due to
a net reduction in proceeds from the sale of stock offset by a lower level of
debt reduction.
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 160,000 of the Company's employees.
During 1995 the Company negotiated over 50 labor contracts, all of which were
settled with no work stoppages. Typical agreements are 3 to 5 years in
11
duration, and as such agreements expire, the Company expects to negotiate with
the unions and to enter into new collective bargaining agreements. There can be
no assurance, however, that such agreements will be reached without work
stoppage. A prolonged work stoppage affecting a substantial number of stores
could have a material adverse effect on the results of the Company's operations.
Major union contracts that will be negotiated in 1996 include Denver, Dallas and
Toledo store employees.
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". The Company will
implement the statement in the first quarter 1996, the effect of which will not
be significant to the financial statements.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company expects to elect to continue to measure compensation
cost for stock compensation plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The 1996 adoption of FASB No. 123, therefore, will
have no effect on reported earnings.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
We have audited the accompanying consolidated balance sheet of The Kroger Co. as
of December 30, 1995 and December 31, 1994, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 30, 1995, December 31, 1994, and January 1, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Kroger Co. as
of December 30, 1995 and December 31, 1994, and the consolidated results of its
operations and its cash flows for the years ended December 30, 1995, December
31, 1994, and January 1, 1994, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefit costs other than
pensions, as of January 3, 1993.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 24, 1996
13
CONSOLIDATED BALANCE SHEET
DECEMBER 30, DECEMBER 31,
(In thousands of dollars) 1995 1994
- -----------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary cash investments........... $ -- $ 27,223
Receivables................................... 288,067 270,811
Inventories:
FIFO cost.................................... 2,034,880 2,053,207
Less LIFO reserve............................ (449,163) (438,184)
---------- ----------
1,585,717 1,615,023
Property held for sale........................ 40,527 39,631
Prepaid and other current
assets....................................... 192,673 199,437
---------- ----------
Total current assets........................ 2,106,984 2,152,125
Property, plant and equipment, net............. 2,662,338 2,252,663
Investments and other assets................... 275,395 302,886
---------- ----------
TOTAL ASSETS................................ $5,044,717 $4,707,674
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt............. $ 24,939 $ 7,926
Current portion of obligations under
capital leases............................... 8,975 8,467
Accounts payable.............................. 1,540,067 1,425,612
Other current liabilities..................... 991,456 952,963
---------- ----------
Total current liabilities................... 2,565,437 2,394,968
Long-term debt................................. 3,318,499 3,726,343
Obligations under capital leases............... 171,229 162,851
Deferred income taxes.......................... 153,232 172,690
Other long-term liabilities.................... 439,333 404,506
---------- ----------
TOTAL LIABILITIES........................... 6,647,730 6,861,358
---------- ----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1995--133,777,921 shares
1994--120,573,148 shares.............. 586,541 338,568
Accumulated deficit............................ (1,945,923) (2,248,736)
Common stock in treasury, at cost
1995--9,575,950 shares................
1994--9,576,231 shares................ (243,631) (243,516)
---------- ----------
TOTAL SHAREOWNERS' DEFICIT.................. (1,603,013) (2,153,684)
---------- ----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT.. $5,044,717 $4,707,674
========== ==========
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
14
CONSOLIDATED STATEMENT OF OPERATIONS AND
ACCUMULATED DEFICIT
Years Ended December 30, 1995, December 31, 1994 and January 1, 1994
1995 1994 1993
(In thousands, except per share amounts) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------
Sales.................................... $23,937,795 $22,959,122 $22,384,301
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 18,098,027 17,404,940 17,109,060
Operating, general and administrative... 4,406,445 4,228,046 4,024,468
Rent.................................... 299,828 299,473 290,309
Depreciation and amortization........... 311,272 277,750 263,810
Net interest expense.................... 312,685 327,550 389,991
Other charges........................... 22,725
----------- ----------- -----------
Total................................. 23,428,257 22,537,759 22,100,363
----------- ----------- -----------
Earnings before tax expense, extraordi-
nary loss and cumulative effect of
change in accounting.................... 509,538 421,363 283,938
Tax expense.............................. 190,672 152,460 113,133
----------- ----------- -----------
Earnings before extraordinary loss and
cumulative effect of change in account-
ing..................................... 318,866 268,903 170,805
Extraordinary loss, net of income tax
credit.................................. (16,053) (26,707) (23,832)
Cumulative effect of change in account-
ing, net of income tax credit........... (159,193)
----------- ----------- -----------
Net earnings (loss)................... $ 302,813 $ 242,196 $ (12,220)
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(2,248,736) $(2,490,932) $(2,475,561)
Net earnings (loss)..................... 302,813 242,196 (12,220)
Sales of treasury stock below average
cost................................... (3,151)
----------- ----------- -----------
End of year............................. $(1,945,923) $(2,248,736) $(2,490,932)
=========== =========== ===========
Primary earnings (loss) per Common Share
Earnings before extraordinary loss and
cumulative effect of change in
accounting............................. $ 2.65 $ 2.37 $ 1.60
Extraordinary loss...................... (.13) (.24) (.22)
Cumulative effect of change in account- (1.49)
ing.................................... ------ ------ ------
Net earnings (loss)..................... $ 2.52 $ 2.13 $ (.11)
====== ====== ======
Average number of common shares used in
primary calculation..................... 120,413 113,537 106,711
Fully-diluted earnings (loss) per Common
Share
Earnings before extraordinary loss and
cumulative effect of change in
accounting............................. $ 2.50 $ 2.19 $ 1.50
Extraordinary loss...................... (.12) (.21) (.19)
Cumulative effect of change in account- (1.28)
ing.................................... ------ ------ ------
Net earnings............................ $ 2.38 $ 1.98 $ .03
====== ====== ======
Average number of common shares used in
fully-diluted calculation............... 129,232 129,714 124,293
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
15
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 30, 1995, December 31, 1994, and January 1, 1994
1995 1994 1993
(In thousands of dollars) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings (loss)....................... $ 302,813 $ 242,196 $ (12,220)
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Extraordinary loss....................... 16,053 26,707 23,832
Cumulative effect of change in
accounting.............................. 159,193
Depreciation and amortization............ 311,272 277,750 263,810
Amortization of discount on Junior
Subordinated Debentures................. 64,198
Amortization of deferred financing costs. 13,189 15,305 15,051
Gain on sale of investment............... (25,099)
Loss (gain) on sale of property, plant
and equipment........................... (710) (3,672) 1,004
LIFO charge (credit)..................... 14,103 16,087 (3,172)
Non-cash contribution.................... 4,364
Other changes, net....................... (1,176) 694 140
Net increase in cash from changes in
operating assets and liabilities, net of
effects from sale of subsidiary,
detailed hereafter...................... 143,002 195,931 105,495
--------- ----------- -----------
Net cash provided by operating
activities............................. 798,546 750,263 617,331
--------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures...................... (726,142) (533,965) (376,138)
Proceeds from sale of assets.............. 49,530 21,819 40,296
(Increase) decrease in property held for
sale..................................... 2,942 (19,694) (10,900)
(Increase) decrease in other investments.. 8,106 (65,124) (21,602)
Proceeds from sale of investment.......... 50,469
--------- ----------- -----------
Net cash used by investing activities... (665,564) (546,495) (368,344)
--------- ----------- -----------
Cash Flows From Financing Activities:
Debt prepayment costs..................... (22,244) (24,696) (33,484)
Financing charges incurred................ (6,716) (22,868) (18,159)
Principal payments under capital lease
obligations.............................. (8,780) (8,249) (7,557)
Proceeds from issuance of long-term debt.. 113,246 902,979 724,826
Reductions in long-term debt.............. (304,234) (1,207,125) (1,147,807)
Book overdrafts........................... 18,633
Proceeds from issuance of capital stock... 38,451 24,753 212,015
Proceeds from sale of treasury stock...... 151 30,609 36,277
Capital stock reacquired.................. (217) (257) (96)
Tax benefit of non-qualified stock
options.................................. 11,505 7,056 2,256
--------- ----------- -----------
Net cash used by financing activities... (160,205) (297,798) (231,729)
--------- ----------- -----------
Net increase (decrease) in cash and
temporary cash investments................ (27,223) (94,030) 17,258
Cash and Temporary Cash Investments:
Beginning of year......................... 27,223 121,253 103,995
--------- ----------- -----------
End of year............................... $ -- $ 27,223 $ 121,253
========= =========== ===========
16
Years Ended December 30, 1995, December 31, 1994, and January 1, 1994
1995 1994 1993
(In thousands of dollars) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------
Increase (Decrease) In Cash From Changes In
Operating Assets And Liabilities:
Inventories (FIFO)........................... $ 10,396 $(51,831) $(12,239)
Receivables.................................. (18,207) 17,114 (12,752)
Prepaid and other current assets............. (3,992) (5,749) (10,993)
Accounts payable............................. 98,681 68,080 59,902
Accrued expenses............................. 43,501 110,290 8,037
Deferred income taxes........................ (10,008) (4,170) 2,175
Other liabilities............................ 22,631 62,197 71,365
-------- -------- --------
$143,002 $195,931 $105,495
======== ======== ========
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries. Certain prior year amounts have been reclassified to conform to
the 1995 presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of consolidated revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Segments of Business
The Company operates primarily in one business segment--retail food and drug
stores, predominately in the Midwest and South as well as Colorado, Arizona,
and Kansas. This segment represents more than 90% of consolidated revenue,
operating profit and identifiable assets. The Company also manufactures and
processes food for sale by its supermarkets and operates convenience stores.
Inventories
Inventories are stated at the lower of cost (principally LIFO) or market.
Approximately 87% of inventories for 1995 and 89% of inventories for 1994 were
valued using the LIFO method. Cost for the balance of the inventories is
determined using the FIFO method.
Property Held for Sale
Property held for sale includes the net book value of property, plant and
equipment that the Company plans to sell. The property is valued at the lower
of cost or market on an individual property basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed principally using the straight-line method over the
estimated useful lives of individual assets, composite group lives or the
initial or remaining terms of leases. Buildings and land improvements are
depreciated based on lives varying from ten to 40 years and equipment
depreciation is based on lives varying from three to 15 years. Leasehold
improvements are amortized over their useful lives which vary from four to 25
years.
Interest Rate Protection Agreements
The Company uses interest rate swaps and caps to hedge a portion of its
borrowings against changes in interest rates. The interest differential to be
paid or received is accrued as interest rates change and is recognized over the
life of the agreements currently as a component of interest expense. Gains and
losses from the disposition of hedge agreements are deferred and amortized over
the term of the related agreements.
Advertising Costs
The Company's advertising costs are predominately expensed as incurred and
included in "operating, general and administrative expenses." Advertising
expenses amounted to $281 million, $250 million and $226 million for 1995, 1994
and 1993, respectively.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax bases of assets and liabilities and their
financial reporting bases. The types of differences that
18
give rise to significant portions of deferred income tax liabilities or assets
relate to: property, plant and equipment, inventories, accruals for
restructuring and other charges, and accruals for compensation-related costs.
Deferred income taxes are classified as a net current and noncurrent asset or
liability based on the classification of the related asset or liability for
financial reporting. A deferred tax asset or liability that is not related to
an asset or liability for financial reporting is classified according to the
expected reversal date. (See Taxes Based on Income footnote.)
Consolidated Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be temporary cash investments.
Cash paid during the year for interest and income taxes was as follows:
1995 1994 1993
------------------------------
Interest....................................... $322,411 $329,570 $329,495
Income taxes................................... 175,151 131,156 92,745
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
1995 1994
------------------------
Land................................................. $ 231,624 $ 214,156
Buildings and land improvements...................... 792,089 683,231
Equipment............................................ 2,609,915 2,441,648
Leaseholds and leasehold improvements................ 763,381 733,019
Construction-in-progress............................. 492,750 284,913
Leased property under capital leases................. 254,897 241,884
----------- -----------
5,144,656 4,598,851
Accumulated depreciation and amortization............ (2,482,318) (2,346,188)
----------- -----------
$ 2,662,338 $ 2,252,663
Substantially all property, plant and equipment, with the exception of
leaseholds, collateralizes debt of the Company. (See Debt Obligations
footnote.)
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
1995 1994
-------------------
Deferred financing costs.................................. $ 85,417 $ 99,094
Goodwill.................................................. 43,253 47,518
Investments in Debt Securities............................ 58,988 68,752
Other..................................................... 87,737 87,522
-------- --------
$275,395 $302,886
The Company is amortizing deferred financing costs using the interest method.
Substantially all goodwill is amortized on the straight-line method over 40
years. Investments in Debt Securities are held at their amortized cost and the
Company intends to hold them to maturity.
19
OTHER CHARGES AND CREDITS
During 1994 the Company recorded a $25,100 pre-tax charge to recognize future
lease commitments and losses on equipment in certain San Antonio stores sublet
to Megafoods, Inc. which declared bankruptcy during 1994. The Company had sold
its San Antonio stores to Megafoods in 1993. Also during 1994 the Company
recorded a gain of $25,100 on the disposition of its investment in Hook-SupeRx,
Inc. ("HSI"), as a part of the merger of HSI and a subsidiary of Revco D.S.,
after providing for certain tax indemnities related to HSI.
In 1994 the Company donated a portion of its stock investment in HSI, with a
$4,364 pre-tax book value, to The Kroger Co. Foundation. The donation resulted
in a $2,705 after tax expense ($.02 per fully diluted share) and produced a
$5,942 tax benefit ($.04 per fully diluted share).
On June 14, 1993, the Company announced its intention to dispose of 15 San
Antonio, Texas stores. The Company recognized a pre-tax charge of $22,725 in
connection with the disposition. Severance pay, unemployment benefits costs and
loss on sale of assets are included in this charge.
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
1995 1994
-------------------
Salaries and wages......................................... $286,058 $279,100
Taxes, other than income taxes............................. 152,006 138,428
Interest................................................... 39,993 51,728
Other...................................................... 513,399 483,707
-------- --------
$991,456 $952,963
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
1995 1994 1993
----------------------------
Federal
Current......................................... $178,936 $127,393 $ 92,863
Deferred........................................ (10,008) 2,184 2,174
-------- -------- --------
168,928 129,577 95,037
State and local.................................. 21,744 22,883 18,096
-------- -------- --------
190,672 152,460 113,133
Tax credit from extraordinary loss............... (10,263) (17,075) (14,607)
Tax credit from cumulative effect of change in
accounting...................................... (89,546)
-------- -------- --------
$180,409 $135,385 $ 8,980
Tax laws enacted in 1993 increased federal income tax rates retroactive to the
beginning of 1993. Deferred taxes have been adjusted to reflect the increased
federal income tax rates. This adjustment increased the deferred tax provision
by $4,200 in 1993. Targeted job tax credits reduced the tax provision by $1,206
in 1995, $3,240 in 1994, and $2,608 in 1993.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
1995 1994 1993
------------------
Statutory rate............................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit............. 2.8 3.5 4.1
Tax credits................................................ (.4) (1.2) (1.0)
Tax rate change effect on deferred taxes................... 1.5
Other, net................................................. (1.1) .2
---- ---- ----
37.4% 36.2% 39.8%
20
The tax effects of significant temporary differences and carryforwards that
comprise deferred tax balances were as follows:
1995 1994
- -------------------------------------------------------------------------------
Current deferred tax assets:
Compensation related costs............................. $ 25,983 $ 30,823
Insurance related costs................................ 32,131 26,182
Inventory related costs................................ 19,045 17,474
Other.................................................. 25,076 28,145
--------- ---------
102,235 102,624
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (24,669) (21,818)
Lease accounting....................................... (4,180) (5,145)
Inventory related costs................................ (27,585) (23,053)
Other.................................................. (9,118) (6,475)
--------- ---------
(65,552) (56,491)
--------- ---------
Current deferred taxes, net (in prepaid and other cur-
rent assets)........................................... $ 36,683 $ 46,133
Long-term deferred tax assets:
Compensation related costs............................. $ 118,255 $ 105,208
Insurance related costs................................ 40,956 28,337
Lease accounting....................................... 23,748 22,885
Other.................................................. 8,293 7,134
--------- ---------
191,252 163,564
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (295,303) (284,957)
Compensation related costs............................. (14,100) (11,310)
Lease accounting....................................... (5,845) (9,146)
Deferred charges....................................... (7,979) (8,859)
Other.................................................. (21,257) (21,982)
--------- ---------
(344,484) (336,254)
--------- ---------
Long-term deferred taxes, net........................... $(153,232) $(172,690)
21
DEBT OBLIGATIONS
Long-term debt consists of:
1995 1994
---------- ----------
Variable rate Revolving Credit Facility, due 2002........ $1,008,128 $ 979,253
9 1/4% Senior Secured Debentures, due 2005............... 131,011 160,150
8 1/2% Senior Secured Debentures, due 2003............... 200,000 200,000
9% Senior Subordinated Notes, due 1999................... 125,000 125,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 102,419 126,550
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 48,051 70,000
9 7/8% Senior Subordinated Debentures, due 2002.......... 86,658 211,150
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009.................................................... 355,774 349,602
10% Senior Subordinated Notes, due 1999.................. 139,244 222,550
6 3/8% Convertible Junior Subordinated Notes, due 1999... 200,000
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 606,982 608,163
5 1/10% to 10 1/4% Industrial Revenue Bonds, due in vary-
ing amounts through 2021................................ 205,035 206,095
7 7/8% to 12 7/8% mortgages, due in varying amounts
through 2017............................................ 297,313 253,301
3 1/2% to 11% notes, due in varying amounts through 2017. 37,823 22,455
---------- ----------
Total debt............................................... 3,343,438 3,734,269
Less current portion..................................... 24,939 7,926
---------- ----------
Total long-term debt..................................... $3,318,499 $3,726,343
The aggregate annual maturities and scheduled payments of long-term debt for
the five years subsequent to 1995 are:
1996..................................................... $ 24,939
1997..................................................... $ 11,838
1998..................................................... $ 16,839
1999..................................................... $337,419
2000..................................................... $ 38,212
The Company has purchased a portion of the debt issued by the lenders of
certain of its structured financings, which cannot be retired early, in an
effort to effectively further reduce the Company's interest expense. Excluding
the debt incurred to make these purchases, which are classified as investments,
the Company's total debt would be $58,988 less or $3,284,450 at year-end 1995
compared to $3,665,517 billion at year-end 1994.
Credit Agreement
The Company has outstanding a Senior Competitive Advance and Revolving Credit
Facility Agreement, dated as of July 19, 1994, as amended, (the "Credit
Agreement"). The following constitutes only a summary of the principal terms
and conditions of the Credit Agreement. Reference is directed to the Credit
Agreement attached as an exhibit to the Company's Current Report on Form 8-K
dated July 20, 1994.
The Credit Agreement provides for a $1,750,000 Senior Competitive Advance and
Revolving Credit Facility (the "Facility"), which expires on July 20, 2002, and
is not otherwise subject to amortization.
Interest Rates
Borrowings under the Facility bear interest at the option of the Company at a
rate equal to either (i) the highest, from time to time, of (A) the average of
the publicly announced prime rate of Chemical Bank and Citibank, N.A., (B) 1/2%
over a moving average of secondary market morning offering rates for three
month certificates of deposit adjusted for reserve requirements, and (C) 1/2%
over the federal funds rate or (ii) an adjusted Eurodollar rate based upon the
London interbank offered rate ("Eurodollar Rate") plus the Applicable
Percentage which varies from .125% to .5% based upon the Company's achievement
of a financial ratio. At
22
December 30, 1995, the Applicable Percentage was .3125% for Eurodollar Rate
advances. The Company also pays a facility fee ("Facility Fee") based on the
entire $1,750,000 Facility which varies from .125% to .25% based upon the
Company's achievement of a financial ratio. The Facility Fee at December 30,
1995 was .1875%.
Collateral
The Company's obligations under the Facility are collateralized by a pledge of
a substantial portion of the Company's and certain of its subsidiaries' assets,
including substantially all of the Company's and such subsidiaries' inventory
and equipment and the stock of all subsidiaries. Such assets also collateralize
the Company's obligations under its existing or hereafter issued senior secured
debt.
The Company is entitled to a release of the collateral under the Facility, upon
request, if certain senior debt ratings are achieved or if its consolidated
ratio of net total debt to consolidated EBITD for the most recently ended
fiscal quarter is 3.15 to 1.0 or lower. The Company's ratio at December 30,
1995 was 2.99 to 1.0, and the Company expects to request the release of
collateral in April, 1996.
Prepayment
The Company may prepay the Facility, in whole or in part, at any time, without
a prepayment penalty.
Certain Covenants
The Credit Agreement contains covenants which, among other things, (i) restrict
investments, capital expenditures, and other material outlays and commitments
relating thereto; (ii) restrict the incurrence of debt, including the
incurrence of debt by subsidiaries; (iii) restrict dividends and payments,
prepayments, and repurchases of capital stock; (iv) restrict mergers and
acquisitions and changes of business or conduct of business; (v) restrict
transactions with affiliates; (vi) restrict certain sales of assets; (vii)
restrict changes in accounting treatment and reporting practices except as
permitted under generally accepted accounting principles; (viii) require the
maintenance of certain financial ratios and levels, including fixed charge
coverage ratios and total debt ratios; and (ix) require the Company to maintain
interest rate protection providing that at least 50% of the Company's
indebtedness for borrowed money is maintained at a fixed rate of interest.
Interest Rate Protection Program
The Company uses derivatives to limit its exposure to rising interest rates.
The guidelines the Company follows are: (i) use average daily bank balance to
determine annual debt amounts subject to interest rate exposure, (ii) limit the
annual amount of debt subject to interest rate reset and the amount of floating
rate debt to a combined total of $1 billion or less, (iii) include no leveraged
products, and (iv) hedge without regard to profit motive or sensitivity to
current mark-to-market status. The Company's compliance with these guidelines
is reviewed semi-annually with the Financial Policy Committee of the Company's
Board of Directors.
The Company currently has in place various interest rate hedging agreements
with notional amounts aggregating $3,165,000. The effect of these agreements is
to: (i) fix the rate on $425,000 floating rate debt, with $200,000 of swaps
expiring in May 1996, $100,000 expiring in December 1998, and the remaining
$125,000 expiring in January 1999, for which the Company pays an average rate
of 6.34% and receives 6 month LIBOR; (ii) fix the rate on $530,000 floating
rate debt incurred to purchase the Company's high-rate public bonds in the open
market to match the original maturity of the debt purchased, with the Company
borrowing at an effective rate that is lower than the yield to maturity of the
repurchased debt and paying an average rate of 7.52% on these agreements which
will expire $75,000 in 2000, $395,000 in 2001, and $60,000 in 2002; (iii) swap
the contractual interest rate on $350,000 of seven and ten year debt
instruments into floating-rate instruments, for which the Company pays 6 month
LIBOR and receives an average rate of 7.04%,
23
with $100,000 of these contracts expiring in May 1999 and the remaining
$250,000 expiring in August 2002, and concurrently, fixing the rate on $300,000
of floating rate debt, with $100,000 of swaps expiring in August 1996, $100,000
expiring in May 1997, and $100,000 expiring in August 1998, for which the
Company pays an average rate of 6.38%; effectively changing a portion of the
Company's interest rate exposure from seven to ten years to three to five
years; (iv) swap the contractual interest rate on $735,000 of four, seven and
ten year fixed-rate instruments into floating-rate instruments, for which the
Company pays 6 month LIBOR and receives an average rate of 5.99%, with $75,000
of these swaps expiring in February 1998, $75,000 expiring in March 1998,
$50,000 expiring in October 1999, $100,000 expiring in November 1999, $50,000
expiring in July 2000, $110,000 expiring in November 2000, $125,000 expiring in
January 2001, and $150,000 expiring in July 2003; and (v) cap six month LIBOR
on $825,000 for one to five years at rates between 5.0% and 6.0%, with $275,000
expiring in the first quarter of 1996, $50,000 of the caps expiring in each of
July 1997 and July 1998, $100,000 expiring in December 1997, $100,000 expiring
in each of January 1997 and January 1998, and the remaining $150,000 expiring
in January 1999. Interest expense was increased $2,760 in 1995 and reduced
$13,449 and $11,943 in 1994 and 1993, respectively, as a result of the
Company's hedging program.
The present value of the estimated annual effect on future interest expense of
the Company's derivative portfolio, based on six month LIBOR of 5.5% as in
effect at year-end and the forward yield curve at year-end is:
YEAR-END
LIBOR FORWARD YIELD
AT 5.5% CURVE
-------- ---------------
LIBOR
INCOME (EXPENSE) RATE
------------------ -----
1996................................................ $ (7,311) $ (7,322) 5.29%
1997................................................ (5,349) (5,166) 5.24%
1998................................................ (4,646) (4,786) 5.62%
1999................................................ (3,535) (4,361) 5.85%
2000................................................ (4,237) (4,810) 5.99%
2001................................................ (1,102) (1,670) 6.16%
2002................................................ 1,851 434 6.22%
2003................................................ 292 (148) 6.33%
-------- --------
$(24,037) $(27,829)
(See Fair Value of Financial Instruments footnote.)
9 1/4% Senior Secured Debentures
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior Secured
Debentures (the "9 1/4% Senior Secureds"). As of December 30, 1995, the Company
has repurchased $68,989 of this issue, $29,139 of these repurchases were
completed in 1995. The 9 1/4% Senior Secureds become due on January 1, 2005.
The 9 1/4% Senior Secureds are redeemable at any time on or after January 1,
1998, in whole or in part at the option of the Company. The redemption prices
commence at 104.625% and are reduced by 1.156% annually until January 1, 2002
when the redemption price is 100%.
8 1/2% Senior Secured Debentures
On July 1, 1993, the Company issued $200,000 of 8 1/2% Senior Secured
Debentures (the "8 1/2% Senior Secureds"). The 8 1/2% Senior Secureds become
due on June 15, 2003. The 8 1/2% Senior Secureds are redeemable at any time on
or after June 15, 1998, in whole or in part at the option of the Company. The
redemption prices commence at 104.250% and are reduced by 1.4165% annually
until June 15, 2001, when the redemption price is 100%.
24
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $125,000 9%
Senior Subordinated Notes due August 15, 1999, redeemable at any time on or
after August 15, 1996 in whole or in part at the option of the Company at par;
(ii) $175,000 9 3/4% Senior Subordinated Debentures due February 15, 2004,
redeemable at any time on or after February 15, 1997 in whole or in part at the
option of the Company, commencing at 104.875% in 1997 and reduced by 1.625%
annually until 2000 when the redemption price is 100% (of the total $72,581
repurchased by the Company, $24,131 was repurchased in 1995); (iii) $100,000 9
3/4% Senior Subordinated Debentures due February 15, 2004, Series B, redeemable
at any time on or after February 15, 1997 in whole or in part at the option of
the Company, commencing at 104.875% in 1997 and reduced by 1.625% annually
until 2000 when the redemption price is 100% (the Company has repurchased
$51,949 of the 9 3/4% Senior Subordinated Debentures, Series B. $21,949 of
these purchases occurred in 1995); (iv) $250,000 9 7/8% Senior Subordinated
Debentures due August 1, 2002, redeemable at any time on or after August 1,
1999, in whole or in part at the option of the Company at par (the Company has
repurchased $163,342 of the 9 7/8% Senior Subordinated Debentures, $124,492 in
1995); (v) $355,774 6 3/4% to 9 5/8% Senior Subordinated Notes due March 15,
1999 to October 15, 2009, with portions of these issues subject to early
redemption by the Company; (vi) $250,000 10% Senior Subordinated Notes due
May 1, 1999. This issue is not subject to early redemption by the Company. The
Company repurchased $83,306 of the 10% Senior Subordinated Notes during 1995.
A total of $110,756 of this issue has been repurchased. The proceeds from these
offerings, together with proceeds from the sale of common stock were used to
repay, purchase or redeem outstanding indebtedness of the Company in the year
issued.
6 3/8% Convertible Junior Subordinated Notes
The 6 3/8% Convertible Junior Subordinated Notes were converted at the election
of the holders into approximately 10.7 million shares of common stock on or
before the redemption date of September 5, 1995.
Redemption Event
Subject to certain conditions (including repayment in full of all obligations
under the Credit Agreement or obtaining the requisite consents under the Credit
Agreement), the Company's publicly issued debt will be subject to redemption,
in whole or in part, at the option of the holder upon the occurrence of a
redemption event, upon not less than five days' notice prior to the date of
redemption, at a redemption price equal to the default amount, plus a specified
premium. "Redemption Event" is defined in the indentures as the occurrence of
(i) any person or group, together with any affiliate thereof, beneficially
owning 50% or more of the voting power of the Company or (ii) any one person or
group, or affiliate thereof, succeeding in having a majority of its nominees
elected to the Company's Board of Directors, in each case, without the consent
of a majority of the continuing directors of the Company.
Mortgage Financing
During 1989 the Company completed a $612,475, 10% mortgage financing of 127 of
its retail properties, distribution warehouse facilities, food processing
facilities and other properties (the "Properties"), with a net book value of
$325,327 held by 13 newly formed wholly-owned subsidiaries. The wholly-owned
subsidiaries mortgaged the Properties, which are leased to the Company or
affiliates of the Company, to a newly formed special purpose corporation,
Secured Finance Inc.
The mortgage loans had an original maturity of 15 years. The Properties are
subject to the liens of Secured Finance Inc. The mortgage loans are subject to
semi-annual payments of interest and principal on $150,000 of the borrowing
based on a 30-year payment schedule and interest only on the remaining $462,475
principal amount. The unpaid principal amount will be due on December 15, 2004.
25
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to
$1,750,000 of unrated commercial paper and borrow up to $1,750,000 from the
lenders under the Credit Agreement on a competitive bid basis. The total of
unrated commercial paper, $221,739 at December 30, 1995, and competitive bid
borrowings, $462,000 at December 30, 1995, however, may not exceed $1,750,000.
All commercial paper and competitive bid borrowings must be supported by
availability under the Credit Agreement. These borrowings have been classified
as long-term because the Company expects that during 1996 these borrowings will
be refinanced using the same type of securities. Additionally, the Company has
the ability to refinance the short-term borrowings under the Facility which
matures July 20, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash And Short-term Investments
The carrying amount approximates fair value because of the short maturity
of those instruments.
Long-term Investments
The fair values of these investments are estimated based on quoted market
prices for those or similar investments.
Long-term Debt
The fair value of the Company's long-term debt, including the current
portion thereof, is estimated based on the quoted market price for the same or
similar issues.
Interest Rate Protection Agreements
The fair value of these agreements is based on the net present value of the
future cash flows using the forward interest rate yield curve in effect at the
respective years-end. If the swaps and caps were cancelled as of the respective
years-end the result would have been a net cash outflow for 1995 and 1994. The
swaps and caps are linked to the Company's debt portfolio. The improvement in
the value of the swaps and caps relates to a decrease in market rates during
1995, a corresponding increase in the fair value of linked debt, and a change
in the mix of swaps held. (See Accounting Policies and Debt Obligations
footnotes.)
The estimated fair values of the Company's financial instruments are as
follows:
1995 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
Cash and short-term investments......... $ 27,223 $ 27,223
Long-term investments for which it is
Practicable .......................... $ 53,423 $ 53,423 $ 68,752 $ 68,752
Not Practicable ...................... $ 29,508 $ -- $ 38,672 $ --
Long-term debt for which it is
Practicable .......................... $1,795,139 $1,942,414 $2,273,165 $2,375,293
Not Practicable ...................... $1,548,299 $ -- $1,461,104 $ --
Interest Rate Protection Agreements
Variable rate pay swaps .............. $ -- $ 30,595 $ -- $ (92,925)
Fixed rate pay swaps ................. $ -- $ (56,120) $ -- $ 15,572
Interest rate caps ................... $ 6,773 $ 3,378 $ 6,823 $ 22,451
---------- ---------- ---------- ----------
$ 6,773 $ (22,147) $ 6,823 $ (54,902)
26
The investments for which it was not practicable to estimate fair value relate
to equity investments in unrelated entities for which there is no market and
investments in real estate development partnerships for which there is no
market.
It was not practicable to estimate the fair value of $1,008,128 of long-term
debt outstanding under the Company's Credit Agreement. There is no liquid
market for this debt. The remaining long-term debt that it was not practicable
to estimate relates to Industrial Revenue Bonds of $205,035, various mortgages
of $297,313, and other notes of $37,823 for which there is no market.
LEASES
The Company operates primarily in leased facilities. Lease terms generally
range from 10 to 25 years with options to renew at varying terms. Certain of
the leases provide for contingent payments based upon a percent of sales.
Rent expense (under operating leases) consists of:
1995 1994 1993
------- -------- --------
Minimum rentals....................................... 288,961 $288,499 $275,336
Contingent payments................................... 10,867 10,974 14,973
------- -------- --------
299,828 $299,473 $290,309
Assets recorded under capital leases consists of:
1995 1994
-------- ---------
Distribution and manufacturing facilities................. 35,382 $ 38,742
Store facilities.......................................... 219,515 203,142
Less accumulated amortization............................. (118,482) (112,403)
-------- ---------
136,415 $ 129,481
Minimum annual rentals for the five years subsequent to 1995 and in the
aggregate are:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1996....................................................... $ 30,454 $ 277,213
1997....................................................... 29,654 263,073
1998....................................................... 29,006 249,876
1999....................................................... 28,715 233,632
2000....................................................... 27,773 215,374
Thereafter................................................. 235,929 1,746,018
-------- ----------
381,531 $2,985,186
Less estimated executory costs included in capital leases.. 22,769
--------
Net minimum lease payments under capital leases............ 358,762
Less amount representing interest.......................... 178,558
--------
Present value of net minimum lease payments under capital
leases.................................................... $180,204
EXTRAORDINARY LOSS
The extraordinary loss in 1995, 1994 and 1993 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share equals net earnings (loss) divided by
the weighted average number of common shares outstanding, after giving effect
to dilutive stock options. Fully diluted earnings per common share for 1995 is
computed by adjusting both net earnings and shares outstanding as if the
September
27
1995 conversion of the Convertible Junior Subordinated Notes occurred on the
first day of the year. The net earnings adjustment in 1995 was $3,590. Shares
outstanding are also adjusted for the dilutive effect of stock options. Fully
diluted earnings per common share for 1994 and 1993 equals net earnings plus
after-tax interest incurred on the 8 1/4% Convertible Junior Subordinated
Debentures up to the date of their redemption on October 24, 1994, and on the 6
3/8% Convertible Junior Subordinated Notes of $14,805 and $16,065,
respectively, divided by common shares outstanding after giving effect to
dilutive stock options and for shares assumed to be issued on conversion of the
Company's convertible securities.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at December 30, 1995. The stock
has a par value of $100 and is issuable in series.
COMMON STOCK
The Company has authorized 350,000,000 shares of $1 par common stock. The main
trading market for the Company's common stock is the New York Stock Exchange,
where it is listed under the symbol KR. For the three years ended December 30,
1995, changes in common stock were:
ISSUED IN TREASURY
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------
January 2, 1993.................... 104,378,000 $104,378 12,925,729 $328,861
Exercise of stock options including
restricted stock grants........... 896,173 10,658 9,342 62
Sale of treasury shares to the
Company's employee benefit plans.. (12,251) (2,033,225) (51,679)
Shares issued through public offer-
ing............................... 13,275,000 203,493
Tax benefit from exercise of non-
qualified stock options........... 2,256
----------- -------- ---------- --------
January 1, 1994.................... 118,549,173 308,534 10,901,846 277,244
Exercise of stock options including
restricted stock grants........... 2,023,975 26,473 15,479 376
Sale of treasury shares to the
Company's employee benefit plans.. (3,495) (1,341,094) (34,104)
Tax benefit from exercise of non-
qualified stock options........... 7,056
----------- -------- ---------- --------
December 31, 1994.................. 120,573,148 338,568 9,576,231 243,516
Exercise of stock options including
restricted stock grants........... 2,506,667 40,017 8,120 272
Shares issued on conversion of Con-
vertible Junior Subordinated
Notes............................. 10,698,106 196,451 (8,401) (157)
Tax benefit from exercise of non-
qualified stock options........... 11,505
----------- -------- ---------- --------
December 30, 1995.................. 133,777,921 $586,541 9,575,950 $243,631
The number of shareowners of record of common stock as of March 15, 1996, was
49,517.
STOCK OPTION PLANS
The Company grants options for common stock to employees under various plans,
as well as to its non-employee directors owning a minimum of 1,000 shares of
common stock of the Company, at an option price equal to the fair market value
of the stock at the date of grant. In addition to cash payments, the plans
provide for the exercise of options by exchanging issued shares of stock of the
Company. At December 30, 1995 and December 31, 1994, 3,219,730 and 6,088,924
shares of common stock, respectively, were available
28
for future options. Options may be granted under the 1987, 1988, 1990 and 1994
plans until 1997, 1998, 2000, and 2004, respectively, and generally will expire
10 years from the date of grant. Options granted prior to May 1994 become
exercisable six months from the date of grant. Options granted beginning in May
1994 vest in one year to three years. At December 30, 1995, options for
8,869,223 shares were exercisable. All grants outstanding become immediately
exercisable upon certain changes of control of the Company.
Changes in options outstanding under the stock option plans, excluding
restricted stock grants, were:
SHARES SUBJECT OPTION PRICE
TO OPTION RANGE PER SHARE
------------------------------
Outstanding, January 2, 1993..................... 12,201,697 $ 4.69--$23.44
Granted.......................................... 314,865 $17.50--$21.13
Exercised........................................ (784,658) $ 4.69--$18.69
Cancelled or expired............................. (123,545) $ 9.13--$23.44
----------
Outstanding, January 1, 1994..................... 11,608,359 $ 4.92--$23.44
Granted.......................................... 2,666,175 $20.57--$25.32
Exercised........................................ (1,878,973) $ 4.92--$23.44
Cancelled or expired............................. (89,679) $ 9.13--$25.32
----------
Outstanding, December 31, 1994................... 12,305,882 $ 4.92--$25.32
Granted.......................................... 2,774,650 $25.50--$33.82
Exercised........................................ (2,339,390) $ 4.92--$25.50
Cancelled or expired............................. (77,615) $ 9.13--$25.94
----------
Outstanding, December 30, 1995................... 12,663,527 $ 4.92--$33.82
In addition to stock options, the Company may grant stock appreciation rights
(SARs). In general, the eligible optionees are permitted to surrender the
related option and receive shares of the Company's common stock and/or cash
having a value equal to the appreciation on the shares subject to the options.
The appreciation of SARs is charged to earnings in the current period based
upon the market value of common stock. As of December 30, 1995 and December 31,
1994, there were no SARs outstanding.
The Company also may grant limited stock appreciation rights (LSARs) to
executive officers in tandem with the related options. LSARs operate in the
same manner as SARs but are exercisable only following a change of control of
the Company. As of December 30, 1995 and December 31, 1994, there were no LSARs
outstanding.
Also, the Company may grant restricted stock awards to eligible employee
participants. In general, a restricted stock award entitles an employee to
receive a stated number of shares of common stock of the Company subject to
forfeiture if the employee fails to remain in the continuous employ of the
Company for a stipulated period. The holder of an award shall be entitled to
the rights of a shareowner except that the restricted shares and the related
rights to vote or receive dividends may not be transferred. The award is
charged to earnings over the period in which the employee performs services and
is based upon the market value of common stock at the date of grant for those
grants without performance contingencies. As of December 30, 1995 and December
31, 1994, awards related to 209,426 and 95,509 shares, respectively, were
outstanding. Of the 209,426 awards outstanding at December 30, 1995, 100,000
shares are contingent on the attainment of certain performance objectives. The
charge to earnings for grants with performance-contingent vesting includes
share appreciation between the grant date and the vesting date.
The Company may grant performance units, either in conjunction with or
independent of a grant of stock options. Performance units entitle a grantee to
receive payment in common stock and/or cash based on the extent to which
performance goals for the specified period have been satisfied. As of December
30, 1995 and December 31, 1994, there were no performance units outstanding.
Incentive shares may be granted which consist of shares of common stock issued
subject to achievement of performance goals. No incentive shares were
outstanding as of December 30, 1995 and December 31, 1994.
29
CONTINGENCIES
The Company continuously evaluates contingencies based upon the best available
evidence.
Management believes that allowances for loss have been provided to the extent
necessary and that its assessment of contingencies is reasonable. To the extent
that resolution of contingencies results in amounts that vary from management's
estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Income Taxes--The Company has closed all tax years through 1983 with the
Internal Revenue Service. The Internal Revenue Service has completed its
examination of the Company's tax returns for 1984 through 1989. All issues have
been resolved with one exception. Efforts to resolve this issue for years 1984
through 1986 with the Appeals Division of the Internal Revenue Service were
unsuccessful. As a result the Company has filed a petition with the United
States Tax Court in Washington, D.C. Litigation was completed in November 1995
and the decision is currently pending. This issue for years 1987 through 1989
is being held in abeyance pending the outcome of this court case. The Company
has provided for this and other tax contingencies.
Insurance--The Company's workers' compensation risks are self-insured in
certain states. In addition, other workers' compensation risks and certain
levels of insured general liability risks are based on retrospective premium
plans, deductible plans, and self-insured retention plans. The liability for
workers' compensation risks is accounted for on a present value basis. Actual
claim settlements and expenses incident thereto may differ from the provisions
for loss. Property risks have been underwritten by a subsidiary and are
reinsured in unrelated insurance companies. Operating divisions and
subsidiaries have paid premiums, and the insurance subsidiary has provided loss
allowances, based upon actuarially determined estimates.
Litigation--Fry's Food Stores of Arizona, Inc. ("Fry's"), a subsidiary of the
Company, is currently a defendant and cross-defendant in actions pending in the
U.S. District Court for the Southern District of Florida entitled Harley S.
Tropin v. Kenneth Thenen, et. al., No. 93-2502-CIV-MORENO and Walco
Investments, Inc., et. al. v. Kenneth Thenen, et. al., No. 93-2534-CIV-MORENO.
The plaintiff and cross-claimants in these actions seek unspecified damages
against numerous defendants and cross-defendants, including Fry's. Plaintiffs
and cross-claimants allege that a former employee of Fry's supplied false
information to third parties in connection with purported sales transactions
between Fry's and affiliates of Premium Sales Corporation or certain limited
partnerships. Claims have been alleged against Fry's for breach of implied
contract, aiding and abetting and conspiracy, conversion and civil theft,
negligent supervision, fraud, and violations of 18 U.S.C. (S)(S) 1961 and 1962
(d) and Chapter 895, Florida Statutes. Fry's believes that it has substantial
meritorious defenses to the claims alleged against it, and Fry's intends to
defend the litigation vigorously. The Company is involved in this and various
other legal actions arising in the normal course of business. Management is of
the opinion that their outcome will not have a material adverse effect on the
Company's financial position or results of operations.
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan in which each
holder of common stock is entitled to one common stock purchase right for each
share of common stock owned. The Plan was amended and restated as of November
30, 1995. When exercisable, the nonvoting rights entitle the registered holder
to purchase one share of common stock at a price of $175 per share. The rights
will become exercisable, and separately tradeable, ten days after a person or
group acquires 10% or more of the Company's common stock or ten business days
following a tender offer or exchange offer resulting in a person or group
having beneficial ownership of 10% or more of the Company's common stock. In
the event the rights become exercisable and thereafter the Company is acquired
in a merger or other business combination, each right
30
will entitle the holder to purchase common stock of the surviving corporation,
for the exercise price, having a market value of twice the exercise price of
the right. Under certain other circumstances, including the acquisition of 25%
or more of the Company's common stock, each right will entitle the holder to
receive upon payment of the exercise price, shares of common stock with a
market value of two times the exercise price. At the Company's option, the
rights, prior to becoming exercisable, are redeemable in their entirety at a
price of $.01 per right. The rights are subject to adjustment and expire March
19, 2006.
PENSION PLANS
The Company administers non-contributory defined benefit retirement plans for
substantially all non-union employees. Funding for the pension plans is based
on a review of the specific requirements and on evaluation of the assets and
liabilities of each plan. Employees are eligible to participate upon the
attainment of age 21 (25 for participants prior to January 1, 1986) and the
completion of one year of service, and benefits are based upon final average
salary and years of service. Vesting is based upon years of service.
The Company-administered pension benefit obligations and the assets were valued
as of the end of 1995 and 1994. Substantially all plan assets are invested in
cash and short-term investments or listed stocks and bonds, including $118,187
and $89,635 of common stock of The Kroger Co. at the end of 1995 and 1994,
respectively. The status of the plans at the end of 1995 and 1994 was:
1995 1994
-----------------
Actuarial present value of benefit obligations:
Vested employees............................................ $642,582 $528,204
Non-vested employees........................................ 39,503 27,299
-------- --------
Accumulated benefit obligations............................. 682,085 555,503
Additional amounts related to projected salary increases.... 134,208 111,635
-------- --------
Projected benefit obligations............................... 816,293 667,138
Plan assets at fair value.................................... 878,121 705,982
-------- --------
Plan assets in excess of projected benefit obligations....... $ 61,828 $ 38,844
Consisting of:
Unamortized transitional asset.............................. $ 22,997 $ 32,394
Unamortized prior service cost and net gain................. 18,617 (8,188)
Adjustment required to recognize minimum liability.......... 11,266 7,820
Prepaid pension cost in Consolidated Balance Sheet.......... 8,948 6,818
-------- --------
$ 61,828 $ 38,844
The components of net periodic pension income for 1995, 1994 and 1993 are as
follows:
1995 1994 1993
-----------------------------
Service cost.................................... $ 20,249 $ 18,959 $ 17,752
Interest cost................................... 57,218 47,778 48,601
Return on assets................................ (211,942) 23,935 (141,143)
Net amortization and deferral................... 131,360 (103,495) 68,041
--------- -------- --------
Net periodic pension income for the year........ $ (3,115) $(12,823) $ (6,749)
Assumptions:
Discount rate.................................. 7.25% 8.5% 7.25%
Salary Progression rate........................ 4.25% 5.5% 4.25%
Long-term rate of return on plan assets........ 9.5% 9.5% 9.5%
1995 and 1994 assumptions represent the rates in effect at the end of the
fiscal year. These rates were used to calculate the actuarial present value of
the benefit obligations at December 30, 1995 and December 31, 1994,
respectively. However, for the calculation of periodic pension income for 1995
and 1994 the assumptions in the table above for 1994 and 1993, respectively,
were used. The 1996 calculation of periodic pension income will be based on the
assumptions in the table above for 1995.
31
The Company also administers certain defined contribution plans for eligible
union and non-union employees. The cost of these plans for 1995, 1994 and 1993
was $24,902, $24,298 and $20,388, respectively.
The Company participates in various multi-employer plans for substantially all
union employees. Benefits are generally based on a fixed amount for each year
of service. Contributions and expense for 1995, 1994 and 1993 were $90,872,
$87,711 and $86,377, respectively. Information on the actuarial present value
of accumulated plan benefits and net assets available for benefits relating to
the multi-employer plans is not available.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. The majority of the
Company's employees may become eligible for these benefits if they reach normal
retirement age while employed by the Company. Funding of retiree health care
and life insurance benefits occurs as claims or premiums are paid. For 1995,
1994 and 1993, the combined payments for these benefits were $10,025, $10,996
and $12,266, respectively.
As of January 3, 1993 the Company implemented SFAS No. 106 using the immediate
recognition approach. This standard requires that the expected cost of retiree
benefits be charged to expense during the years that the employees render
service rather than the Company's past practice of recognizing these costs on a
cash basis. As part of adopting the standard, the Company recorded in 1993, a
one-time, non-cash charge against earnings of $248,739 before taxes ($159,193
after taxes). This cumulative adjustment as of January 3, 1993 represents the
discounted present value of expected future retiree benefits attributed to
employees' service rendered prior to that date.
The following table sets forth the postretirement benefit plans combined status
at December 30, 1995 and December 31, 1994:
1995 1994
-------- --------
Accumulated postretirement benefit obligation (APBO)
Retirees.................................................... $100,166 $ 91,162
Fully eligible active participants.......................... 36,862 41,604
Other active participants................................... 125,098 111,021
-------- --------
262,126 243,787
Unrecognized net gain....................................... 34,394 34,288
-------- --------
Accrued postretirement benefit cost......................... $296,520 $278,075
The components of net periodic postretirement benefit costs are as follows:
1995 1994 1993
------- ------- -------
Service costs (benefits attributed to employee serv-
ices during the year)................................ $ 9,344 $ 9,181 $10,261
Interest cost on accumulated postretirement benefit
obligations.......................................... 20,662 19,743 19,607
Net amortization and deferral......................... (725) -- --
------- ------- -------
$29,281 $28,924 $29,868
The significant assumptions used in calculating the APBO are as follows:
HEALTH CARE TREND RATE
-------------------------
DISCOUNT YEARS TO
RATE INITIAL ULTIMATE ULTIMATE
-------- ------- -------- --------
Transition Obligation........................ 8% 15% 6% 15
Year-end 1993................................ 7.25% 13% 4.5% 13
Year-end 1994................................ 8.50% 12.3% 4.5% 12
Year-end 1995................................ 7.25% 10.0% 5.0% 7
32
The impact of a one percent increase in the medical trend rate is as follows:
PERIODIC
COST APBO
-----------------------
Transition..................................................... $2,000 $ 9,800
Year-end 1993.................................................. $2,331 $17,135
Year-end 1994.................................................. $4,088 $27,283
Year-end 1995.................................................. $4,037 $32,209
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". The Company will
implement the statement in the first quarter 1996, the impact of which will not
be significant to the financial statements.
In October 1995 the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company expects to elect to continue to measure compensation
cost for stock compensation plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." The 1996 adoption of FASB No. 123, therefore, will
have no effect on reported earnings.
QUARTERLY DATA (UNAUDITED)
QUARTER
---------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
1995 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------------
Sales................... $5,464,954 $5,652,890 $6,959,216 $5,860,735 $23,937,795
Merchandise costs....... 5,359,203 5,515,839 6,857,196 5,696,019 23,428,257
Extraordinary loss...... (5,336) (5,451) (1,516) (3,750) (16,053)
Net earnings............ 59,141 77,012 61,161 105,499 302,813
Primary earnings per
common share:
Earnings before ex-
traordinary loss .... .56 .71 .52 .84 2.65
Extraordinary loss.... (.05) (.05) (.01) (.03) (.13)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .51 .66 .51 .81 2.52
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .53 .67 .49 .84 2.50
Extraordinary loss.... (.04) (.04) (.01) (.03) (.12)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .49 .63 .48 .81 2.38
1994
- -------------------------------------------------------------------------------------
Sales................... $5,328,804 $5,394,228 $6,650,257 $5,585,833 $22,959,122
Merchandise costs....... 4,052,901 4,081,213 5,052,997 4,217,829 17,404,940
Extraordinary loss...... (8,332) (2,645) (15,175) (555) (26,707)
Net earnings............ 47,358 67,333 36,022 91,483 242,196
Primary earnings per
common share:
Earnings before ex-
traordinary loss .... .50 .62 .45 .80 2.37
Extraordinary loss.... (.07) (.02) (.13) (.01) (.24)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .43 .60 .32 .79 2.13
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .46 .57 .43 .75 2.19
Extraordinary loss.... (.06) (.02) (.12) (.01) (.21)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .40 .55 .31 .74 1.98
33
The third quarter 1994 earnings include a $4,364 pre-tax charge ($2,705 after
tax) offset by a $5,942 tax credit in connection with the Company's
contribution to The Kroger Co. Foundation. Also included in third quarter 1994
earnings is a $25,100 pre-tax charge to recognize future lease commitments and
losses on equipment in certain San Antonio stores sold to Megafoods, Inc. which
declared bankruptcy during the third quarter of 1994. The Company sold its San
Antonio stores to Megafoods in the 1993 third quarter. Also during the third
quarter of 1994 the Company recorded a $25,100 pre-tax gain on the disposition
of its investment in HSI after providing for certain tax indemnities related to
HSI. The extraordinary loss in the four quarters of 1995 and 1994 relates to
expenses associated with the early retirement of debt.
Common Stock Price Range
1995 1994
-------------- ---------------
QUARTER HIGH LOW HIGH LOW
-----------------------------------------------------
1st.................. 27 7/8 23 3/8 25 7/8 19 3/8
2nd.................. 28 25 25 3/8 21 1/8
3rd.................. 34 3/4 26 1/2 26 7/8 23
4th.................. 37 3/4 31 7/8 26 7/8 21 3/4
Under the Company's Credit Agreement dated July 19, 1994, as amended, the
Company is prohibited from paying cash dividends during the term of the Credit
Agreement. The Company is permitted to pay dividends in the form of stock of
the Company.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is set forth in
Item No. 1, Election of Directors, of the definitive proxy statement to be filed
by the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
Based solely on its review of the copies of all Section 16(a) forms
received by the Company, or written representations from certain persons that no
Forms 5 were required for those persons, the Company believes that during fiscal
year 1995 all filing requirements applicable to its officers, directors and ten
percent beneficial owners were satisfied except that Mr. Richard W. Dillon
inadvertently filed a Form 5, reporting a gift of 8,000 shares by a trust of
which he serves as co-trustee and a beneficiary, 17 days late; Mr. Michael S.
Heschel inadvertently filed a Form 4, reporting the sale of 12,500 shares, four
days late; and Mr. Jack W. Partridge, Jr. inadvertently reported the effect of
the sale by his son of 100 shares without reporting the transaction itself.
Upon discovery of the oversight, Mr. Partridge reported the disposition on an
amended Form 5.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the names and ages of the executive officers and
the positions held by each such person as of February 9, 1996. Except as
otherwise noted below, each person has held such office for at least five years
and was elected to his present office at the 1995 Organizational Meeting of the
Board of Directors held May 18, 1995, and will hold such office at the
discretion of the Board for the ensuing year until removed or replaced.
Name Age Recent Employment History
- ---- --- -------------------------
David B. Dillon 44 Mr. Dillon was elected President and Chief
Operating Officer of Kroger effective June 18,
1995. Prior to this he was elected Executive
Vice President on September 13, 1990, Chairman
of the Board of Dillon Companies, Inc. on
September 8, 1992, and President of Dillon
Companies, Inc. on April 22, 1986. Before his
election he was appointed President of Dillon
Companies, Inc.
Paul W. Heldman 44 Mr. Heldman was elected Secretary on May 21,
1992, and Vice President and General Counsel
effective June 18, 1989. Prior to his election
he held various positions in the Company's Law
Department. Mr. Heldman joined the Company in
1982.
Michael S. Heschel 54 Mr. Heschel was elected Executive Vice
President effective June 18, 1995. Prior to
this he was elected Senior Vice President--
Information Systems and Services on February
10, 1994, and Group Vice President--Management
Information Services on July 18, 1991. Prior
to this Mr. Heschel served as Chairman and
Chief Executive Officer of Security Pacific
Automation Company. From 1985 to 1990 he was
Vice President of Baxter International, Inc.
Lorrence T. Kellar 58 Mr. Kellar was elected Group Vice President on
July 18, 1986. Prior to this he was elected
Vice President and Treasurer on October 2,
1981. Mr. Kellar has been with the Company
since 1965.
Patrick J. Kenney 59 Mr. Kenney was elected Executive Vice President
effective June 18, 1995. Prior to this he was
elected Senior Vice President on September 13,
1990. Prior to his election, Mr. Kenney was
President of the Company's Texas Marketing
Area. Mr. Kenney joined the Company in 1955.
35
W. Rodney McMullen 35 Mr. McMullen was elected Group Vice President
and Chief Financial Officer effective June 18,
1995. Prior to this he was appointed Vice
President-Control and Financial Services on
March 4, 1993, and Vice President, Planning and
Capital Management effective December 31, 1989.
Mr. McMullen joined the Company in 1978 as a
part-time stock clerk.
Thomas E. Murphy 53 Mr. Murphy was elected Group Vice President
effective October 24, 1986. Prior to his
election Mr. Murphy was appointed Vice
President and Senior Counsel on November 7,
1982. Mr. Murphy joined the Company in 1974.
Jack W. Partridge, Jr. 50 Mr. Partridge was elected Group Vice President
on December 7, 1989. Prior to his election Mr.
Partridge was appointed Vice President--Public
Affairs in 1980. Mr. Partridge joined the
Company in 1975.
Joseph A. Pichler 56 Mr. Pichler was elected Chairman of the Board
on September 13, 1990, and Chief Executive
Officer effective June 17, 1990. Prior to this
he was elected President and Chief Operating
Officer on October 24, 1986, and Executive Vice
President on July 16, 1985. Mr. Pichler joined
Dillon Companies, Inc. in 1980 as Executive
Vice President and was elected President of
Dillon Companies, Inc. in 1982.
Ronald R. Rice 60 Mr. Rice was elected Senior Vice President on
May 19, 1994. Prior to this he was elected
Group Vice President and appointed President,
Manufacturing on April 16, 1992. Mr. Rice has
been with the Company since 1957 and before his
election was appointed President--Dairy/Bakery
Division in 1991, Vice President--Dairy/ Bakery
Division in 1986, and Vice President--Dairy
Division in 1974.
James R. Thorne 49 Mr. Thorne was elected Senior Vice President
effective June 18, 1995. Prior to his election
Mr. Thorne was appointed President of the
Company's Mid-Atlantic Marketing Area in 1993.
Prior to this Mr. Thorne served in a number of
key management positions in the Mid-Atlantic
Marketing Area, including Advertising Manager,
Zone Manager, Director of Operations, and Vice
President--Merchandising. Mr. Thorne joined the
Company in 1966 as a part-time grocery clerk.
Lawrence M. Turner 48 Mr. Turner was elected Vice President on
December 5, 1986. He was elected Treasurer on
December 2, 1984. Mr. Turner has been with the
Company since 1974.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the section entitled
Compensation of Executive Officers in the definitive proxy statement to be filed
by the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the tabulation of the
amount and nature of Beneficial Ownership of the Company's securities in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section entitled
Information Concerning The Board Of Directors--Certain Transactions in the
definitive proxy statement to be filed by the Company with the Securities and
Exchange Commission and is hereby incorporated by reference into this Form 10-K.
36
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: March 22, 1996 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: March 22, 1996 By (*W. Rodney McMullen)
W. Rodney McMullen
Group Vice President and
Chief Financial Officer
Dated: March 22, 1996 By (*J. Michael Schlotman)
J. Michael Schlotman
Vice President & Corporate Controller
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on the 22 day of March, 1996.
(*Reuben V. Anderson) Director
Reuben V. Anderson
(*Raymond B. Carey, Jr.) Director
Raymond B. Carey, Jr.
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
_________________________________
Richard W. Dillon Director
(*Lyle Everingham) Director
Lyle Everingham
(*John T. LaMacchia) Director
John T. LaMacchia
(*Edward M. Liddy) Director
Edward M. Liddy
(*Patricia Shontz Longe) Director
Patricia Shontz Longe
(*T. Ballard Morton, Jr). Director
T. Ballard Morton, Jr.
(*Thomas H. O'Leary) Director
Thomas H. O'Leary
________________________ Director
John D. Ong
37
(*Katherine D. Ortega) Director
Katherine D. Ortega
(*Joseph A. Pichler) Chairman of the Board of
Joseph A. Pichler Directors, Chief Executive
Officer, and Director
(*Martha Romayne Seger) Director
Martha Romayne Seger
(*James D. Woods) Director
James D. Woods
*By: (Paul W. Heldman)
Paul W. Heldman
Attorney-in-fact
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet as of December 30, 1995
and December 31, 1994
Consolidated Statement of Operations and Accumulated
Deficit for the years ended December 30, 1995,
December 31, 1994 and January 1, 1994
Consolidated Statement of Cash Flows for the years
ended December 30, 1995, December 31, 1994,
and January 1, 1994
Notes to Consolidated Financial Statements
Financial Statement Schedules:
There are no Financial Statement Schedules included with this filing for the
reason that they are not applicable or are not required or the information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
On October 18, 1995, the Company filed a Current Report on Form 8-K
disclosing its unaudited earnings for the third quarter 1995.
(c) Exhibits
3.1 Amended Articles of Incorporation and Regulations of the Company are
hereby incorporated by reference to Exhibits 4.1 and 4.2 of the
Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on January 28, 1993 and bearing
Registration No. 33-57552
4.1 Instruments defining the rights of holders of long-term debt of the
Company and its subsidiaries are not filed as Exhibits because the
amount of debt under each instrument is less than 10% of the
consolidated assets of the Company. The Company undertakes to file
these instruments with the Commission upon request
10.1 Material Contracts - Third Amended and Restated Employment Agreement
dated as of July 22, 1993, between the Company and Joseph A. Pichler -
Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended October 9, 1993
11.1 Statement Regarding Computation of Per Share Earnings
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Annual Reports on Form 11-K for The Kroger Co. Savings Plan and the
Dillon Companies, Inc. Employee Stock Ownership Plan and Trust for the
Year 1995 will be filed by amendment on or before April 28, 1996
39