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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 28, 1996
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
126,987,871 shares outstanding on
March 10, 1997
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
nonafflilates as of February 28, 1997: $6,689,444,184
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act
on or before April 28, 1997 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 1996. The retail food
business in which the Company is engaged is highly competitive. The Company had
approximately 212,000 full and part-time employees on December 28, 1996 and
operated 1,356 supermarkets in 24 states.
At December 28, 1996, the Company had 711 Company owned and directly operated
convenience stores in 15 states. Additionally the Company had 120 franchised
convenience stores in 4 states. The Company also operates food processing
facilities which enable the Company's stores to offer quality, low-cost private
label perishable and non-perishable products, and a warehouse and distribution
system which supplies products to its stores.
FOOD OPERATIONS
As of December 28, 1996, the Company operated 1,356 supermarkets, most of which
are leased. Of this number, 1,105 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 251 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."
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
wholesalers.
The Company's primary supermarket 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 food
stores. 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 53,255 square feet. At December 28, 1996,
combination stores accounted for 64% of the store base, 77% of supermarket
square footage, and 77% 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 28, 1996, superstores represented 29% of the
store base, 21% of the square footage and 20% of the food store sales.
Superstores average 31,620 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 17,611 square feet, and contributed 3% of total supermarket
sales in 1996.
CONVENIENCE STORES
At December 28, 1996, the Company's Dillon convenience store group operated,
directly or through franchise agreements, 831 convenience stores in 15 states as
follows:
No. Stores
Chain Company Owned Franchise Sq. Feet States of Operation
- ----- ------------- --------- --------- ----------------------------
Kwik Shop 182 7 484,000 Iowa, Kansas, Nebraska,
Oklahoma, Illinois
Quik Stop 113 255,000 California
Turkey Hill 229 568,000 Pennsylvania
Loaf 'N Jug 80 247,000 Colorado, New Mexico,
Oklahoma
Mini Mart 110 273,000 Colorado, Montana, Nebraska,
North Dakota, South Dakota,
Wyoming
Tom Thumb 110 295,000 Alabama, Florida
--- --- ---------
711 120 2,122,000
Dillon convenience stores averaged 2,553 square feet at December 28, 1996. The
average store employs six to seven employees, with one or two employees on duty
at any given time.
Each week, an average of 1,531 transactions occur at a typical Dillon
convenience store to purchase gasoline and 5,108 transactions occur to purchase
groceries. Each gasoline transaction averages $10.47 and each inside store
transaction averages $2.28. The average convenience store carries 3,000 items.
Approximately 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 36 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.
ITEM 2. PROPERTIES
As of December 28, 1996, the Company operated more than 2,200 owned or leased
supermarkets, convenience stores, distribution warehouses and food processing
facilities, through divisions, 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 28, 1996 was
$5.726 billion while the accumulated depreciation was $2.663 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.
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.
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
- ------------------------------------------------------------------
1996 1995
--------------------- ---------------------
Quarter High Low High Low
- ------- ------ ------ ------ ------
1st 39-5/8 33-1/2 27-7/8 23-3/8
2nd 44 37-1/2 28 25
3rd 45 37-1/8 34-3/4 26-1/2
4th 47-1/2 40-3/4 37-3/4 31-7/8
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1996: 47,603
Number of shareowners at March 10, 1997 47,128
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
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
------------------------------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 2,
1996 1995 1994 1994 1993
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS)
------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales from continuing
operations............. $25,170,909 $23,937,795 $22,959,122 $22,384,301 $22,144,588
Earnings from continuing
operations before ex-
traordinary loss and
cumulative effect of
change in accounting... 352,735 318,866 268,903 170,805 101,160
Extraordinary loss (net
of income tax
credit)(A) ............ (2,862) (16,053) (26,707) (23,832) (107,103)
Cumulative effect of
change in accounting
(net of income tax
credit)(B)............. (159,193)
Net earnings (loss)..... 349,873 302,813 242,196 (12,220) (5,943)
Fully diluted earnings
(loss) per share
Earnings from continu-
ing operations before
extraordinary loss.... 2.67 2.50 2.19 1.50 1.11
Extraordinary loss(A).. (.02) (12) (.21) (.19) (1.17)
Cumulative effect of
change in
accounting(B)......... (1.28)
Net earnings (loss).... 2.65 2.38 1.98 .03 (.06)
Total assets............ 5,825,413 5,044,717 4,707,674 4,480,464 4,303,084
Long-term obligations,
including obligations
under capital leases... 3,659,491 3,489,728 3,889,194 4,135,013 4,472,978
Shareowners' deficit.... (1,181,706) (1,603,013) (2,153,684) (2,459,642) (2,700,044)
Cash dividends per com-
mon share.............. (C) (C) (C) (C) (C)
- ---------------------------------------------------------------------------------------------
(A) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(B) See Postretirement Health Care and Life Insurance Benefits in the
respective year's Notes to Consolidated Financial Statements.
(C) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SALES
Total sales for the fourth quarter of 1996 were $6.2 billion compared to
$5.9 billion in the fourth quarter of 1995, a 5.8% increase. Sales for the full
year increased 5.1%. Food stores sales for the fourth quarter 1996 were 5.0%
ahead of the fourth quarter 1995 and 4.5% ahead for the year. A review of sales
by lines of business for the three years ended December 28, 1996, is as follows:
1996 1995 1994
% OF 1996 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
Food Stores.............. 93.4% $23,508 +4.5% $22,488 +4.9% $21,442 +4.9%
Convenience Stores....... 3.8% 948 +11.6% 850 -5.4% 898 -5.6%
Other sales.............. 2.8% 714 +19.0% 600 -3.1% 619 -37.5%
------ ------- ------- -------
Total sales.............. 100.0% $25,170 +5.1% $23,938 +4.3% $22,959 +2.6%
Sales in identical food stores, stores that have been in operation and have
not been expanded or relocated for one full year, increased .5% in the fourth
quarter and .5% for the full year. Identical store sales, excluding the strike
in the King Soopers and City Markets divisions, were up 1.0% for the full year.
In the fourth quarter comparable store sales, which include results of expanded
and relocated stores, increased 4.0%. The increase in food stores' sales can be
attributed primarily to inflation of less than .5%, the opening or expansion of
116 food stores, and higher average sales per customer. Higher sales per
customer are the result of the Company's focus on the combination food and drug
store, combining a food store with a pharmacy and numerous specialty departments
such as floral, video rental, and book stores. The Company expects to emphasize
this "one-stop shopping" convenience format tailored to each market to obtain
future sales growth.
Convenience stores' sales increased 11.6% for the year and 15.4% during the
fourth quarter of 1996. The convenience stores' sales increase can be
attributed to a 12% increase in gas retails for the quarter on a 10.5% increase
in gallons sold. In-store sales in identical convenience stores increased 1.9%
for both the fourth quarter and the full year. Gasoline sales at identical
convenience stores increased 13.3% in the fourth quarter 1996 on a 1.1%
increase in gallons sold, and gasoline sales increased 8.9% for the year on a
1.5% increase in gallons sold.
Other sales primarily consists of outside sales by the Company's
manufacturing divisions. The increase in other sales compared to 1995 was 24.2%
for the fourth quarter and 19.0% for the year. Manufacturing division outside
sales increased 22.5% in the fourth quarter 1996 and 15.4% for the full year.
Total food store square footage increased 6.7%, 4.6% and 4.7% in 1996,
1995, and 1994, respectively. The Company expects to increase retail food store
square footage by approximately 5-6% in both 1997 and 1998. Convenience store
square footage increased 1.5% in 1996, decreased 10.6% in 1995, and increased
.4% in 1994.
Sales per average square foot for the last three years were:
TOTAL SALES
PER
AVERAGE SQUARE
FOOT
--------------
1996 1995 1994
---- ---- ----
Food Stores...................................................... $403 $405 $404
Convenience Stores............................................... $519 $475 $436
Sales per average square foot for convenience stores for 1996, 1995, and
1994 exclude stores that are operated by franchisees. The decrease in sales per
average square foot for food stores can be attributed to a large increase in
square footage at the end of 1996 as new store construction was completed.
The Company produced record sales in 1996 despite work stoppages at the
King Soopers and City Markets divisions. In 1996 and 1995 sales improved despite
increased competition from other food retailers, supercenters, mass
merchandisers, and restaurants. The Company's wide regional diversity allowed it
to withstand these challenges and to produce record results.
5
The sales improvement in 1994 was the result of new square footage combined
with the increased productivity of existing stores.
The Company's future food store strategy is to invest in existing Kroger
markets or adjacent geographic regions where the Company has a strong franchise
and can leverage marketing, distribution, and overhead dollars. Consistent
increases from the Company's existing store base combined with incremental
contributions from the capital spending program are expected.
EBITD
The Company's Senior Competitive Advance and Revolving Credit Facility
Agreement (the "Credit Agreement"), as amended, and the indentures underlying
approximately $1.2 billion of publicly issued debt, contain various restrictive
covenants, many of which are based on earnings before interest, taxes,
depreciation, LIFO charge, unusual and extraordinary items ("EBITD"). All such
covenants are based, among other things, upon generally accepted accounting
principles ("GAAP") as applied on a date prior to January 3, 1993. The ability
to generate EBITD at levels sufficient to satisfy the requirements of these
agreements is a key measure of the Company's financial strength. The
presentation of EBITD is not intended to be an alternative to any GAAP measure
of performance but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At December 28, 1996 the Company was
in compliance with all covenants of its Credit Agreement. The Company believes
it has adequate coverage of its debt covenants to continue to respond
effectively to competitive conditions.
EBITD, which does not include the effect of Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions," increased 6.7% in 1996 to $1.241 billion compared
to $1.163 billion in 1995 and $1.065 billion in 1994. Excluding the effect of
strikes in the King Soopers and City Markets divisions, EBITD would have been
approximately $1.274 billion for 1996. EBITD growth was generated by sales
gains, and reduced operating, general and administrative expenses as a percent
of sales. The Company's strong storing program continued to produce incremental
EBITD increases as well. EBITD increases in 1995 and 1994 were due in large part
to increased sales combined with improved gross profits rates.
MERCHANDISE COSTS
Merchandise costs include warehousing and transportation expenses and LIFO
charges or credits. The following table shows the relative effect that LIFO
charges have had on merchandising costs as a percent of sales:
1996 1995 1994
------ ------ ------
Merchandise costs as reported.............................. 75.65% 75.60% 75.81%
LIFO charge................................................ .05% .05% .07%
------ ------ ------
Merchandise costs as adjusted.............................. 75.60% 75.55% 75.74%
On a consolidated basis, cost of goods increased for the year. However, the
consolidated gross profit rate does not reflect the general trend in food
stores. The food stores' gross profit rates were favorable to last year. Much of
the decline in the consolidated gross profit rate was due to lower gross margins
experienced at the convenience stores, primarily in gasoline. The Company will
continue to invest capital in technology focusing on improved store operations,
procurement, and distribution practices. Warehousing costs as a percent of sales
declined from 1995's rates. The gross profit rate is expected to be favorably
influenced by the Company's advances in consolidated distribution and
coordinated purchasing, reduced transportation costs, and strong private label
sales.
6
The Company expects to limit product cost increases through continued use
of technology, outsourcing, and a variety of store level efficiency
enhancements.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales in
1996, 1995 and 1994 were 18.34%, 18.41% and 18.42%, respectively.
Operating, general and administrative costs declined 40 basis points in the
fourth quarter and 7 basis points for the full year. The improved fourth quarter
results were caused by a combination of factors, including favorable workers
compensation and general liability trends, cost reduction achieved through
enhanced technology, a reduction in employee benefit costs, and reduced
administrative expenses.
The Company's goal for 1997 is to further reduce operating, general and
administrative expense rates. Increased sales volume combined with investments
in new technologies and logistics programs to improve efficiencies and lower
costs while maintaining customer service, should help achieve this goal. In
1997, the Company plans to open or expand approximately 100 stores compared to
116 in 1996. This expansion program will adversely affect operating, general and
administrative rates as upfront costs associated with the opening of new stores
are incurred.
INCOME TAXES
The Company has closed all tax years through 1983 with the Internal Revenue
Service. The Internal Revenue Service has completed its examination of the
Company's tax returns for tax years 1984-1989. All issues have been resolved
with one exception. Efforts to resolve this issue for tax years 1984-1986 with
the Appeals Division of the Internal Revenue Service were unsuccessful. As a
result the Company filed a petition with the United States Tax Court in
Washington, D.C. Litigation was completed in November 1995 and a decision was
rendered in January 1997 in favor of the Company. The Company is awaiting a
decision from the Internal Revenue Service regarding appeal. This issue for
years 1987-1989 is being held in abeyance pending the ultimate outcome of this
court case. The Company has provided for this and other tax contingencies.
NET EARNINGS
Net earnings totaled $349.8 million in 1996 compared to $302.8 million in
1995 and $242.2 million in 1994. Earnings in 1996 compared to 1995 and 1994 were
affected by: (i) an after tax extraordinary loss from the early retirement of
debt in 1996 of $2.9 million compared to $16.1 million in 1995 and $26.7 million
in 1994, (ii) net interest expense in 1996 of $300.0 million versus $312.7
million in 1995 and $327.6 million in 1994, and (iii) depreciation expense of
$343.7 million, $311.3 million and $277.8 million in 1996, 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management and Interest Expense
Net interest expense declined to $300.0 million in 1996 as compared to
$312.7 million in 1995 and $327.6 million in 1994.
In 1996, the Company made open market purchases of $49.9 million of its
senior and subordinated debt and redeemed $134.7 million of its subordinated
debt. The repurchases and redemption were effected with proceeds from the
issuance of $240 million of new senior debt, additional bank borrowings and cash
generated from operations. In 1995 the Company repurchased, on the open market,
$283.0 million of high yield senior and subordinated debt which was financed by
cash generated from operations and lower cost bank debt. Interest expense was
adversely affected in 1995 by an increase in market rates. In 1994 the Company
repurchased or redeemed $559.5 million of high rate senior debt. A portion of
these redemptions were financed by $111.4 million of new subordinated debt and
$132.3 million in additional bank borrowings.
7
The Company has in place a Senior Competitive Advance and Revolving Credit
Facility Agreement ("Credit Agreement") providing a $1.75 billion revolving
credit loan through July 20, 2002. The average interest rate on the Company's
bank debt, which totaled $1.001 billion at year-end 1996 versus $1.008 billion
at year-end 1995 was 6.16% compared to 6.84% in 1995 and 5.57% in 1994. The
Company's rate on the bank debt is variable.
The Company currently expects 1997 net interest expense, estimated using
year-end 1996 rates, to total approximately $295 million. A 1% increase in
market rates would increase this estimated expense by approximately $6.5
million. A 1% decrease in market rates would reduce the estimated expense by
approximately $9.4 million.
Long-term debt, including capital leases and current portion thereof,
increased $157.0 million to $3.681 billion at year-end 1996 from $3.524 billion
at year-end 1995. The Company purchased a portion of the debt issued by the
lenders of certain of its structured financings, which cannot be retired early,
in an effort to effectively further reduce the Company's interest expense.
Excluding the debt incurred to make these purchases, which are classified as
investments, the Company's long-term debt would be $152.6 million less or $3.528
billion at year-end 1996 compared to $3.465 billion at year-end 1995.
Required principal repayments over the next five years amount to $285.8
million at year-end 1996 versus $429.2 million and $670.7 million at year-end
1995 and 1994, respectively. Scheduled debt maturities for the five years
subsequent to 1996, 1995 and 1994 were:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Year 1............................................... $ 11,642 $ 24,939 $ 7,926
Year 2............................................... 16,095 11,838 14,341
Year 3............................................... 197,876 16,839 12,875
Year 4............................................... 28,868 337,419 15,507
Year 5............................................... 31,301 38,212 620,012
In 1996, Year 3 maturities include the remaining $124.7 million of 10%
Senior Subordinated Notes.
In 1995, Year 4 maturities included the remaining $139.2 million of 10%
Senior Subordinated Notes, and $125.0 million of 9% Senior Subordinated Notes.
In 1994, Year 5 maturities included $125 million of 9% Senior Subordinated
Notes, $200 million of 6 3/8% Convertible Junior Subordinated Notes, and $222.6
million of 10% Senior Subordinated Notes. In 1995 the Company issued a
redemption notice to the holders of the remaning outstanding balance of the
6 rate reset and the amount of
floating rate debt to a combined total of $1
billion or less, (iii) include no leveraged products, and (iv) hedge without
regard to profit motive or sensitivity to current mark-to-market status. The
Company's compliance with these guidelines is reviewed semi-annually with the
Financial Policy Committee of the Company's Board of Directors.
The Company currently has in place various interest rate hedging agreements
with notional amounts aggregating $3.160 billion. The effect of these agreements
is to: (i) fix the rate on $465 million floating rate debt, with $100 million of
swaps expiring in December 1998, $125 million expiring in January 1999, $75
million expiring in January 2001, $65 million expiring in December 2004, and the
remaining $100 million expiring in 2007, for which the Company pays an average
rate of 6.72% and receives 6 month LIBOR; (ii) fix
8
the rate on $860 million floating rate debt incurred to purchase the Company's
high-rate public bonds in the open market to match the original maturity of the
debt purchased, with the Company borrowing at an effective rate that is lower
than the yield to maturity of the repurchased debt and paying an average rate of
7.11% and receiving 6 month LIBOR on these agreements which will expire $375
million in 2000, $395 million in 2001, and $90 million in 2002; (iii) swap the
contractual interest rate on $350 million of seven and ten year debt instruments
into floating-rate instruments, for which the Company pays 6 month LIBOR and
receives an average rate of 7.04%, with $100 million of these contracts expiring
in May 1999 and the remaining $250 million expiring in August 2002, and
concurrently, fixing the rate on $200 million of floating rate debt, with $100
million expiring in May 1997, and $100 million expiring in August 1998, for
which the Company pays an average rate of 6.87%; effectively changing a portion
of the Company's interest rate exposure from seven to ten years to three to five
years; (iv) swap the contractual interest rate on $735 million of four, seven
and ten year fixed-rate instruments into floating-rate instruments, for which
the Company pays 6 month LIBOR and receives an average rate of 5.99%, with $75
million of these swaps expiring in February 1998, $75 million expiring in March
1998, $50 million expiring in October 1999, $100 million expiring in November
1999, $50 million expiring in July 2000, $110 million expiring in November 2000,
$125 million expiring in January 2001, and $150 million expiring in July 2003;
and (v) cap six month LIBOR on $550 million for one to five years at rates
between 5.0% and 6.0%, with $50 million of the caps expiring in each of July
1997 and July 1998, $100 million expiring in December 1997, $100 million
expiring in each of January 1997 and January 1998, and the remaining $150
million expiring in January 1999. Interest expense was increased $11,071 and
$2,760 in 1996 and 1995, respectively, and reduced $13,449 in 1994, as a result
of the Company's hedging program.
The Company's borrowings under the Credit Agreement are permitted to be in
the form of commercial paper. At December 28, 1996, the Company had $187.7
million of commercial paper outstanding of the $1.001 billion in total bank
borrowings. After deducting amounts set aside as backup for the Company's
unrated commercial paper program, $739.5 million was available under the
Company's Credit Agreement to meet short-term liquidity needs. There are no
principal payments required under the Credit Agreement until its expiration on
July 20, 2002.
COMMON STOCK
On September 5, 1995 the Company issued approximately 10.7 million shares
of common stock in connection with the redemption of its 6 3/8% Convertible
Junior Subordinated Notes and the election by holders to convert their Notes to
stock.
REPURCHASE AND REDEMPTION OF DEBT
In 1996, the Company redeemed the entire $125 million outstanding balance
of its 9% Senior Subordinated Notes and approximately $9.7 million of its
General Term Notes, Series B. The Company also made open market purchases
totaling $23.4 million of its 9 1/4% Senior Secured Debentures and $26.5 million
of its various senior subordinated debt issues. Borrowings under the Credit
Agreement, proceeds from exercise of stock options, the issuance of new senior
debt, the sale of assets and excess cash from operations were used to finance
these redemptions and repurchases. The outstanding balances of these debt issues
at December 28, 1996 were $695.8 million for the senior subordinated debt issues
which includes the General Term Notes, and $107.6 million for the 9 1/4% Senior
Secured Debentures.
During 1995 the Company redeemed the remaining outstanding amount of its
6 3/8% Convertible Junior Subordinated Notes. The holders elected thereupon to
convert their Notes into 10.7 million shares of common stock. The Company also
repurchased, on the open market, $29.1 million of its 9 1/4% Senior Secured
Debentures and $253.9 million of its various senior subordinated debt issues.
The redemptions and repurchases were affected using additional bank borrowings,
cash from operations, proceeds from the sale of assets and working capital
improvements. The outstanding balances of these debt issues at December 30, 1995
were $857.1 million for the senior subordinated debt issues and $131.0 million
for the 9 1/4% Senior Secured Debentures.
9
During 1994 the Company redeemed the remaining outstanding amounts of its
11 1/8% Senior Notes, its 8 3/4% Senior Subordinated Reset Notes and its 8 1/4%
Convertible Junior Subordinated Debentures. The Company also repurchased $144.8
million of its various senior subordinated debt issues and $39.9 million of its
9 1/4% Senior Secured Debentures. The redemptions and repurchases were affected
using funds from asset sales, the sale of treasury stock to employee benefit
plans, proceeds from new financings, excess cash from operations and additional
bank borrowings. The outstanding balances of these debt issues at December 31,
1994 were $1.105 billion for the Senior Subordinated Debt issues, and $160.2
million for the 9 1/4% Senior Secured Debentures.
CAPITAL EXPENDITURES
Capital expenditures totaled $733.8 million for 1996, compared to $726.1
million in 1995. Capital outlays in 1994 were $534.0 million. During 1996 the
Company opened, acquired or expanded 116 food stores and 31 convenience stores
compared to 83 food stores and 19 convenience stores in 1995 and 82 food stores
and 17 convenience stores in 1994. The Company also completed 53 food store and
9 convenience store remodels during 1996. During 1996, the Company closed or
sold 49 food stores and 19 convenience stores.
The Company expects 1997 capital expenditures, including additional Company
owned real estate, logistics projects, and continuing technology investments, to
total approximately $800-$850 million. Food store square footage is expected to
increase 5-6% through the opening, expansion or acquisition of approximately 90-
100 food stores. The Company also expects to complete within-the-wall remodels
of 50 food stores. The increased square footage is planned for existing Company
markets where the Company has an established market position and an existing
administrative and logistical network. The Company's ability to execute its
capital expenditure plan will depend, in part, on its ability to generate
continued EBITD growth.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1996 the Company generated $477.8 million in cash from operating
activities compared to $798.5 million in 1995 and $750.3 million in 1994. The
decrease from 1995 is primarily due to an increase in operating assets and
liabilities that used $248.5 million of cash in 1996 compared to generating cash
of $143.0 million in 1995. The largest component of the change in operating
assets and liabilities was net owned inventories due in part to the Company's
storing program and warehouse expansions which increased $224.5 million as
compared to a decrease of $109.1 million in 1995. Additionally, prepaid and
other assets increased $120.6 million, primarily because of the Company's
funding of a Voluntary Employee Benefit Association Trust for employee benefit
plan expenses. Offsetting these net uses of cash were increases in net earnings
before extraordinary losses of $47.1 million and non-cash charges for
depreciation and amortization of $32.5 million.
Investing activities used $856.9 million compared to $665.6 million of cash
used in 1995 and $546.5 million of cash used in 1994. The increase in the use of
cash was due to increased purchase of investments of $140.9 million and
increased capital expenditures of $7.7 million combined with a decrease in
proceeds from sale of assets and investments of $40.3 million.
Cash provided by financing activities in 1996 totaled $379.1 million
compared to uses of $160.2 million and $297.8 million in 1995 and 1994,
respectively. The decrease in the use of cash during 1996 as compared to 1995 is
due to a 1996 net debt increase of $146.9 million versus 1995's net debt
reduction of $191.0 million. Additionally, $6.8 million less cash was needed for
debt prepayments and finance charges and an additional $175.4 million was
provided by outstanding checks. An additional $19.5 million was provided from
the sale of stock and related transactions.
10
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 160,000 of the Company's employees.
During 1996 the Company negotiated over 50 labor contracts, but it did incur
work stoppages in the King Soopers and City Markets divisions. Typical
agreements are 3 to 5 years in duration, and as such agreements expire, the
Company expects to negotiate with the unions and to enter into new collective
bargaining agreements. There can be no assurance, however, that such agreements
will be reached without work stoppage. A prolonged work stoppage affecting a
substantial number of stores could have a material adverse effect on the results
of the Company's operations. Major union contracts that will be negotiated in
1997 include Phoenix, Dallas, Atlanta and Nashville store employees.
SUBSEQUENT EVENTS
On January 29, 1997, the Company announced that it would begin a stock
repurchase program in order to reduce dilution caused by the Company's stock
option plans for employees. The repurchase program will be funded by proceeds
derived from employee stock option exercises, plus associated tax benefits.
Effective as of February 15, 1997, the Company redeemed the entire
outstanding balances of its 9 3/4% Senior Subordinated Debentures and its 9 3/4%
Senior Subordinated Debentures, Series B, both of which were due in 2004. The
balance outstanding under both issues totaled approximately $142 million.
SPECIAL NOTE
The foregoing Management's Discussion and Analysis contains certain
forward-looking statements about the future performance of the Company which are
based on management's assumptions and beliefs in light of the information
currently available to it. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially from those statements including, but not limited to: competitive
practices and pricing in the food and drug industries generally and particularly
in the Company's principal markets; changes in the financial markets related to
the cost of the Company's capital; the ability of the Company to access the
public debt and equity markets to refinance indebtedness and fund the Company's
capital expenditure program on satisfactory terms; supply or quality control
problems with the Company's vendors; labor disputes and material shortages; and
changes in economic conditions that affect the buying patterns of the Company's
customers.
11
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 28, 1996 and December 30, 1995, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 28, 1996, December 30, 1995, and December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Kroger Co.
as of December 28, 1996 and December 30, 1995, and the consolidated results of
its operations and its cash flows for the years ended December 28, 1996,
December 30, 1995, and December 31, 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 22, 1997
12
CONSOLIDATED BALANCE SHEET
DECEMBER 28, December 30,
(In thousands of dollars) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets
Receivables......................................... $ 324,050 $ 288,067
Inventories:
FIFO cost.......................................... 2,175,630 2,034,880
Less LIFO reserve.................................. (461,689) (449,163)
----------- -----------
1,713,941 1,585,717
Property held for sale.............................. 38,333 40,527
Prepaid and other current assets.................... 276,440 192,673
----------- -----------
Total current assets.............................. 2,352,764 2,106,984
Property, plant and equipment, net................... 3,063,534 2,662,338
Investments and other assets......................... 409,115 275,395
----------- -----------
TOTAL ASSETS...................................... $ 5,825,413 $ 5,044,717
=========== ===========
LIABILITIES
Current liabilities
Current portion of long-term debt................... $ 11,642 $ 24,939
Current portion of obligations under capital leases. 9,501 8,975
Accounts payable.................................... 1,650,256 1,540,067
Other current liabilities........................... 1,041,521 991,456
----------- -----------
Total current liabilities......................... 2,712,920 2,565,437
Long-term debt....................................... 3,478,743 3,318,499
Obligations under capital leases..................... 180,748 171,229
Deferred income taxes................................ 151,036 153,232
Other long-term liabilities.......................... 483,672 439,333
----------- -----------
TOTAL LIABILITIES................................. 7,007,119 6,647,730
----------- -----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1996--136,461,521 shares
1995--133,777,921 shares.................... 658,230 586,541
Accumulated deficit.................................. (1,596,050) (1,945,923)
Common stock in treasury, at cost
1996--9,581,856 shares......................
1995--9,575,950 shares...................... (243,886) (243,631)
----------- -----------
TOTAL SHAREOWNERS' DEFICIT........................ (1,181,706) (1,603,013)
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT........ $ 5,825,413 $ 5,044,717
=========== ===========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
13
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
1996 1995 1994
(In thousands, except per share amounts) (52 WEEKS) (52 Weeks) (52 Weeks)
- --------------------------------------------------------------------------------
Sales.................................... $25,170,909 $23,937,795 $22,959,122
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 19,041,465 18,098,027 17,404,940
Operating, general and administrative... 4,616,749 4,406,445 4,228,046
Rent.................................... 301,629 299,828 299,473
Depreciation and amortization........... 343,769 311,272 277,750
Net interest expense.................... 299,984 312,685 327,550
----------- ----------- -----------
Total................................. 24,603,596 23,428,257 22,537,759
----------- ----------- -----------
Earnings before tax expense and extraor-
dinary loss............................. 567,313 509,538 421,363
Tax expense.............................. 214,578 190,672 152,460
----------- ----------- -----------
Earnings before extraordinary loss....... 352,735 318,866 268,903
Extraordinary loss, net of income tax
benefit................................. (2,862) (16,053) (26,707)
----------- ----------- -----------
Net earnings.......................... $ 349,873 $ 302,813 $ 242,196
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(1,945,923) $(2,248,736) $(2,490,932)
Net earnings............................ 349,873 302,813 242,196
----------- ----------- -----------
End of year............................. $(1,596,050) $(1,945,923) $(2,248,736)
=========== =========== ===========
Primary earnings per Common Share
Earnings before extraordinary loss ..... $ 2.68 $ 2.65 $ 2.37
Extraordinary loss...................... (.02) (.13) (.24)
------ ------ ------
Net earnings............................ $ 2.66 $ 2.52 $ 2.13
====== ====== ======
Average number of common shares used in
primary calculation..................... 131,375 120,413 113,537
Fully-diluted earnings per Common Share
Earnings before extraordinary loss ..... $ 2.67 $ 2.50 $ 2.19
Extraordinary loss...................... (.02) (.12) (.21)
------ ------ ------
Net earnings............................ $ 2.65 $ 2.38 $ 1.98
====== ====== ======
Average number of common shares used in
fully-diluted calculation............... 132,033 129,232 129,714
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
14
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 28, 1996, December 30, 1995, and December 31, 1994
1996 1995 1994
(In thousands of dollars) (52 WEEKS) (52 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings................................ $ 349,873 $ 302,813 $ 242,196
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary loss......................... 2,862 16,053 26,707
Depreciation and amortization.............. 343,769 311,272 277,750
Amortization of deferred financing costs... 13,004 13,189 15,305
Gain on sale of investment................. (25,099)
Loss (gain) on sale of assets.............. 4,496 (710) (3,672)
LIFO charge................................ 12,526 14,103 16,087
Non-cash contribution...................... 4,364
Other changes, net......................... (200) (1,176) 694
Net increase in cash from changes in
operating assets and liabilities, net of
effects from sale of subsidiary, detailed
hereafter................................. (248,528) 143,002 195,931
--------- --------- -----------
Net cash provided by operating activities. 477,802 798,546 750,263
--------- --------- -----------
Cash Flows From Investing Activities:
Capital expenditures........................ (733,883) (726,142) (533,965)
Proceeds from sale of assets................ 9,242 49,530 21,819
(Increase) decrease in property held for
sale....................................... 580 2,942 (19,694)
(Increase) decrease in other investments.... (132,796) 8,106 (65,124)
Proceeds from sale of investment............ 50,469
--------- --------- -----------
Net cash used by investing activities..... (856,857) (665,564) (546,495)
--------- --------- -----------
Cash Flows From Financing Activities:
Debt prepayment costs....................... (4,196) (22,244) (24,696)
Financing charges incurred.................. (17,927) (6,716) (22,868)
Principal payments under capital lease
obligations................................ (9,229) (8,780) (8,249)
Proceeds from issuance of long-term debt.... 382,161 113,246 902,979
Reductions in long-term debt................ (235,214) (304,234) (1,207,125)
Outstanding checks.......................... 193,997 18,633
Proceeds from issuance of capital stock..... 48,120 38,451 24,753
Proceeds from sale of treasury stock........ 151 30,609
Capital stock reacquired.................... (254) (217) (257)
Tax benefit of non-qualified stock options.. 21,597 11,505 7,056
--------- --------- -----------
Net cash provided (used) by financing
activities............................... 379,055 (160,205) (297,798)
--------- --------- -----------
Net decrease in cash and temporary cash
investments................................. 0 (27,223) (94,030)
Cash and Temporary Cash Investments:
Beginning of year........................... 0 27,223 121,253
--------- --------- -----------
End of year................................. $ 0 $ 0 $ 27,223
========= ========= ===========
15
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
Years Ended December 28, 1996, December 30, 1995, and December 31, 1994
1996 1995 1994
(In thousands of dollars) (52 WEEKS) (52 Weeks) (52 Weeks)
- -------------------------------------------------------------------------------
Increase (Decrease) In Cash From Changes In
Operating Assets And Liabilities:
Inventories (FIFO).......................... $(140,750) $ 10,396 $(51,831)
Receivables................................. (35,983) (18,207) 17,114
Prepaid and other current assets............ (120,641) (3,992) (5,749)
Accounts payable............................ (83,808) 98,681 68,080
Accrued expenses............................ 76,423 43,501 110,290
Deferred income taxes....................... 45,665 (10,008) (4,170)
Other liabilities........................... 10,566 22,631 62,197
--------- -------- --------
$(248,528) $143,002 $195,931
========= ======== ========
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of consolidated
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segments of Business
The Company operates primarily in one business segment--retail food and
drug stores, predominately in the Midwest and South as well as Colorado,
Arizona, and Kansas. This segment represents more than 90% of consolidated
revenue, operating profit and identifiable assets. The Company also manufactures
and processes food for sale by its supermarkets and others and operates
convenience stores.
Inventories
Inventories are stated at the lower of cost (principally LIFO) or market.
Approximately 88% of inventories for 1996 and 87% of inventories for 1995 were
valued using the LIFO method. Cost for the balance of the inventories is
determined using the FIFO method.
Property Held for Sale
Property held for sale includes the net book value of property, plant and
equipment that the Company plans to sell. The property is valued at the lower of
cost or market on an individual property basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed principally using the straight-line method over the
estimated useful lives of individual assets, composite group lives or the
initial or remaining terms of leases. Buildings and land improvements are
depreciated based on lives varying from ten to 40 years and equipment
depreciation is based on lives varying from three to 15 years. Leasehold
improvements are amortized over their useful lives which vary from four to 25
years.
Interest Rate Protection Agreements
The Company uses interest rate swaps and caps to hedge a portion of its
borrowings against changes in interest rates. The interest differential to be
paid or received is accrued as interest rates change and is recognized over the
life of the agreements currently as a component of interest expense. Gains and
losses from the disposition of hedge agreements are deferred and amortized over
the term of the related agreements.
Advertising Costs
The Company's advertising costs are predominately expensed as incurred and
included in "operating, general and administrative expenses." Advertising
expenses amounted to $302 million, $281 million and $250 million for 1996, 1995
and 1994, respectively.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
their financial reporting bases. The types of differences that
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
give rise to significant portions of deferred income tax liabilities or assets
relate to: property, plant and equipment, inventories and other charges, and
accruals for compensation-related costs. Deferred income taxes are classified
as a net current and noncurrent asset or liability based on the classification
of the related asset or liability for financial reporting. A deferred tax asset
or liability that is not related to an asset or liability for financial
reporting is classified according to the expected reversal date. (See Taxes
Based on Income footnote.)
Consolidated Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be temporary cash investments. Outstanding checks represent
disbursements which are funded as the item is presented for payment.
Cash paid during the year for interest and income taxes was as follows:
1996 1995 1994
--------------------------
Interest............................................. $304,240 $322,411 $329,570
Income taxes......................................... 166,732 175,151 131,156
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
1996 1995
------------------------
Land.................................................. $ 308,451 $ 231,624
Buildings and land improvements....................... 1,034,441 792,089
Equipment............................................. 2,895,826 2,609,915
Leaseholds and leasehold improvements................. 807,422 763,381
Construction-in-progress.............................. 417,080 492,750
Leased property under capital leases.................. 263,398 254,897
----------- -----------
5,726,618 5,144,656
Accumulated depreciation and amortization............. (2,663,084) (2,482,318)
----------- -----------
$ 3,063,534 $ 2,662,338
=========== ===========
Approximately $723,961, original cost, of Property, Plant and Equipment
collateralizes certain mortgage obligations.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
1996 1995
-----------------
Deferred financing costs..................................... $ 90,171 $ 85,417
Goodwill..................................................... 39,745 43,253
Investments in Debt Securities............................... 152,675 58,988
Other........................................................ 126,524 87,737
-------- --------
$409,115 $275,395
======== ========
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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CHARGES AND CREDITS
During 1994 the Company recorded a $25,100 pre-tax charge to recognize
future lease commitments and losses on equipment in certain San Antonio stores
sublet to Megafoods, Inc. which declared bankruptcy during 1994. The Company had
sold its San Antonio stores to Megafoods in 1993. Also during 1994 the Company
recorded a gain of $25,100 on the disposition of its investment in Hook-Superx,
Inc. ("HSI"), as a part of the merger of HSI and a subsidiary of Revco D.S.,
after providing for certain tax indemnities related to HSI.
In 1994 the Company donated a portion of its stock investment in HSI, with
a $4,364 pre-tax book value, to The Kroger Co. Foundation. The donation resulted
in a $2,705 after tax expense ($.02 per fully diluted share) and produced a
$5,942 tax benefit ($.04 per fully diluted share).
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
1996 1995
-------------------
Salaries and wages......................................... $ 292,393 $286,058
Taxes, other than income taxes............................. 146,781 152,006
Interest................................................... 39,202 39,993
Other...................................................... 563,145 513,399
---------- --------
$1,041,521 $991,456
========== ========
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
1996 1995 1994
----------------------------
Federal
Current.......................................... $146,296 $178,936 $127,393
Deferred......................................... 43,638 (10,008) 2,184
-------- -------- --------
189,934 168,928 129,577
State and local................................... 24,644 21,744 22,883
-------- -------- --------
214,578 190,672 152,460
Tax credit from extraordinary loss................ (1,792) (10,263) (17,075)
-------- -------- --------
$212,786 $180,409 $135,385
======== ======== ========
Targeted job tax credits reduced the tax provision by $1,206 in 1995, and
$3,240 in 1994.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
1996 1995 1994
----------------
Statutory rate................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit................ 2.8 2.8 3.5
Tax credits................................................... (.2) (.4) (1.2)
Other, net.................................................... .2 (1.1)
---- ---- ----
37.8% 37.4% 36.2%
==== ==== ====
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences and carryforwards that
comprise deferred tax balances were as follows:
1996 1995
- -------------------------------------------------------------------------------
Current deferred tax assets:
Compensation related costs............................. $ 27,873 $ 25,983
Insurance related costs................................ 33,109 32,131
Inventory related costs................................ 19,092 19,045
Other.................................................. 19,844 25,076
--------- ---------
99,918 102,235
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (63,691) (24,669)
Lease accounting....................................... (3,680) (4,180)
Inventory related costs................................ (33,116) (27,585)
Other.................................................. (8,582) (9,118)
--------- ---------
(109,069) (65,552)
--------- ---------
Current deferred taxes, net............................. $ (9,151) $ 36,683
========= =========
Long-term deferred tax assets:
Compensation related costs............................. $ 125,466 $ 118,255
Insurance related costs................................ 43,492 40,956
Lease accounting....................................... 24,214 23,748
Other.................................................. 15,466 8,293
--------- ---------
208,638 191,252
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (312,546) (295,303)
Compensation related costs............................. (14,239) (14,100)
Lease accounting....................................... (1,863) (5,845)
Deferred charges....................................... (7,471) (7,979)
Other.................................................. (23,555) (21,257)
--------- ---------
(359,674) (344,484)
--------- ---------
Long-term deferred taxes, net........................... $(151,036) $(153,232)
========= =========
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
1996 1995
---------- ----------
Variable Rate Revolving Credit Facility, due 2002........ $1,001,459 $1,008,128
Credit Facility.......................................... 110,000
9 1/4% Senior Secured Debentures, due 2005............... 107,648 131,011
8 1/2% Senior Secured Debentures, due 2003............... 200,000 200,000
8.15% Senior Notes due 2006.............................. 240,000
9% Senior Subordinated Notes, due 1999................... 125,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 96,008 102,419
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 46,050 48,051
9 7/8% Senior Subordinated Debentures, due 2002.......... 83,065 86,658
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009.................................................... 346,064 355,774
10% Senior Subordinated Notes, due 1999.................. 124,703 139,244
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 605,665 606,982
4 9/10% to 8 5/8% Industrial Revenue Bonds, due in vary-
ing amounts through 2021................................ 203,785 205,035
7 7/8% to 10 1/4% mortgages, due in varying amounts
through 2017............................................ 280,711 297,313
3 1/2% to 10 1/4% notes, due in varying amounts through
2017.................................................... 45,227 37,823
---------- ----------
Total debt............................................... 3,490,385 3,343,438
Less current portion..................................... 11,642 24,939
---------- ----------
Total long-term debt..................................... $3,478,743 $3,318,499
========== ==========
The aggregate annual maturities and scheduled payments of long-term debt
for the five years subsequent to 1996 are:
1997...................................................... $ 11,642
1998...................................................... $ 16,095
1999...................................................... $197,876
2000...................................................... $ 28,868
2001...................................................... $ 31,301
The Company has purchased a portion of the debt issued by the lenders of
certain of its structured financings, which cannot be retired early, in an
effort to effectively further reduce the Company's interest expense. Excluding
the debt incurred to make these purchases, which are classified as investments,
the Company's total debt would be $152,675 less or $3,337,710 at year-end 1996
compared to $3,284,450 at year-end 1995.
Variable Rate Revolving Credit Facility
The Company has outstanding a Senior Competitive Advance and Revolving
Credit Facility Agreement, dated as of July 19, 1994, as amended, (the "Credit
Agreement"). The following constitutes only a summary of the principal terms and
conditions of the Credit Agreement. Reference is directed to the Credit
Agreement attached as an exhibit to the Company's Current Report on Form 8-K
dated July 20, 1994.
The Credit Agreement provides for a $1,750,000 Senior Competitive Advance
and Revolving Credit Facility (the "Facility"), which expires on July 20, 2002,
and is not otherwise subject to amortization.
Interest Rates
Borrowings under the Facility bear interest at the option of the Company at
a rate equal to either (i) the highest, from time to time, of (A) the average of
the publicly announced prime rate of Chemical Bank and Citibank, N.A., (B) 1/2%
over a moving average of secondary market morning offering rates for three month
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
certificates of deposit adjusted for reserve requirements, and (C) 1/2% over the
federal funds rate or (ii) an adjusted Eurodollar rate based upon the London
Interbank Offered Rate ("Eurodollar Rate") plus the Applicable Percentage which
varies from .125% to .5% based upon the Company's achievement of a financial
ratio. At December 28, 1996, the Applicable Percentage was .225% for Eurodollar
Rate advances. The Company also pays a facility fee ("Facility Fee") based on
the entire $1,750,000 Facility which varies from .125% to .25% based upon the
Company's achievement of a financial ratio. The Facility Fee at December 28,
1996 was .15%.
Collateral
The Company's obligations under the Facility originally were collateralized
by a pledge of a substantial portion of the Company's and certain of its
Subsidiaries' assets, including substantially all of the Company's and such
Subsidiaries' inventory and equipment and the stock of all Subsidiaries, which
collateral also secured the Company's obligations under its Secured Debentures.
On April 29, 1996, pursuant to the terms of the Credit Agreement, the Company
elected to release all collateral.
Prepayment
The Company may prepay the Facility, in whole or in part, at any time,
without a prepayment penalty.
Certain Covenants
The Credit Agreement contains covenants which, among other things, (i)
restrict investments, capital expenditures, and other material outlays and
commitments relating thereto; (ii) restrict the incurrence of debt, including
the incurrence of debt by subsidiaries; (iii) restrict dividends and payments,
prepayments, and repurchases of capital stock; (iv) restrict mergers and
acquisitions and changes of business or conduct of business; (v) restrict
transactions with affiliates; (vi) restrict certain sales of assets; (vii)
restrict changes in accounting treatment and reporting practices except as
permitted under generally accepted accounting principles; (viii) require the
maintenance of certain financial ratios and levels, including fixed charge
coverage ratios, senior debt ratios and total debt ratios; and (ix) require the
Company to maintain interest rate protection providing that at least 50% of the
Company's indebtedness for borrowed money is maintained at a fixed rate of
interest.
Credit Facility
Effective December 13, 1996, the Company entered into a $110,000 financing
("VEBA Financing") to fund the cost of providing certain employee benefits. The
following constitutes only a summary of the principal terms and conditions of
the financing. Reference is made to the credit agreement related to the VEBA
Financing attached as an exhibit to the Company's Current Report on Form 8-K
dated December 26, 1996.
The VEBA Financing provides for an initial term of 364 days. The Company
annually may request a 364 day extension, subject to approval of the lenders.
The Company currently intends to request, on an annual basis, that the lenders
grant such an extension. Should the lenders decline the extension request, the
Company expects to refinance the VEBA Financing with funds available under the
Credit Agreement. The Company has classified this financing as long-term with a
maturity equal to the Credit Agreement.
The VEBA Financing is a variable rate facility with a current borrowing
rate of LIBOR plus 20 basis points, in addition to a facility fee of 9 basis
points. The VEBA Financing includes various covenants, none of which,
individually or in the aggregate, are more restrictive than those contained in
the Credit Agreement.
9 1/4% Senior Secured Debentures
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior Secured
Debentures (the "9 1/4% Senior Secureds"). As of December 28, 1996, the Company
has repurchased $92,352 of this issue, $23,363 of these repurchases were
completed in 1996. The 9 1/4% Senior Secureds become due on January 1, 2005. The
9 1/4% Senior Secureds are redeemable at any time on or after January 1, 1998,
in whole or in part at the option of the Company. The redemption prices commence
at 104.625% and are reduced by 1.156% annually until
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
January 1, 2002 when the redemption price is 100%. These debentures were
originally secured. On April 29, 1996, all collateral was released pursuant to
the terms of the indenture.
8 1/2% Senior Secured Debentures
On July 1, 1993, the Company issued $200,000 of 8 1/2% Senior Secured
Debentures (the "8 1/2% Senior Secureds"). The 8 1/2% Senior Secureds become due
on June 15, 2003. The 8 1/2% Senior Secureds are redeemable at any time on or
after June 15, 1998, in whole or in part at the option of the Company. The
redemption prices commence at 104.250% and are reduced by 1.4165% annually until
June 15, 2001, when the redemption price is 100%. These debentures were
originally secured. On April 29, 1996, all collateral was released pursuant to
the terms of the indenture.
8.15% Senior Notes
On July 24, 1996, the Company issued $240,000 of 8.15% Senior Notes (the
"8.15% Senior Notes"). The 8.15% Senior Notes become due on July 15, 2006 and
are not redeemable prior to their final maturity.
9% Senior Subordinated Notes
The 9% Senior Subordinated Notes were redeemed on August 14, 1996.
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $175,000
9 3/4% Senior Subordinated Debentures due February 15, 2004, redeemable at any
time on or after February 15, 1997 in whole or in part at the option of the
Company, commencing at 104.875% in 1997 and reduced by 1.625% annually until
2000 when the redemption price is 100% (of the total $78,992 repurchased by the
Company, $6,411 was repurchased in 1996); (ii) $100,000 9 3/4% Senior
Subordinated Debentures due February 15, 2004, Series B, redeemable at any time
on or after February 15, 1997 in whole or in part at the option of the Company,
commencing at 104.875% in 1997 and reduced by 1.625% annually until 2000 when
the redemption price is 100% (the Company has repurchased $53,950 of the 9 3/4%
Senior Subordinated Debentures, Series B. $2,001 of these purchases occurred in
1996); (iii) $250,000 9 7/8% Senior Subordinated Debentures due August 1, 2002,
redeemable at any time on or after August 1, 1999, in whole or in part at the
option of the Company at par (the Company has repurchased $166,935 of the 9 7/8%
Senior Subordinated Debentures, $3,593 in 1996); (iv) $355,774 6 3/4% to 9 5/8%
Senior Subordinated Notes due March 15, 1999 to October 15, 2009, with portions
of these issues subject to early redemption by the Company at varying times and
premiums (the Company repurchased $9,710 of the notes in 1996); (v) $250,000 10%
Senior Subordinated Notes due May 1, 1999. This issue is not subject to early
redemption by the Company. The Company repurchased $14,541 of the 10% Senior
Subordinated Notes during 1996. A total of $125,297 of this issue has been
repurchased.
Redemption Event
Subject to certain conditions (including repayment in full of all
obligations under the Credit Agreement or obtaining the requisite consents under
the Credit Agreement), the Company's publicly issued debt will be subject to
redemption, in whole or in part, at the option of the holder upon the occurrence
of a redemption event, upon not less than five days' notice prior to the date of
redemption, at a redemption price equal to the default amount, plus a specified
premium. "Redemption Event" is defined in the indentures as the occurrence of
(i) any person or group, together with any affiliate thereof, beneficially
owning 50% or more of the voting power of the Company or (ii) any one person or
group, or affiliate thereof, succeeding in having a majority of its nominees
elected to the Company's Board of Directors, in each case, without the consent
of a majority of the continuing directors of the Company.
Mortgage Financing
During 1989 the Company completed a $612,475, 10% mortgage financing of 127
of its retail properties, distribution warehouse facilities, food processing
facilities and other properties (the "Properties"), with a net book value of
$325,327 held by 13 newly formed wholly-owned subsidiaries. The wholly-owned
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
subsidiaries mortgaged the Properties, which are leased to the Company or
affiliates of the Company, to a newly formed special purpose corporation,
Secured Finance Inc.
The mortgage loans had an original maturity of 15 years. The Properties are
subject to the liens of Secured Finance Inc. The mortgage loans are subject to
semi-annual payments of interest and principal on $150,000 of the borrowing
based on a 30-year payment schedule and interest only on the remaining $462,475
principal amount. The unpaid principal amount will be due on December 15, 2004.
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to
$1,750,000 of unrated commercial paper and borrow up to $1,750,000 from the
lenders under the Credit Agreement on a competitive bid basis. The total of
unrated commercial paper, $196,000 at December 28, 1996, and competitive bid
borrowings, $251,500 at December 28, 1996, however, may not exceed $1,750,000.
All commercial paper and competitive bid borrowings must be supported by
availability under the Credit Agreement. These borrowings have been classified
as long-term because the Company expects that during 1997 these borrowings will
be refinanced using the same type of securities. Additionally, the Company has
the ability to refinance the short-term borrowings under the Facility which
matures July 20, 2002.
Interest Rate Protection Program
The Company uses derivatives to limit its exposure to rising interest
rates. The guidelines the Company follows are: (i) use average daily bank
balance to determine annual debt amounts subject to interest rate exposure, (ii)
limit the annual amount of debt subject to interest rate reset and the amount of
floating rate debt to a combined total of $1,000,000 or less, (iii) include no
leveraged products, and (iv) hedge without regard to profit motive or
sensitivity to current mark-to-market status. The Company's compliance with
these guidelines is reviewed semi-annually with the Financial Policy Committee
of the Company's Board of Directors.
The Company currently has in place various interest rate hedging agreements
with notional amounts aggregating $3,160,000. The effect of these agreements is
to: (i) fix the rate on $465,000 floating rate debt, with $100,000 of swaps
expiring in December 1998, $125,000 expiring in January 1999, $75,000 expiring
in January 2001, $65,000 expiring in December 2004, and the remaining $100,000
expiring in 2007, for which the Company pays an average rate of 6.72% and
receives 6 month LIBOR; (ii) fix the rate on $860,000 floating rate debt
incurred to purchase the Company's high-rate public bonds in the open market to
match the original maturity of the debt purchased, with the Company borrowing at
an effective rate that is lower than the yield to maturity of the repurchased
debt and paying an average rate of 7.11% and receiving 6 month LIBOR on these
agreements which will expire $375,000 in 2000, $395,000 in 2001, and $90,000 in
2002; (iii) swap the contractual interest rate on $350,000 of seven and ten year
debt instruments into floating-rate instruments, for which the Company pays 6
month LIBOR and receives an average rate of 7.04%, with $100,000 of these
contracts expiring in May 1999 and the remaining $250,000 expiring in August
2002, and concurrently, fixing the rate on $200,000 of floating rate debt, with
$100,000 expiring in May 1997, and $100,000 expiring in August 1998, for which
the Company pays an average rate of 6.87%; effectively changing a portion of the
Company's interest rate exposure from seven to ten years to three to five years;
(iv) swap the contractual interest rate on $735,000 of four, seven and ten year
fixed-rate instruments into floating-rate instruments, for which the Company
pays 6 month LIBOR and receives an average rate of 5.99%, with $75,000 of these
swaps expiring in February 1998, $75,000 expiring in March 1998, $50,000
expiring in October 1999, $100,000 expiring in November 1999, $50,000 expiring
in July 2000, $110,000 expiring in November 2000, $125,000 expiring in January
2001, and $150,000 expiring in July 2003; and (v) cap six month LIBOR on
$550,000 for one to five years at rates between 5.0% and 6.0%, with $50,000 of
the caps expiring in each of July 1997 and July 1998, $100,000 expiring in
December 1997, $100,000 expiring in each of January 1997 and January 1998, and
the remaining $150,000 expiring in January 1999. Interest expense was increased
$11,071 and $2,760 in 1996 and 1995, respectively, and reduced $13,449 in 1994,
as a result of the Company's hedging program.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The present value of the estimated annual effect on future interest expense
of the Company's derivative portfolio, based on six month LIBOR of 5.63% as in
effect at year-end and the forward yield curve at year-end is:
YEAR-END
LIBOR FORWARD YIELD
AT 5.63% CURVE
-------- ---------------
LIBOR
INCOME (EXPENSE) RATE
------------------ -----
1997.................................................. $ (8,113) $ (7,775) 5.88%
1998.................................................. (7,910) (6,958) 6.17%
1999.................................................. (7,700) (6,536) 6.97%
2000.................................................. (6,585) (5,929) 6.59%
2001.................................................. (1,653) (1,934) 6.73%
2002.................................................. 1,038 (658) 6.85%
2003.................................................. (310) (430) 6.94%
2004.................................................. (469) 80 7.02%
-------- --------
$(31,702) $(30,140)
======== ========
(See Fair Value of Financial Instruments footnote.)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Long-term Investments
The fair values of these investments are estimated based on quoted market
prices for those or similar investments.
Long-term Debt
The fair value of the Company's long-term debt, including the current
portion thereof, is estimated based on the quoted market price for the same or
similar issues.
Interest Rate Protection Agreements
The fair value of these agreements is based on the net present value of the
future cash flows using the forward interest rate yield curve in effect at the
respective years-end. If the swaps and caps were cancelled as of the respective
years-end the result would have been a net cash outflow for 1996 and 1995. The
swaps and caps are linked to the Company's debt portfolio. (See Accounting
Policies and Debt Obligations footnotes.)
The estimated fair values of the Company's financial instruments are as
follows:
1996 1995
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Long-term investments for which
it is
Practicable.................... $ 154,748 $ 154,645 $ 53,423 $ 53,423
Not Practicable................ $ 31,576 $ -- $ 29,508 $ --
Long-term debt for which it is
Practicable.................... $1,849,203 $1,980,925 $1,795,139 $1,942,414
Not Practicable................ $1,641,182 $ -- $1,548,299 $ --
Interest Rate Protection Agree-
ments
Variable rate pay swaps........ $ -- $ 4,900 $ -- $ 30,595
Fixed rate pay swaps........... $ -- $ (37,311) $ -- $ (56,120)
Interest rate caps............. $ 3,854 $ 2,807 $ 6,773 $ 3,378
---------- ---------- ---------- ----------
$ 3,854 $ (29,604) $ 6,773 $ (22,147)
========== ========== ========== ==========
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The investments for which it was not practicable to estimate fair value
relate to equity investments accounted for under the equity method and
investments in real estate development partnerships for which there is no
market.
It was not practicable to estimate the fair value of $1,001,459 of long-
term debt outstanding under the Company's Credit Agreement. There is no liquid
market for this debt. The remaining long-term debt that it was not practicable
to estimate relates to Industrial Revenue Bonds of $203,785, various mortgages
of $280,711, and other notes of $155,227 for which there is no market.
LEASES
The Company operates primarily in leased facilities. Lease terms generally
range from 10 to 25 years with options to renew at varying terms. Certain of the
leases provide for contingent payments based upon a percent of sales.
Rent expense (under operating leases) consists of:
1996 1995 1994
-------- -------- --------
Minimum rentals...................................... $291,256 $288,961 $288,499
Contingent payments.................................. 10,373 10,867 10,974
-------- -------- --------
$301,629 $299,828 $299,473
======== ======== ========
Assets recorded under capital leases consists of:
1996 1995
--------- ---------
Distribution and manufacturing facilities................. $ 30,381 $ 35,382
Store facilities.......................................... 233,017 219,515
Less accumulated amortization............................. (118,589) (118,482)
--------- ---------
$ 144,809 $ 136,415
========= =========
Minimum annual rentals for the five years subsequent to 1996 and in the
aggregate are:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1997....................................................... $ 31,974 $ 293,302
1998....................................................... 31,332 280,191
1999....................................................... 31,042 265,751
2000....................................................... 30,099 246,444
2001....................................................... 29,041 225,502
Thereafter................................................. 245,364 1,955,358
-------- ----------
398,852 $3,266,548
==========
Less estimated executory costs included in capital leases.. 20,606
--------
Net minimum lease payments under capital leases............ 378,246
Less amount representing interest.......................... 187,997
--------
Present value of net minimum lease payments under capital
leases.................................................... $190,249
========
EXTRAORDINARY LOSS
The extraordinary loss in 1996, 1995 and 1994 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS PER COMMON SHARE
Primary and fully diluted earnings per common share equals net earnings
divided by the weighted average number of common shares outstanding, after
giving effect to dilutive stock options. Fully diluted earnings per common share
for 1995 is computed by adjusting both net earnings and shares outstanding as if
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the September 1995 conversion of the 6 3/8% Convertible Junior Subordinated
Notes occurred on the first day of the year. The net earnings adjustment in 1995
was $3,590. Fully diluted earnings per common share for 1994 equal net earnings
plus after-tax interest incurred on the 8 1/4% Convertible Junior Subordinated
Debentures up to the date of their redemption on October 24, 1994, and on the
6 3/8% Convertible Junior Subordinated Notes of $14,805, divided by common
shares outstanding after giving effect to dilutive stock options and for shares
assumed to be issued on conversion of the Company's convertible securities.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at December 28, 1996. The stock has
a par value of $100 and is issuable in series.
COMMON STOCK
The Company has authorized 350,000,000 shares of $1 par common stock. The
main trading market for the Company's common stock is the New York Stock
Exchange, where it is listed under the symbol KR. For the three years ended
December 28, 1996, changes in common stock were:
ISSUED IN TREASURY
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------
January 1, 1994................... 118,549,173 $ 308,534 10,901,846 $277,244
Exercise of stock options includ-
ing restricted stock grants...... 2,023,975 26,473 15,479 376
Sale of treasury shares to the
Company's employee benefit plans. (3,495) (1,341,094) (34,104)
Tax benefit from exercise of non-
qualified stock options.......... 7,056
----------- --------- ---------- --------
December 31, 1994................. 120,573,148 338,568 9,576,231 243,516
Exercise of stock options includ-
ing restricted stock grants...... 2,506,667 40,017 8,120 272
Shares issued on conversion of
Convertible Junior Subordinated
Notes............................ 10,698,106 196,451 (8,401) (157)
Tax benefit from exercise of non-
qualified stock options.......... 11,505
----------- --------- ---------- --------
December 30, 1995................. 133,777,921 586,541 9,575,950 243,631
Exercise of stock options includ-
ing restricted stock grants...... 2,683,600 50,091 5,906 255
Tax benefit from exercise of non-
qualified stock options.......... 21,598
----------- --------- ---------- --------
December 28, 1996................. 136,461,521 $ 658,230 9,581,856 $243,886
=========== ========= ========== ========
STOCK OPTION PLANS
The Company grants options for common stock to employees under various
plans, as well as to its non-employee directors owning a minimum of 1,000 shares
of common stock of the Company, at an option price equal to the fair market
value of the stock at the date of grant. In addition to cash payments, the plans
provide for the exercise of options by exchanging issued shares of stock of the
Company. At December 28, 1996 and December 30, 1995, 455,059 and 3,219,730
shares of common stock, respectively, were available
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
for future options. Options may be granted under the 1987, 1988, 1990 and 1994
plans until 1997, 1998, 2000, and 2004, respectively, and generally will expire
10 years from the date of grant. Options granted prior to May 1994 become
exercisable six months from the date of grant. Options granted beginning in May
1994 vest in one year to three years. All grants outstanding become immediately
exercisable upon certain changes of control of the Company.
Changes in options outstanding under the stock option plans, excluding
restricted stock grants, were:
WEIGHTED AVERAGE
SHARES SUBJECT OF EXERCISE
TO OPTION PRICE OF OPTIONS
-------------------------------
Outstanding, January 1, 1994.................... 11,608,359 $15.40
Granted......................................... 2,666,175 $23.39
Exercised....................................... (1,878,973) $13.23
Cancelled or expired............................ (89,679) $19.79
----------
Outstanding, December 31, 1994.................. 12,305,882 $17.43
Granted......................................... 2,774,650 $25.70
Exercised....................................... (2,339,390) $16.89
Cancelled or expired............................ (77,615) $14.18
----------
Outstanding, December 30, 1995.................. 12,663,527 $19.36
Granted......................................... 2,843,510 $41.42
Exercised....................................... (2,669,708) $18.07
Cancelled or expired............................ (91,759) $32.24
----------
Outstanding, December 28, 1996.................. 12,745,570 $24.46
==========
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock awards. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and fully diluted net earnings per share would have been reduced by
approximately $12,800, or $.09 per share and $5,200, or $.04 per share, for 1996
and 1995, respectively. The weighted average fair value of the options granted
during 1996 and 1995 was estimated as $11.77 and $7.91, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: volatility of 22.7% and 26.6%, for 1996 and 1995,
respectively, risk-free interest rate of 6.3% and 6.4%, for 1996 and 1995
respectively, and an expected term of approximately 3.3 years for both 1996 and
1995. A summary of options outstanding and exercisable at December 28, 1996
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING LIFE IN EXERCISE EXERCISABLE EXERCISE
PRICE AT 12/28/96 YRS. PRICE AT 12/28/96 PRICE
- --------------------------------------------------------------------------------
$ 4.92-$10.00 1,014,958 1.36 $ 7.35 1,014,958 $ 7.35
$10.00-$20.00 3,436,067 4.94 16.17 3,436,067 16.17
$20.00-$30.00 5,490,510 7.14 24.37 3,992,720 24.07
$30.00-$44.50 2,804,035 9.42 41.44 9,700 41.06
---------- ---------
12,745,570 8,453,445
========== =========
At December 30, 1995 and December 31, 1994, options for 8,869,223 shares
and 9,725,292 shares, respectively, were exercisable at a weighted average
exercise price of $17.04 and $15.34, respectively.
In addition to stock options, the Company may grant stock appreciation
rights (SARs) under the 1994 plan. In general, the eligible optionees are
permitted to surrender the related option and receive shares of the Company's
common stock and/or cash having a value equal to the appreciation on the shares
subject to the options. The appreciation of SARs is charged to earnings in the
current period based upon the market value of common stock. As of December 28,
1996 and December 30, 1995, there were no SARs outstanding.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also may grant limited stock appreciation rights (LSARs) to
executive officers in tandem with the related options. LSARs operate in the same
manner as SARs but are exercisable only following a change of control of the
Company. As of December 28, 1996 and December 30, 1995, there were no LSARs
outstanding.
Also, the Company may grant restricted stock awards to eligible employee
participants. In general, a restricted stock award entitles an employee to
receive a stated number of shares of common stock of the Company subject to
forfeiture if the employee fails to remain in the continuous employ of the
Company for a stipulated period. The holder of an award is entitled to the
rights of a shareowner except that the restricted shares and the related rights
to vote or receive dividends may not be transferred. The award is charged to
earnings over the period in which the employee performs services and is based
upon the market value of common stock at the date of grant for those grants
without performance contingencies. As of December 28, 1996 and December 30,
1995, awards related to 178,902 and 209,426 shares, respectively, were
outstanding. Of the awards outstanding at December 28, 1996 and December 30,
1995, 100,000 shares are contingent on the attainment of certain performance
objectives. The charge to earnings for grants with performance-contingent
vesting includes share appreciation between the grant date and the vesting date.
The Company may grant performance units under the 1994 plan, either in
conjunction with or independent of a grant of stock options. Performance units
entitle a grantee to receive payment in common stock and/or cash based on the
extent to which performance goals for the specified period have been satisfied.
As of December 28, 1996 and December 30, 1995, there were no performance units
outstanding.
Incentive shares may be granted under the 1994 plan, which consist of
shares of common stock issued subject to achievement of performance goals. No
incentive shares were outstanding as of December 28, 1996 and December 30, 1995.
CONTINGENCIES
The Company continuously evaluates contingencies based upon the best
available evidence.
Management believes that allowances for loss have been provided to the
extent necessary and that its assessment of contingencies is reasonable. To the
extent that resolution of contingencies results in amounts that vary from
management's estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Income Taxes--The Company has closed all tax years through 1983 with the
Internal Revenue Service. The Internal Revenue Service has completed its
examination of the Company's tax returns for tax years 1984-1989. All issues
have been resolved with one exception. Efforts to resolve this issue for tax
years 1984-1986 with the Appeals Division of the Internal Revenue Service were
unsuccessful. As a result the Company filed a petition with the United States
Tax Court in Washington, D.C. Litigation was completed in November 1995 and a
decision was rendered in January 1997 in favor of the Company. The Company is
awaiting a decision from the Internal Revenue Service regarding appeal. This
issue for years 1987-1989 is being held in abeyance pending the ultimate outcome
of this court case. The Company has provided for this and other tax
contingencies.
Insurance--The Company's workers' compensation risks are self-insured in
certain states. In addition, other workers' compensation risks and certain
levels of insured general liability risks are based on retrospective premium
plans, deductible plans, and self-insured retention plans. The liability for
workers' compensation risks is accounted for on a present value basis. Actual
claim settlements and expenses incident thereto may differ from the provisions
for loss. Property risks have been underwritten by a subsidiary and are
reinsured with unrelated insurance companies. Operating divisions and
subsidiaries have paid premiums, and the insurance subsidiary has provided loss
allowances, based upon actuarially determined estimates.
Litigation--The Company is involved in various legal actions arising in the
normal course of business. Management is of the opinion that their outcome will
not have a material adverse effect on the Company's financial position or
results of operations.
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan in which
each holder of common stock is entitled to one common stock purchase right for
each share of common stock owned. The
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Plan was amended and restated as of November 30, 1995. When exercisable, the
nonvoting rights entitle the registered holder to purchase one share of common
stock at a price of $175 per share. The rights will become exercisable, and
separately tradeable, ten days after a person or group acquires 10% or more of
the Company's common stock or ten business days following a tender offer or
exchange offer resulting in a person or group having beneficial ownership of
10% or more of the Company's common stock. In the event the rights become
exercisable and thereafter the Company is acquired in a merger or other
business combination, each right will entitle the holder to purchase common
stock of the surviving corporation, for the exercise price, having a market
value of twice the exercise price of the right. Under certain other
circumstances, including the acquisition of 25% or more of the Company's common
stock, each right will entitle the holder to receive upon payment of the
exercise price, shares of common stock with a market value of two times the
exercise price. At the Company's option, the rights, prior to becoming
exercisable, are redeemable in their entirety at a price of $.01 per right. The
rights are subject to adjustment and expire March 19, 2006.
PENSION PLANS
The Company administers non-contributory defined benefit retirement plans
for substantially all non-union employees. Funding for the pension plans is
based on a review of the specific requirements and on evaluation of the assets
and liabilities of each plan. Employees are eligible to participate upon the
attainment of age 21 (25 for participants prior to January 1, 1986) and the
completion of one year of service, and benefits are based upon final average
salary and years of service. Vesting is based upon years of service.
The Company-administered pension benefit obligations and the assets were
valued as of the end of 1996 and 1995. Substantially all plan assets are
invested in cash and short-term investments or listed stocks and bonds,
including $94,229 and $118,187 of common stock of The Kroger Co. at the end of
1996 and 1995, respectively. The status of the plans at the end of 1996 and 1995
was:
1996 1995
-----------------
Actuarial present value of benefit obligations:
Vested employees............................................. $686,203 $642,582
Non-vested employees......................................... 40,837 39,503
-------- --------
Accumulated benefit obligations.............................. 727,040 682,085
Additional amounts related to projected salary increases..... 147,057 134,208
-------- --------
Projected benefit obligations................................ 874,097 816,293
Plan assets at fair value..................................... 947,725 878,121
-------- --------
Plan assets in excess of projected benefit obligations........ $ 73,628 $ 61,828
======== ========
Consisting of:
Unamortized transitional asset............................... $ 14,456 $ 22,997
Unamortized prior service cost and net gain.................. 40,860 18,617
Adjustment required to recognize minimum liability........... 13,619 11,266
Prepaid pension cost in Consolidated Balance Sheet........... 4,693 8,948
-------- --------
$ 73,628 $ 61,828
======== ========
The components of net periodic pension expense (income) for 1996, 1995 and
1994 are as follows:
1996 1995 1994
-----------------------------
Service cost.................................... $ 25,977 $ 20,249 $ 18,959
Interest cost................................... 61,090 57,218 47,778
Return on assets................................ (110,819) (211,942) 23,935
Net amortization and deferral................... 28,785 131,360 (103,495)
-------- --------- --------
Net periodic pension expense (income) for the
year........................................... $ 5,033 $ (3,115) $(12,823)
======== ========= ========
Assumptions:
Discount rate.................................. 7.75% 7.25% 8.5%
Salary Progression rate........................ 4.75% 4.25% 5.5%
Long-term rate of return on plan assets........ 9.5% 9.5% 9.5%
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1996 and 1995 assumptions represent the rates in effect at the end of the
fiscal year. These rates were used to calculate the actuarial present value of
the benefit obligations at December 28, 1996 and December 30, 1995,
respectively. However, for the calculation of periodic pension expense for 1996
and income for 1995 the assumptions in the table above for 1995 and 1994,
respectively, were used. The 1997 calculation of periodic pension expense
(income) will be based on the assumptions in the table above for 1996.
The Company also administers certain defined contribution plans for
eligible union and non-union employees. The cost of these plans for 1996, 1995
and 1994 was $21,278, $24,902 and $24,298, respectively.
The Company participates in various multi-employer plans for substantially
all union employees. Benefits are generally based on a fixed amount for each
year of service. Contributions and expense for 1996, 1995 and 1994 were $88,758,
$90,872 and $87,711, respectively. Information on the actuarial present value of
accumulated plan benefits and net assets available for benefits relating to
the multi-employer plans is not available.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. The majority of
the Company's employees may become eligible for these benefits if they reach
normal retirement age while employed by the Company. Funding of retiree health
care and life insurance benefits occurs as claims or premiums are paid. For
1996, 1995 and 1994, the combined payments for these benefits were $10,634,
$10,025 and $10,996, respectively.
The following table sets forth the postretirement benefit plans combined
status at December 28, 1996 and December 30, 1995:
1996 1995
-------- --------
Accumulated postretirement benefit obligation (APBO)
Retirees.................................................... $ 96,262 $100,166
Fully eligible active participants.......................... 36,898 36,862
Other active participants................................... 120,012 125,098
-------- --------
253,172 262,126
Unrecognized net gain....................................... 59,762 34,394
-------- --------
Accrued postretirement benefit cost......................... $312,934 $296,520
======== ========
The components of net periodic postretirement benefit costs are as follows:
1996 1995 1994
------- ------- -------
Service costs (benefits attributed to employee
services during the year)........................... $ 9,557 $ 9,344 $ 9,181
Interest cost on accumulated postretirement benefit
obligations......................................... 18,006 20,662 19,743
Net amortization and deferral........................ (991) (725) --
------- ------- -------
$26,572 $29,281 $28,924
======= ======= =======
The significant assumptions used in calculating the APBO are as follows:
HEALTH CARE TREND RATE
-------------------------
DISCOUNT YEARS TO
RATE INITIAL ULTIMATE ULTIMATE
-------- ------- -------- --------
Year-end 1994................................ 8.50% 12.3% 4.5% 12
Year-end 1995................................ 7.25% 10.0% 5.0% 7
Year-end 1996................................ 7.75% 9.3% 5.0% 6
The effect of a one percent increase in the medical trend rate is as
follows:
PERIODIC
COST APBO
----------------
Year-end 1994.................................................. $4,088 $27,283
Year-end 1995.................................................. $4,037 $32,209
Year-end 1996.................................................. $4,114 $23,942
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997 the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". The Company
will implement the statement in the fourth quarter 1997, the effect of which has
not yet been determined.
QUARTERLY DATA (UNAUDITED)
QUARTER
---------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
1996 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------------
Sales................... $5,784,254 $5,844,366 $7,343,132 $6,199,157 $25,170,909
Merchandise costs....... 4,367,967 4,412,202 5,582,032 4,679,264 19,041,465
Extraordinary loss...... (1,084) (766) (928) (84) (2,862)
Net earnings............ 75,406 77,612 71,420 125,435 349,873
Primary earnings per
common share:
Earnings before
extraordinary loss .. .59 .60 .55 .95 2.68
Extraordinary loss.... (.01) (.01) (.01) 0 (.02)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .58 .59 .54 .95 2.66
Fully-diluted earnings
per common share:
Earnings before
extraordinary loss... .59 .60 .55 .95 2.67
Extraordinary loss.... (.01) (.01) (.01) 0 (.02)
---- ---- ---- ---- ----
Fully-diluted net
earnings per common
share................. .58 .59 .54 .95 2.65
1995
- -------------------------------------------------------------------------------------
Sales................... $5,464,954 $5,652,890 $6,959,216 $5,860,735 $23,937,795
Merchandise costs....... 4,129,439 4,267,794 5,284,006 4,416,787 18,098,027
Extraordinary loss...... (5,336) (5,451) (1,516) (3,750) (16,053)
Net earnings............ 59,141 77,012 61,161 105,499 302,813
Primary earnings per
common share:
Earnings before
extraordinary 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
extraordinary loss .. .53 .67 .49 .84 2.50
Extraordinary loss.... (.04) (.04) (.01) (.03) (.12)
---- ---- ---- ---- ----
Fully-diluted net
earnings per common
share................. .49 .63 .48 .81 2.38
Common Stock Price Range
1996 1995
------------- -------------
QUARTER HIGH LOW HIGH LOW
--------------------------------------------------
1st................... 39 5/8 33 1/2 27 7/8 23 3/8
2nd................... 44 37 1/2 28 25
3rd................... 45 37 1/8 34 3/4 26 1/2
4th................... 47 1/2 40 3/4 37 3/4 31 7/8
The number of shareowners of record of common stock as of March 10, 1997,
was 47,128.
Under the Company's Credit Agreement dated July 19, 1994, as amended, the
Company is prohibited from paying cash dividends during the term of the Credit
Agreement. The Company is permitted to pay dividends in the form of stock of the
Company.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
33
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
1996 all filing requirements applicable to its officers, directors and ten
percent beneficial owners were satisfied except that Mr. Richard W. Dillon
inadvertently filed an amended Form 4, reporting a sale of 5,086 shares by a
trust under which he is a co-trustee and a beneficiary, four days late, and Mr.
James R. Thorne inadvertently filed a Form 4, reporting the sale of a fractional
share resulting from the closing of an account under an employee benefit plan,
eight days late.
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 7, 1997. Except as otherwise
noted below, each person has held his office for at least five years and was
elected to that office at the 1996 Organizational Meeting of the Board of
Directors held May 16, 1996. Each officer will hold office at the discretion of
the Board for the ensuing year until removed or replaced.
Name Age Recent Employment History
- ---- --- -------------------------
Warren F. Bryant 51 Mr. Bryant was elected President and Chief
Executive Officer of Dillon Companies, Inc.
effective September 1, 1996. Prior to this he
was elected President and Chief Operating
Officer of Dillon Companies, Inc. on June 18,
1995, Senior Vice President of Dillon
Companies, Inc. on May 1, 1993, and Vice
President of Dillon Companies, Inc. on March
1, 1990. Before this Mr. Bryant served as
Vice President of Marketing, Dillon Stores
Division, from June 1988 until March 1990,
and in a number of key management positions
with the Company, including Director of
Merchandising for the Mid-Atlantic Marketing
Area and Director of Operations for the
Charleston, West Virginia division of the
Mid-Atlantic Marketing Area. He joined the
Company in 1964.
David B. Dillon 45 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 45 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
34
various positions in the Company's Law
Department. Mr. Heldman joined the Company in
1982.
Michael S. Heschel 55 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. Before 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.
Patrick J. Kenney 60 Mr. Kenney was elected Executive Vice
President effective June 18, 1995. Prior to
this he was elected Senior Vice President on
September 13, 1990. Before his election, Mr.
Kenney was President of the Company's Texas
Marketing Area. Mr. Kenney joined the Company
in 1955.
W. Rodney McMullen 36 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 54 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. 51 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 57 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 61 Mr. Rice was elected Senior Vice President on
April 21, 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.
35
James R. Thorne 50 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. Before 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 49 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
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 28, 1996 and December 30, 1995
Consolidated Statement of Operations and Accumulated Deficit for the years
ended December 28, 1996, December 30, 1995, and December 31, 1994
Consolidated Statement of Cash Flows for the years ended December 28, 1996,
December 30, 1995, and December 31, 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 16, 1996, the Company filed a current report on Form 8-K
disclosing its unaudited earnings for the third quarter 1996
On December 26, 1996, the Company filed a current report on Form 8-K
disclosing its Credit Agreement dated December 13, 1996, among the Company,
the Lenders named therein, The Bank of New York, as Agent, and BNY Capital
Markets, Inc., as Arranging Agent
(c) Exhibits
3.1 Amended Articles of Incorporation and hereby incorporated by
reference to Exhibits 4.1 and 4.2 of the Company's Regulations of
the Company are 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 Company and its
subsidiaries are not filed as Exhibits because the amount long-
term debt of the 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 dated as of July 22, 1993,
between the Company and Joseph A. Pichler is Restated Employment
Agreement hereby 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 Dillon Companies, Inc.
Employee Stock Ownership Plan and Trust for the Co. Savings Plan
and the Year 1996 will be filed by amendment on or before April
28, 1996
37
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 19, 1997 By (*Joseph A. Pichler)
Joseph A. Pichler,
Chairman of the Board of Directors
and Chief Executive Officer
Dated: March 19, 1997 By (*W. Rodney McMullen)
W. Rodney McMullen
Group Vice President
and Chief Financial Officer
Dated: March 19, 1997 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 19th day of March, 1997.
Director
- ------------------------------
Reuben V. Anderson
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
Director
- ------------------------------
Richard W. Dillon
(*John T. LaMacchia) Director
John T. LaMacchia
(*Edward M. Liddy) Director
Edward M. Liddy
Director
- ------------------------------
Patricia Shontz Longe
(*T. Ballard Morton, Jr.) Director
T. Ballard Morton, Jr.
(*Thomas H. O'Leary) Director
38
Thomas H. O'Leary
(*John D. Ong) Director
John D. Ong
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
Director
- ------------------------------
James D. Woods
*By: (Paul W. Heldman)
Paul W. Heldman
Attorney-in-fact
39