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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 27, 1997
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
255,664,563 shares outstanding on
March 17, 1998
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 10K or any amendment to this
Form 10K [_].
The aggregate market value of the voting and non-voting common equity of The
Kroger Co. held by nonafflilates as of February 27, 1998: $10,760,140,852
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act
on or before April 27, 1998 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 1997. 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 27, 1997 and
operated 1,392 supermarkets in 24 states.
At December 27, 1997, the Company had 697 Company owned and directly operated
convenience stores in 15 states. Additionally the Company had 119 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 27, 1997, the Company operated 1,392 supermarkets, most of which
are leased. Of this number, 1,132 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 260 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 54,173 square feet. At December 27, 1997,
combination stores accounted for 67% of the store base, 79% of supermarket
square footage, and 80% 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 27, 1997, superstores represented 25% of the
store base, 19% of the square footage and 18% of the food store sales.
Superstores average 33,420 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 13,568 square feet, and contributed 2% of total supermarket
sales in 1997.
CONVENIENCE STORES
At December 27, 1997, the Company's Dillon convenience store group operated,
directly or through franchise agreements, 816 convenience stores in 15 states as
follows:
No. Stores
Chain Company Owned Franchise Sq. Feet States of Operation
- ----- ------------- --------- -------- --------------------------
Kwik Shop 165 6 435,000 Iowa, Kansas, Nebraska,
Illinois
Quik Stop 113 255,000 California
Turkey Hill 229 576,000 Pennsylvania
Loaf 'N Jug 81 253,000 Colorado, New Mexico,
Oklahoma
Mini Mart 110 273,000 Colorado, Montana, Nebraska,
North Dakota, South Dakota,
Wyoming
Tom Thumb 112 303,000 Alabama, Florida
--- --- ---------
697 119 2,095,000
Dillon convenience stores averaged 2,567 square feet at December 27, 1997. The
average store employs six to seven employees, with one or two employees on duty
at any given time.
Each week, an average of 1,536 transactions occur at a typical Dillon
convenience store to purchase gasoline and 5,034 transactions occur to purchase
groceries. Each gasoline transaction averages $11.00 and each inside store
transaction averages $2.34. 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 27, 1997, 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 27, 1997 was
$6.183 billion while the accumulated depreciation was $2.887 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
- ---------------------------------------------------------------
1997 1996
------------------- ------------------
Quarter High Low High Low
- ------- ------- -------- -------- -------
1st 28-1/8 22-11/16 19-13/16 16-3/4
2nd 29-1/8 23-13/16 22 18-3/4
3rd 31-1/16 27-1/8 22-1/2 18-9/16
4th 37-5/16 28-1/2 23-3/4 20-3/8
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1997: 47,268
Number of shareowners at March 17, 1998 46,960
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past three fiscal
years. See Quarterly Data Note to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-------------------------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1,
1997 1996 1995 1994 1994
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
-------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales................... $26,567,348 $25,170,909 $23,937,795 $22,959,122 $22,384,301
Earnings before
extraordinary loss and
cumulative effect of
change in accounting... 444,032 352,735 318,866 268,903 170,805
Extraordinary loss (net
of income tax
benefit)(A) ........... (32,376) (2,862) (16,053) (26,707) (23,832)
Cumulative effect of
change in accounting
(net of income tax
benefit)(B)............ (159,193)
Net earnings (loss)..... 411,656 349,873 302,813 242,196 (12,220)
Diluted earnings (loss)
per share
Earnings before ex-
traordinary loss...... 1.69 1.36 1.28 1.10 .76
Extraordinary loss(A).. (.12) (.01) (.06) (.10) (.10)
Cumulative effect of
change in
accounting(B)......... (.65)
Net earnings (loss).... 1.57 1.35 1.22 1.00 .01
Total assets............ 6,301,341 5,892,465 5,044,717 4,707,674 4,480,464
Long-term obligations,
including obligations
under capital leases... 3,493,075 3,659,491 3,489,728 3,889,194 4,135,013
Shareowners' deficit.... (784,848) (1,181,706) (1,603,013) (2,153,684) (2,459,642)
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SALES
Total sales for the fourth quarter of 1997 were $6.5 billion compared to
$6.2 billion in the fourth quarter of 1996, a 5.0% increase. Total sales and
food store sales both increased 5.5% for the full year. Food stores sales for
the fourth quarter 1997 rose 5.2% compared to the fourth quarter 1996. Sales by
lines of business for the three years ended December 27, 1997, were as follows:
1997 1996 1995
% OF 1997 -------------- -------------- --------------
SALES AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
--------- ------- ------ ------- ------ ------- ------
(MILLIONS OF DOLLARS)
Food Stores.............. 93.4% $24,801 +5.5% $23,508 +4.5% $22,488 +4.9%
Convenience Stores....... 3.8% 1,006 +6.0% 948 +11.6% 850 -5.4%
Other sales.............. 2.8% 760 +6.5% 714 +19.0% 600 -3.1%
----- ------- ------- -------
Total Sales.............. 100.0% $26,567 +5.5% $25,170 +5.1% $23,938 +4.3%
Sales in identical food stores, which include stores that have been in
operation and have not been expanded or relocated for five quarters, increased
.7% in the fourth quarter and were flat for the full year. Comparable store
sales, which include identical stores plus expanded and relocated stores,
increased 3.0% in the fourth quarter. The increase in food store sales
correlates to the 5.7% square footage growth generated by the Company's capital
expenditure program. This program enabled the Company to open, relocate or
expand 96 food stores during 1997. Most of the new and expanded stores feature
the Company's combination store format. Combination stores are expected to
generate higher sales per customer by the inclusion of numerous specialty
departments, such as pharmacies, video rental, floral shops, and book stores.
This "one-stop shopping" format saves time and travel for customers and is
adaptable to the demographics of individual markets.
Convenience stores total sales increased 6.0% for the year and 2.3% during
the fourth quarter of 1997. The lower sales increase during the fourth quarter
can be attributed to a 4.3% decrease in gasoline retails for the quarter.
Gasoline sales increased 8.5% for the year on a 7.9% increase in gallons sold.
In-store sales in identical convenience stores increased 2.7% for the fourth
quarter and 1.5% for the full year. Gasoline sales at identical convenience
stores decreased 0.9% in 1997 on a 1.2% decrease in gallons sold.
Other sales primarily consist of sales by the Company's manufacturing
divisions to non-affiliated entities. Compared to 1996, other sales increased
0.9% for the fourth quarter and 6.5% for the year. Manufacturing division
outside sales declined 2.6% in the fourth quarter 1997 and increased 4.7% for
the full year.
Total food store square footage increased 5.7%, 6.7%, and 4.6% in 1997,
1996, and 1995, respectively. Convenience store square footage decreased 1.3% in
1997, increased 1.5% in 1996, and decreased 10.6% in 1995.
Sales per average square foot for the last three years were:
TOTAL SALES PER
AVERAGE SQUARE FOOT
--------------------
1997 1996 1995
------ ------ ------
Food Stores................................................ $398 $401 $405
Convenience Stores......................................... $548 $519 $475
Sales per average square foot for convenience stores exclude stores
operated by franchisees. The decrease in sales per average square foot for food
stores can be attributed to Company's substantial new construction program.
EBITD
The Company's 364-Day Credit Agreement and Five-Year Credit Agreement
(collectively, the "Credit Agreement") and the indentures underlying
approximately $706 million of publicly issued debt contain various restrictive
covenants. Many covenants are based on earnings before interest, taxes,
depreciation, LIFO charge, unusual and extraordinary items ("EBITD"). 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. Rather EBITD results facilitate an understanding of the
Company's performance compared to its debt covenants. At December 27, 1997 the
Company was in compliance with all Credit Agreement and indenture covenants.
The Company believes it has adequate coverage of its debt covenants to continue
to respond effectively to competitive conditions.
EBITD increased 13.2% in 1997 to $1.385 billion compared to $1.224 billion
in 1996. EBITD in 1995 was $1.148 billion. Excluding the effect of strikes in
the King Soopers and City Market divisions, EBITD would have been approximately
$1.256 billion in 1996. EBITD growth in 1997 was generated by increased sales at
higher gross profit and reduced operating, general and administrative expense
rates as a percent of sales. The Company's capital expenditure program continued
to produce incremental EBITD increases.
MERCHANDISE COSTS
Merchandise costs include warehousing and transportation expenses and
charges related to valuing inventory on the Last In First Out method (LIFO). The
following table shows the relative effect of LIFO charges on merchandising costs
as a percent of sales:
1997 1996 1995
------ ------ ------
Merchandise costs as reported.............................. 75.27% 75.65% 75.60%
LIFO charge................................................ .03% .05% .05%
------ ------ ------
Merchandise costs as adjusted.............................. 75.24% 75.60% 75.55%
The merchandise cost rate for 1996 increased as a result of the work
stoppages in Colorado.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses as a percent of sales were
18.30%, 18.34% and 18.41%, in 1997, 1996, and 1995 respectively.
Operating, general and administrative costs declined three basis points in
the fourth quarter of 1997 and four basis points for the full year. The improved
results were caused by a combination of factors, including cost reductions
achieved through enhanced technology, a reduction in employee benefit costs, and
reduced administrative expenses.
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 1984-1992. With one exception, all issues
have been resolved for tax years 1984-1989. A second issue remains unresolved
for tax years 1990-1992. Efforts to resolve the 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 Commissioner of Internal
Revenue has appealed this case to the United States Court of Appeals for the
Sixth Circuit. The issue before the court is being held in abeyance for tax
years 1987-1992 pending the ultimate outcome of this appeal. The other issue
for tax years 1990-1992 is being temporarily held in abeyance by the Internal
Revenue Service. The Company has made provisions for these and other tax
contingencies.
NET EARNINGS
Net earnings totaled $411.7 million in 1997 as compared to $349.9 million
in 1996 and $302.8 million in 1995. Earnings in 1997 compared to 1996 and 1995
were affected by: (i) an after tax extraordinary loss from the early retirement
of debt in 1997 of $32.4 million compared to $2.9 million in 1996 and $16.1
million in 1995, (ii) net interest expense in 1997 of $285.9 million compared to
$300.0 million in 1996 and $312.7 million in 1995, (iii) depreciation expense in
1997 of $380.2 million, compared to $343.8 million in 1996 and $311.3 million in
1995, (iv) and the effect of the work stoppages during 1996 in Colorado.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management and Interest Expense
During 1997, the Company redeemed $316.2 million of senior subordinated
debt, repurchased $11.5 million of its senior and senior subordinated debt
issues, and prepaid $178.0 million of mortgage loans. The redemptions and
repurchases were financed with the issuance of $200 million of senior debt, bank
borrowings and excess cash flow from operations.
In 1996, the Company made open market purchases of $49.9 million of its
senior and subordinated debt and redeemed $134.7 of its subordinated debt. The
repurchases and redemption were effected with the 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.
The Company has in place a 364-Day Credit Agreement and a Five-Year Credit
Agreement with a consortium of bank lenders. The 364-Day Credit Agreement is a
revolving credit facility in the amount of $500 million, that terminates on May
27, 1998, unless extended as provided in the Credit Agreement. The Five-Year
Credit Agreement is a revolving credit facility in the amount of $1.5 billion,
that terminates on May 28, 2002, unless extended or terminated earlier by the
Company as provided in the Credit Agreement. The average interest rate on the
Company's bank debt was 6.06% in 1997 compared to 6.16% in 1996. The borrowing
under the Credit Agreement at year-end 1997 totaled $1.262 billion compared to
$1.001 billion at year-end 1996. The borrowing rate on the bank debt is
variable. At December 27, 1997 the Company had $709.6 million available under
its Credit Agreement to meet short-term liquidity needs.
Long-term debt, including capital leases and current portion thereof,
decreased $163.4 million to $3.517 billion at year-end 1997 from $3.681 billion
at year-end 1996. The Company purchased a portion of the debt issued by the
lenders of certain structured financings in an effort to further reduce the
Company's effective interest expense. The Company pre-funded $160 million of
employee benefit costs at year-end 1997 compared to $110 million at year-end
1996. Excluding the debt incurred to make these purchases, which are classified
as investments, and the pre-funding of employee benefits, the Company's long-
term debt would have been $315.0 million less, or $3.202 billion, at year-end
1997 compared to $3.418 billion at year-end 1996.
Interest Rate Protection Program
The Company uses derivatives to limit its exposure to rising interest
rates. The Company follows these guidelines in using derivatives: (i) use
average daily bank balance to determine annual debt amounts subject to interest
rate exposure, (ii) limit the annual amount of floating rate debt to a total of
$1.0 billion or less, (iii) include no leveraged derivative 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 table below provides information about the Company's interest rate
derivative and underlying debt portfolio. The amounts per year represent the
contractual maturities of long-term debt, excluding capital leases, and the
outstanding notional amount of interest rate derivatives. Interest rates
reflect the weighted average for the maturing instruments. The variable
component of each interest rate derivative and the expected interest rate for
variable rate long-term debt are based on 6 month LIBOR using the forward yield
curve as of December 27, 1997.
EXPECTED YEAR OF MATURITY
------------------------------------------------------------------------
(IN THOUSANDS)
1998 1999 2000 2001 2002 THEREAFTER TOTAL
--------- --------- ------- ------- --------- ---------- ---------
LONG-TERM DEBT
- ------------------------
Fixed rate.............. 14,304 164,835 10,613 14,274 168,284 1,649,771 2,022,081
Average interest rate... 8.86% 8.88% 8.81% 8.81% 8.74% 8.75%
Variable rate........... 1,262,058 36,616 1,298,674
Average interest rate... 6.06% 6.14% 6.28% 6.39% 6.49% 6.19%
INTEREST RATE
DERIVATIVES
- ------------------------
Variable to fixed....... 1,300,000 1,000,000 675,000 352,500 97,500 65,000 1,400,000
Average pay rate........ 6.86% 7.08% 7.28% 7.20% 6.68% 6.80% 6.92%
Average receive rate.... 5.56% 5.64% 5.78% 5.89% 5.99% 6.05% 5.62%
Fixed to variable....... 910,000 760,000 605,000 400,000 275,000 150,000 1,135,000
Average pay rate........ 5.56% 5.64% 5.78% 5.82% 5.99% 6.05% 5.62%
Average receive rate.... 6.43% 6.24% 6.26% 6.55% 6.41% 6.03% 6.33%
It was not practicable to determine a fair value for $480.1 million of
fixed rate or any of the variable rate debt. The remaining $1,542.0 million of
fixed rate debt had an estimated fair value of $1,675.0 million. The variable to
fixed interest rate derivatives had an estimated fair value of a negative $41.6
million. The fixed to variable rate interest rate derivatives had an estimated
fair value of $11.3 million.
CAPITAL EXPENDITURES
Capital expenditures for 1997 totaled $612.2 million, compared to $733.8
million in 1996, and $726.1 million in 1995, net of reclassification for
property held for sale. During 1997 the Company opened, acquired or expanded 96
food stores and 15 convenience stores as compared to 116 food stores and 31
convenience stores in 1996, and 83 food stores and 19 convenience stores in
1995. The Company also completed 48 food store and 9 convenience store remodels
during 1997. During 1997, the Company closed or sold 41 food stores and 30
convenience stores.
CONSOLIDATED STATEMENT OF CASH FLOWS
During 1997 the Company generated $853.6 million in cash from operating
activities compared to $499.4 million in 1996 and $810.1 million in 1995. The
increase over 1996 is primarily due to a decrease in operating assets and
liabilities that provided $12.9 million of cash in 1997 compared to using
$226.9 million in 1996. The largest component of the change in operating assets
and liabilities was a decrease in net owned inventories of $16.6 million
compared to a decrease of $224.5 million in 1996. Offsetting these net uses of
cash were increases in net earnings of $61.8 million and non-cash charges for
depreciation and amortization of $36.5 million.
Investing activities used $579.4 million of cash in 1997 compared to $856.9
million in 1996 and $665.6 million in 1995. The decrease in the use of cash was
caused by decreased purchases of investments of $145.1 million and decreased
capital expenditures of $121.7 million.
Cash used by financing activities in 1997 totaled $275.7 million as
compared to $345.4 million provided in 1996 and $151.4 million used in 1995. The
increase in the use of cash during 1997 as compared to 1996 was caused by a net
debt decrease of $169.6 million in 1997 versus a net debt increase of $146.9
million in 1996. An additional $13.1 million of cash was used for debt
prepayments and finance charges, and $85.2 million was used to repurchase
capital stock.
OTHER ISSUES
The Company is party to more than 200 collective bargaining agreements with
local unions representing approximately 162,000 of the Company's employees.
During 1997 the Company negotiated over 30 labor contracts without any work
stoppages. Typical agreements are 3 to 5 years in duration and, as agreements
expire, the Company expects 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. No major union contracts will be negotiated in 1998.
OUTLOOK
The Company's outlook for 1998 is positive. Statements below regarding the
Company's expectations, hopes, beliefs, intentions or strategies are forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934. While we believe that the statements are accurate, uncertainties
and other factors could cause actual results to differ materially from those
statements. In particular:
. The Company's food store strategy is to invest in existing Kroger
markets or in areas adjacent to markets where the Company has a strong
franchise and can leverage marketing, distribution, and overhead
dollars. The Company expects consistent sales and earnings increases
from the existing store base combined with incremental sales and
earnings contributions as a result of the capital investment program.
. Management believes that the combination store format and the Company's
geographic diversity are strategic advantages that will allow Kroger to
withstand continued competition from other food retailers,
supercenters, mass merchandisers, and restaurants.
. As new stores mature and capital spending levels off, the Company
expects to achieve increases in sales per average food store square
foot.
. The Company continues to invest capital in technology to enhance
Kroger's distribution network in order to improve store operations,
product procurement and distribution practices. These initiatives,
combined with increasing private label sales, are expected to have a
favorable influence on the gross profit rate.
. The Company's goal is to further reduce operating, general and
administrative expense rates. Increased sales volume combined with
investments in new technologies and lower costs, while maintaining or
improving customer service, should help achieve this goal.
. The Company currently expects 1998 net interest expense, estimated
using year-end 1997 rates, to total approximately $280 million. A 1%
increase in market rates would increase the estimated expense by
approximately $6.5 million. A 1% decrease in market rates would reduce
the estimated expense by approximately $9.4 million.
. The Company expects to increase retail food store square footage by
approximately 5% in both 1998 and 1999. In 1998, the Company plans to
open or expand 90-100 stores compared to 96 in 1997. The Company
expects 1998 capital expenditures, including additional Company owned
real estate, logistics projects, and continuing technology investments,
to total approximately $775 million. The Company also expects to
complete within-the-wall remodels of 60 food stores. The increased
square footage is planned for existing Company markets where the
Company has an established market position and an existing
administrative and logistical network.
. The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the
Company's computerized information systems. The year 2000 problem is
the result of computer programs being written using two digits (rather
than four) to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. Based on current information, costs
of addressing potential problems are not expected to have a material
adverse impact on the Company's financial position, results of
operations or cash flows in future periods. However, if the Company,
its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk.
Accordingly, the Company believes it has allocated the resources
necessary to resolve all significant year 2000 issues in a timely
manner.
Inflationary factors, increased competition, construction delays, and labor
disputes could affect the Company's ability to obtain expected increases in
sales and earnings. Delays in store maturity, increased competition and
increased capital spending could adversely affect the anticipated increase in
sales per square foot. Increases in gross profit rate may not be achieved if
start up costs are higher than expected or if problems associated with
integrating new systems occur. Increased operating costs and changes in
inflationary trends, could prevent the Company from reducing operating, general
and administrative expenses, while new technologies could fail to achieve the
desired savings and efficiencies. Net interest expenses could exceed
expectations due to acquisitions, inflation, or increased competition. The
Company's ability to achieve its construction goals could be hampered by
construction delays, labor disputes, increase competition, delays in technology
projects, and its ability to generate continued EBITD growth. The inherent
complexity of computer software and reliance on third party software vendors to
interface with the Company's systems could affect the completion of necessary
"year 2000" modifications.
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 27, 1997 and December 28, 1996, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 27, 1997, December 28, 1996, and December 30, 1995. 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 27, 1997 and December 28, 1996, and the consolidated results of
its operations and its cash flows for the years ended December 27, 1997,
December 28, 1996, and December 30, 1995, in conformity with generally accepted
accounting principles.
(Coopers & Lybrand L.L.P.)
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 22, 1998
CONSOLIDATED BALANCE SHEET
DECEMBER 27, December 28,
(In thousands of dollars) 1997 1996
- ---------------------------------------------------------------------------------
ASSETS
Current assets
Cash................................................. $ 65,484 $ 67,052
Receivables.......................................... 400,529 324,050
Inventories:
FIFO cost........................................... 2,273,896 2,175,630
Less LIFO reserve................................... (467,931) (461,689)
----------- -----------
1,805,965 1,713,941
Property held for sale............................... 39,672 38,333
Prepaid and other current assets..................... 328,901 276,440
----------- -----------
Total current assets............................... 2,640,551 2,419,816
Property, plant and equipment, net.................... 3,296,599 3,063,534
Investments and other assets.......................... 364,191 409,115
----------- -----------
TOTAL ASSETS....................................... $ 6,301,341 $ 5,892,465
=========== ===========
LIABILITIES
Current liabilities
Current portion of long-term debt.................... $ 14,304 $ 11,642
Current portion of obligations under capital leases.. 10,031 9,501
Accounts payable..................................... 1,781,527 1,717,308
Other current liabilities............................ 1,137,654 1,041,521
----------- -----------
Total current liabilities.......................... 2,943,516 2,779,972
Long-term debt........................................ 3,306,451 3,478,743
Obligations under capital leases...................... 186,624 180,748
Deferred income taxes................................. 166,013 151,036
Other long-term liabilities........................... 483,585 483,672
----------- -----------
TOTAL LIABILITIES.................................. 7,086,189 7,074,171
----------- -----------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1997--277,153,260 shares
1996--272,923,042 shares..................... 728,644 658,230
Accumulated deficit................................... (1,184,394) (1,596,050)
Common stock in treasury, at cost
1997--22,182,650 shares
1996--19,163,712 shares...................... (329,098) (243,886)
----------- -----------
TOTAL SHAREOWNERS' DEFICIT......................... (784,848) (1,181,706)
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' DEFICIT......... $ 6,301,341 $ 5,892,465
=========== ===========
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Years Ended December 27, 1997, December 28, 1996, and December 30, 1995
1997 1996 1995
(In thousands, except per share amounts) (52 WEEKS) (52 Weeks) (52 Weeks)
- --------------------------------------------------------------------------------
Sales.................................... $26,567,348 $25,170,909 $23,937,795
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 19,996,381 19,041,465 18,098,027
Operating, general and administrative... 4,861,426 4,616,749 4,406,445
Rent.................................... 331,012 301,629 299,828
Depreciation and amortization........... 380,221 343,769 311,272
Net interest expense.................... 285,945 299,984 312,685
----------- ----------- -----------
Total................................. 25,854,985 24,603,596 23,428,257
----------- ----------- -----------
Earnings before tax expense and extraor-
dinary loss............................. 712,363 567,313 509,538
Tax expense.............................. 268,331 214,578 190,672
----------- ----------- -----------
Earnings before extraordinary loss....... 444,032 352,735 318,866
Extraordinary loss, net of income tax
benefit................................. (32,376) (2,862) (16,053)
----------- ----------- -----------
Net earnings.......................... $ 411,656 $ 349,873 $ 302,813
=========== =========== ===========
Accumulated Deficit
Beginning of year....................... $(1,596,050) $(1,945,923) $(2,248,736)
Net earnings............................ 411,656 349,873 302,813
----------- ----------- -----------
End of year............................. $(1,184,394) $(1,596,050) $(1,945,923)
=========== =========== ===========
Basic earnings per Common Share
Earnings before extraordinary loss ..... $ 1.75 $ 1.41 $ 1.38
Extraordinary loss...................... (.13) (.01) (.07)
------ ------ ------
Net earnings............................ $ 1.62 $ 1.40 $ 1.31
====== ====== ======
Average number of common shares used in
basic calculation....................... 254,284 250,979 231,468
Diluted earnings per Common Share
Earnings before extraordinary loss ..... $ 1.69 $ 1.36 $ 1.28
Extraordinary loss...................... (.12) (.01) (.06)
------ ------ ------
Net earnings............................ $ 1.57 $ 1.35 $ 1.22
====== ====== ======
Average number of common shares used in
diluted calculation..................... 262,860 258,837 251,716
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 27, 1997, December 28, 1996, and December 30, 1995
1997 1996 1995
(In thousands of dollars) (52 WEEKS) (52 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings.................................. $ 411,656 $ 349,873 $ 302,813
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary loss........................... 32,376 2,862 16,053
Depreciation and amortization................ 380,221 343,769 311,272
Amortization of deferred financing costs..... 13,907 13,004 13,189
Loss (gain) on sale of assets................ (3,142) 4,496 (710)
LIFO charge.................................. 6,242 12,526 14,103
Other changes, net........................... (527) (200) (1,176)
Net increase (decrease) in cash from changes
in operating assets and liabilities......... 12,857 (226,931) 154,507
--------- --------- ---------
Net cash provided by operating activities... 853,590 499,399 810,051
--------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures.......................... (612,198) (733,883) (726,142)
Proceeds from sale of assets.................. 24,657 9,242 49,530
(Increase) decrease in property held for sale. (4,165) 580 2,942
(Increase) decrease in other investments...... 12,269 (132,796) 8,106
--------- --------- ---------
Net cash used by investing activities....... (579,437) (856,857) (665,564)
--------- --------- ---------
Cash Flows From Financing Activities:
Debt prepayment costs......................... (8,012) (4,196) (22,244)
Financing charges incurred.................... (27,210) (17,927) (6,716)
Principal payments under capital lease
obligations.................................. (9,662) (9,229) (8,780)
Proceeds from issuance of long-term debt...... 662,322 382,161 113,246
Reductions in long-term debt.................. (831,952) (235,214) (304,234)
Outstanding checks............................ (17,493) 181,993 38,918
Proceeds from issuance of capital stock....... 41,498 48,120 38,602
Capital stock reacquired...................... (85,212) (254) (217)
--------- --------- ---------
Net cash provided (used) by financing
activities................................. (275,721) 345,454 (151,425)
--------- --------- ---------
Net decrease in cash and temporary cash
investments................................... (1,568) (12,004) (6,938)
Cash and Temporary Cash Investments:
Beginning of year............................. 67,052 79,506 86,444
--------- --------- ---------
End of year................................... $ 65,484 $ 67,052 $ 79,506
========= ========= =========
Increase (Decrease) In Cash From Changes In
Operating Assets And Liabilities:
Inventories (FIFO)............................ $ (98,266) $(140,750) $ 10,396
Receivables................................... (76,478) (35,983) (18,207)
Prepaid and other current assets.............. (53,476) (120,641) (3,992)
Accounts payable.............................. 81,712 (83,808) 98,681
Other current liabilities..................... 51,534 76,423 43,501
Deferred income taxes......................... 65,354 45,665 (10,008)
Other liabilities............................. 42,477 32,163 34,136
--------- --------- ---------
$ 12,857 $(226,931) $ 154,507
========= ========= =========
- ----------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share amounts.
ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in preparing these financial statements:
Principles of Consolidation
The consolidated financial statements include the Company and all of its
subsidiaries. Certain prior year amounts have been restated to conform to
current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities.
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 also is required. 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 90% of inventories for 1997 and 88% of inventories for 1996 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. 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 $312,000, $302,000, and $281,000 for 1997, 1996, and 1995,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting bases. The types of differences that 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, which are
included in accounts payable, represent disbursements that are funded as the
item is presented for payment.
Cash paid during the year for interest and income taxes was as follows:
1997 1996 1995
--------------------------
Interest............................................. $304,176 $304,240 $322,411
Income taxes......................................... 154,025 166,732 175,151
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
1997 1996
------------------------
Land.................................................. $ 352,319 $ 308,451
Buildings and land improvements....................... 1,263,700 1,034,441
Equipment............................................. 3,106,548 2,895,826
Leaseholds and leasehold improvements................. 908,948 807,422
Construction-in-progress.............................. 278,821 417,080
Leased property under capital leases.................. 272,911 263,398
----------- -----------
6,183,247 5,726,618
Accumulated depreciation and amortization............. (2,886,648) (2,663,084)
----------- -----------
$ 3,296,599 $ 3,063,534
=========== ===========
Approximately $369,295 and $461,285, original cost, of Property, Plant and
Equipment collateralizes certain mortgage obligations at 1997 and 1996,
respectively.
INVESTMENTS AND OTHER ASSETS
Investments and other assets consists of:
1997 1996
-----------------
Deferred financing costs...................................... $ 59,939 $ 90,171
Goodwill...................................................... 39,119 39,745
Investments in Debt Securities................................ 155,141 152,675
Other......................................................... 109,992 126,524
-------- --------
$364,191 $409,115
======== ========
The Company is amortizing deferred financing costs using the interest
method. Substantially all goodwill is amortized on the straight-line method over
40 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CURRENT LIABILITIES
Other current liabilities consists of:
1997 1996
---------------------
Salaries and wages....................................... $ 300,202 $ 292,393
Taxes, other than income taxes........................... 147,905 146,781
Interest................................................. 36,699 39,202
Other.................................................... 652,848 563,145
---------- ----------
$1,137,654 $1,041,521
========== ==========
TAXES BASED ON INCOME
The provision for taxes based on income consists of:
1997 1996 1995
----------------------------
Federal
Current.......................................... $173,715 $146,296 $178,936
Deferred......................................... 65,354 43,638 (10,008)
-------- -------- --------
239,069 189,934 168,928
State and local................................... 29,262 24,644 21,744
-------- -------- --------
268,331 214,578 190,672
Tax credit from extraordinary loss................ (19,427) (1,792) (10,263)
-------- -------- --------
$248,904 $212,786 $180,409
======== ======== ========
Targeted job tax credits reduced the tax provision by $1,206 in 1995.
A reconciliation of the statutory federal rate and the effective rate is as
follows:
1997 1996 1995
----------------
Statutory rate................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit................ 2.7 2.8 2.8
Tax credits................................................... (.2) (.2) (.4)
Other, net.................................................... .2 .2
---- ---- ----
37.7% 37.8% 37.4%
==== ==== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of significant temporary differences that comprise deferred
tax balances were as follows:
1997 1996
- -------------------------------------------------------------------------------
Current deferred tax assets:
Compensation related costs............................. $ 32,772 $ 27,873
Insurance related costs................................ 35,971 33,109
Inventory related costs................................ 16,257 19,092
Other.................................................. 18,001 19,844
--------- ---------
103,001 99,918
--------- ---------
Current deferred tax liabilities:
Compensation related costs............................. (85,913) (63,691)
Lease accounting....................................... (4,128) (3,680)
Inventory related costs................................ (62,830) (33,116)
Other.................................................. (9,658) (8,582)
--------- ---------
(162,529) (109,069)
--------- ---------
Current deferred taxes, net............................. $ (59,528) $ (9,151)
========= =========
Long-term deferred tax assets:
Compensation related costs............................. $ 130,825 $ 125,466
Insurance related costs................................ 37,788 43,492
Lease accounting....................................... 25,110 24,214
Other.................................................. 20,692 15,466
--------- ---------
214,415 208,638
--------- ---------
Long-term deferred tax liabilities:
Depreciation........................................... (339,951) (312,546)
Compensation related costs............................. (10,328) (14,239)
Lease accounting....................................... (740) (1,863)
Deferred charges....................................... (6,653) (7,471)
Other.................................................. (22,756) (23,555)
--------- ---------
(380,428) (359,674)
--------- ---------
Long-term deferred taxes, net........................... $(166,013) $(151,036)
========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DEBT OBLIGATIONS
Long-term debt consists of:
1997 1996
---------- ----------
Five-Year Credit Agreement............................... $1,262,058
Variable Rate Revolving Credit Facility, due 2002........ $1,001,459
Credit Facility.......................................... 110,000
9 1/4% Senior Secured Debentures, due 2005............... 100,648 107,648
8 1/2% Senior Secured Debentures, due 2003............... 197,845 200,000
8.15% Senior Notes due 2006.............................. 240,000 240,000
7.65% Senior Notes due 2007.............................. 200,000
9 3/4% Senior Subordinated Debentures, due 2004.......... 96,008
9 3/4% Senior Subordinated Debentures, due 2004, Series
B....................................................... 46,050
9 7/8% Senior Subordinated Debentures, due 2002.......... 81,530 83,065
6 3/4% to 9 5/8% Senior Subordinated Notes, due 1999 to
2009.................................................... 171,909 346,064
10% Senior Subordinated Notes, due 1999.................. 123,861 124,703
10% Mortgage loans, with semi-annual payments due through
2004.................................................... 426,219 605,665
4 9/10% to 8 5/8% Industrial Revenue Bonds, due in vary-
ing amounts through 2021................................ 201,030 203,785
7 7/8% to 10 1/4% mortgages, due in varying amounts
through 2017............................................ 267,368 280,711
3 1/2% to 10 1/4% notes, due in varying amounts through
2017.................................................... 48,287 45,227
---------- ----------
Total debt............................................... 3,320,755 3,490,385
Less current portion..................................... 14,304 11,642
---------- ----------
Total long-term debt..................................... $3,306,451 $3,478,743
========== ==========
The aggregate annual maturities and scheduled payments of long-term debt
for the five years subsequent to 1997 are:
1998.................................................... $ 14,304
1999.................................................... $ 164,835
2000.................................................... $ 10,613
2001.................................................... $ 14,274
2002.................................................... $1,430,342
The Company has purchased a portion of the debt issued by the lenders of
certain of its structured financings 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 $155,141 less or $3,165,614 for 1997 and $152,675 less or $3,337,710 for
1996.
364-Day Credit Agreement and Five-Year Credit Agreement
The Company has outstanding a 364-Day Credit Agreement and a Five-Year
Credit Agreement dated as of May 28, 1997 (collectively 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 June 2, 1997.
The 364-Day facility is a revolving credit facility in the amount of
$500,000, that terminates on May 27, 1998, unless extended in accordance with
its terms. It may be converted into a term loan maturing two years after the
conversion unless earlier terminated by the Company as provided in the Credit
Agreement. The Five-Year facility is a revolving credit facility in the amount
of $1,500,000. It terminates on May 28, 2002, unless extended or earlier
terminated by the Company as provided in the Credit Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Interest Rates
Borrowings under the Credit Agreement bear interest at the option of the
Company at a rate equal to either (i) the highest, from time to time, of (A)
the base rate of Citibank, N.A., (B) 1/2% over a moving average of secondary
market morning offering rates for three month certificates of deposit adjusted
for reserve requirements, and (C) 1/2% over the federal funds rate or (ii) an
adjusted Eurodollar rate based upon the London Interbank Offered Rate
("Eurodollar Rate") plus an Applicable Margin.
The Applicable Margin for the 364-Day facility varies from .125% to .200%
prior to conversion to a term loan facility and thereafter, if exercised by the
Company, from .175% to .300%. The Applicable Margin for the Five-Year facility
varies from .105% to .175%. In addition, the Company pays a Facility Fee ranging
from .050% to .100% on the entire amount of the 364-Day facility and a Facility
Fee ranging from .070% to .125% on the entire amount of the Five-Year facility.
Both the Applicable Margin and the Facility Fee vary based on the Company's
achievement of a financial ratio. As of December 27, 1997, the Applicable Margin
for the 364-Day facility was .155% and for the Five-Year facility was .135%. The
Facility Fee for the 364-Day facility was .070% and for the Five-Year facility
was .090%.
Prepayment
The Company may prepay the Credit Agreement, 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 dividends; (ii) restrict mergers and consolidations; (iii) restrict
certain sales of assets; (iv) restrict changes in accounting treatment and
reporting practices except as permitted under generally accepted accounting
principles; and (v) require the maintenance of certain financial ratios and
levels, including fixed charge coverage ratios and leverage ratios.
9 1/4% Senior Secured Debentures
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior Secured
Debentures. This issue was redeemed effective January 2, 1998 at 104.625%.
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 price commences at 104.250% and is 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.
Senior Subordinated Indebtedness
Senior Subordinated Indebtedness consists of the following: (i) $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 $168,470 of the 9 7/8% Senior Subordinated
Debentures in total, $1,535 in 1997); (ii) $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 has repurchased or redeemed $183,865 of the notes in
total, $174,155 in 1997); (iii) $250,000 10% Senior Subordinated Notes due May
1, 1999. This issue is not subject to early redemption by the Company (the
Company has repurchased $126,139 of the 10% Senior Subordinated Notes in total,
$842 in 1997).
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
to redemption, in whole or in part, at the option of the holder upon the
occurrence of a redemption event, upon not less than five days' notice prior to
the date of redemption, at a redemption price equal to the default amount, plus
a specified premium. "Redemption Event" is defined in the indentures as the
occurrence of (i) any person or group, together with any affiliate thereof,
beneficially owning 50% or more of the voting power of the Company or (ii) any
one person or group, or affiliate thereof, succeeding in having a majority of
its nominees elected to the Company's Board of Directors, in each case, without
the consent of a majority of the continuing directors of the Company.
Mortgage Financing
During 1989 the Company completed a $612,475, 10% mortgage financing of 127
of its retail properties, distribution warehouse facilities, food processing
facilities and other properties (the "Properties"), with a net book value of
$325,327 held by 13 newly formed wholly-owned subsidiaries. The wholly-owned
subsidiaries mortgaged the Properties, which are leased to the Company or
affiliates of the Company, to a newly formed special purpose corporation,
Secured Finance Inc.
The mortgage loans had an original maturity of 15 years. The Properties are
subject to the liens of Secured Finance Inc. The mortgage loans are subject to
semi-annual payments of interest and principal on $150,000 of the borrowing
based on a 30-year payment schedule and interest only on the remaining $462,475
principal amount. The unpaid principal amount will be due on December 15, 2004.
During 1997 the Company prepaid 35 mortgages with an original balance of
$150,347. The mortgage balances at the time of the prepayment totaled $148,315.
Pursuant to the terms of the mortgages a 20% premium payment was required. The
premium totaled $29,663 and was applied, on a pro-rata basis, to the 92
remaining mortgage loans.
Subsequent to the prepayment the remaining mortgage loans totaled $426,219.
The remaining mortgage loans are subject to semi-annual payments of interest and
principal on $99,095 based on the original 30-year payment schedule, adjusted
for the pre-payment, and interest only on the remaining $327,124 principal
amount.
Commercial Paper
Under the Credit Agreement the Company is permitted to issue up to
$2,000,000 of unrated commercial paper and borrow up to $2,000,000 from the
lenders under the Credit Agreement on a competitive bid basis. The total of
unrated commercial paper, $84,000 at December 27, 1997, and competitive bid
borrowings, $282,000 at December 27, 1997, however, may not exceed $2,000,000.
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 1998 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 Five-Year facility
of the Credit Agreement which matures May 28, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The table below indicates the types of swaps used, their duration, and
their respective interest rates. The variable component of each interest rate
derivative is based on the 6 month LIBOR using the forward yield curve as of
December 27, 1997.
1997 1996
---------- ----------
Receive fixed swaps
Notional amount........................................ $1,085,000 $1,085,000
Duration in years...................................... 3.0 4.0
Average receive rate................................... 6.33% 6.33%
Average pay rate....................................... 5.79% 5.77%
Receive variable swaps
Notional amount........................................ $1,250,000 $1,150,000
Duration in years...................................... 2.7 3.7
Average receive rate................................... 5.83% 5.75%
Average pay rate....................................... 6.92% 6.96%
Interest rate caps
Notional amount........................................ $ 200,000 $ 450,000
Duration in years...................................... .9 1.3
Average receive rate................................... 5.81% 5.65%
In addition, as of December 27, 1997, the Company hedged $200,000 of fixed
rate debt expected to be issued in 1998 by swapping $100,000 of 7 year variable
rate debt and $100,000 of 10 year variable rate debt for a 6.75% fixed rate.
Based on the terms of the agreements the Company expects the hedges to be
terminated during 1998. Any gain or loss from the hedges will be deferred and
amortized over the shorter of the life of the fixed rate debt or the terminated
hedges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 1997 and 1996. 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:
1997 1996
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Long-term investments for which
it is
Practicable.................... $ 167,609 $ 168,512 $ 154,748 $ 154,645
Not Practicable................ $ 33,605 $ -- $ 31,576 $ --
Long-term debt for which it is
Practicable.................... $1,542,012 $1,674,983 $1,849,203 $1,980,925
Not Practicable................ $1,778,743 $ -- $1,641,182 $ --
Interest Rate Protection Agree-
ments
Receive fixed swaps............ $ -- $ 11,307 $ -- $ 4,900
Receive variable swaps......... $ -- $ (42,016) $ -- $ (37,311)
Interest rate caps............. $ 1,130 $ 434 $ 3,854 $ 2,807
---------- ---------- ---------- ----------
$ 1,130 $ (30,275) $ 3,854 $ (29,604)
========== ========== ========== ==========
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 $1,262,058 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 $201,030, various mortgages
of $267,368, and other notes of $48,287 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 on a percent of sales.
Rent expense (under operating leases) consists of:
1997 1996 1995
-------- -------- --------
Minimum rentals...................................... $321,782 $291,256 $288,961
Contingent payments.................................. 9,230 10,373 10,867
-------- -------- --------
$331,012 $301,629 $299,828
======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Assets recorded under capital leases consists of:
1997 1996
-------- ---------
Distribution and manufacturing facilities.................. $ 30,382 $ 30,381
Store facilities........................................... 242,529 233,017
Less accumulated amortization.............................. (123,891) (118,589)
-------- ---------
$149,020 $ 144,809
======== =========
Minimum annual rentals for the five years subsequent to 1997 and in the
aggregate are:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
1998....................................................... $ 33,201 $ 311,199
1999....................................................... 32,912 289,903
2000....................................................... 31,968 266,225
2001....................................................... 30,909 246,497
2002....................................................... 29,848 230,057
Thereafter................................................. 259,263 1,985,448
-------- ----------
418,101 $3,329,329
==========
Less estimated executory costs included in capital leases.. 18,484
--------
Net minimum lease payments under capital leases............ 399,617
Less amount representing interest.......................... 202,962
--------
Present value of net minimum lease payments under capital
leases.................................................... $196,655
========
EXTRAORDINARY LOSS
The extraordinary loss in 1997, 1996, and 1995 relates to premiums paid to
retire certain indebtedness early and the write-off of related deferred
financing costs.
EARNINGS PER COMMON SHARE
Basic earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding. 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. Diluted earnings per
common share for 1995 is computed by adjusting both earnings before
extraordinary loss and shares outstanding as if the September 1995 conversion
of the 6 3/8% Convertible Junior Subordinated Notes occurred on the first day
of the year.
Earnings per share calculations have been made in compliance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 became effective for fourth quarter 1997 calculations. Prior year
calculations have been restated to reflect the adoption of SFAS 128.
On March 20, 1997, the Company's Board of Directors declared a 2-for-1
stock split to shareholders of record at the close of business on April 7, 1997.
All share amounts prior to this date have been restated to reflect this stock
split.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table provides a reconciliation of earnings before
extraordinary loss and shares used in calculating basic earnings per share to
those used in calculating diluted earnings per share.
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 27, 1997 DECEMBER 28, 1996 DECEMBER 30, 1995
------------------------ ------------------------ ------------------------
INCOME SHARES PER- INCOME SHARES PER- INCOME SHARES PER-
(NUMER- (DENOMI- SHARE (NUMER- (DENOMI- SHARE (NUMER- (DENOMI- SHARE
ATOR) NATOR) AMOUNT ATOR) NATOR) AMOUNT ATOR) NATOR) AMOUNT
-------- -------- ------ -------- -------- ------ -------- -------- ------
Basic EPS
- ---------
Earnings before extraor-
dinary loss............ $444,032 254,284 $1.75 $352,735 250,979 $1.41 $318,866 231,468 $1.38
===== ===== =====
Effect of Dilutive Secu-
rities
- ------------------------
Stock option awards.... 8,576 7,858 6,258
Convertible debenture.. 3,590 13,990
Diluted EPS
- -----------
Income available to
shareholders plus -------- ------- -------- ------- -------- -------
assumed conversions... $444,032 262,860 $1.69 $352,735 258,837 $1.36 $322,456 251,716 $1.28
======== ======= ===== ======== ======= ===== ======== ======= =====
PREFERRED STOCK
The Company has authorized 5,000,000 shares of voting cumulative preferred
stock; 2,000,000 were available for issuance at December 27, 1997. 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 27, 1997, changes in common stock were:
ISSUED IN TREASURY
-------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------
December 31, 1994................... 241,146,296 $338,568 19,152,462 $243,516
Exercise of stock options including
restricted stock grants............ 5,013,334 40,017 16,240 272
Shares issued on conversion of Con-
vertible Junior Subordinated Notes. 21,396,212 196,451 (16,802) (157)
Tax benefit from exercise of non-
qualified stock options............ 11,505
----------- -------- ---------- --------
December 30, 1995................... 267,555,842 586,541 19,151,900 243,631
Exercise of stock options including
restricted stock grants............ 5,367,200 50,091 11,812 255
Tax benefit from exercise of non-
qualified stock options............ 21,598
----------- -------- ---------- --------
December 28, 1996................... 272,923,042 658,230 19,163,712 243,886
Exercise of stock options including
restricted stock grants............ 4,230,218 43,693 (605) 280
Open market purchases............... 3,019,543 84,932
Tax benefit from exercise of non-
qualified stock options............ 26,721
----------- -------- ---------- --------
December 27, 1997................... 277,153,260 $728,644 22,182,650 $329,098
=========== ======== ========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 27, 1997, 7,997,891 shares of common stock were available
for future options. Options generally will expire 10 years from the date of
grant. Options vest in one year to five years or, for 511,000 shares, upon the
Company's stock reaching certain pre-determined market prices. 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, December 31, 1994.................. 24,611,764 $ 8.72
Granted......................................... 5,549,300 $ 12.85
Exercised....................................... (4,678,780) $ 8.45
Cancelled or expired............................ (155,230) $ 7.09
----------
Outstanding, December 30, 1995.................. 25,327,054 $ 9.68
Granted......................................... 5,687,020 $ 20.71
Exercised....................................... (5,339,416) $ 9.04
Cancelled or expired............................ (183,518) $ 16.12
----------
Outstanding, December 28, 1996.................. 25,491,140 $ 12.23
Granted......................................... 3,110,560 $ 26.67
Exercised....................................... (4,229,352) $ 9.89
Cancelled or expired............................ (210,670) $ 12.53
----------
Outstanding, December 27, 1997.................. 24,161,678 $ 14.50
==========
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 diluted net earnings per share would have been reduced by
approximately $13,616, or $.05 per share, $12,800, or $.05 per share and $5,200
or $.04 per share, for 1997, 1996 and 1995, respectively. The weighted average
fair value of the options granted during 1997, 1996, and 1995 was estimated as
$10.82, $5.89 and $3.96, respectively, on the date of grant using the Black-
Scholes option-pricing model with the following weighted average assumptions:
volatility of 24.0%, 22.7% and 26.6% for 1997, 1996 and 1995, respectively;
risk-free interest rate of 5.7%, 6.3% and 6.4% for 1997, 1996 and 1995,
respectively; and an expected term of approximately 5.4 years for 1997 and 3.3
years for both 1996 and 1995. A summary of options outstanding and exercisable
at December 27, 1997 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE AS OF 12/27/97 LIFE PRICE AS OF 12/27/97 PRICE
- ---------------------------------------------------------------------------
$ 2.46-$ 7.85 4,244,086 3.06 $ 6.41 4,244,086 $ 6.41
$ 8.10-$10.57 2,669,430 4.42 9.34 2,669,430 9.34
$11.69-$11.69 3,096,529 6.39 11.69 3,096,529 11.69
$11.72-$12.66 2,130,366 3.48 11.74 2,130,366 11.74
$12.75-$20.41 4,188,380 7.31 12.75 3,340,949 12.75
$20.75-$26.13 4,848,391 8.30 20.75 2,637,430 20.75
$26.88-$36.47 2,984,496 9.39 26.99 8,875 26.88
---------- ----------
24,161,678 18,127,665
========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 28, 1996 and December 30, 1995, options for 16,906,890 shares
and 17,738,446 shares, respectively, were exercisable at a weighted average
exercise price of $9.44 and $8.52, respectively.
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 27, 1997 and December 28,
1996, awards related to 354,850 and 357,804 shares, respectively, were
outstanding. Of the awards outstanding at December 27, 1997 and December 28,
1996, 200,000 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.
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 27, 1997 and December 28, 1996.
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 1984-1992. With one
exception, all issues have been resolved for tax years 1984-1989. A second
issue remains unresolved for tax years 1990-1992. Efforts to resolve the 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 Commissioner of Internal Revenue has appealed this case to the
United States Court of Appeals for the Sixth Circuit. The issue before the
court is being held in abeyance for tax years 1987-1992 pending the ultimate
outcome of this appeal. The other issue for tax years 1990-1992 is being
temporarily held in abeyance by the Internal Revenue Service. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan providing
for preferred stock purchase rights to owners of the Company's common stock. The
Plan was amended and restated as of April 4, 1997. Each right, when exercisable,
entitles the holder to purchase from the Company one ten-thousandth of a share
of Series A Preferred Shares, par value $100 per share, at $87.50 per one ten-
thousandth of a 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 certain
acquisitions of the Company in a merger or other business combination
transaction, or if 50% or more of the Company's assets or earning power are sold
under certain circumstances, each right will entitle the holder to receive upon
payment of the exercise price, shares of common stock of the acquiring company
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. This summary description of the Plan is qualified in its entirety by
the terms of the plan more particularly set forth in the Company's Form 8-A/A
dated April 4, 1997.
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 1997 and 1996. Substantially all plan assets are
invested in cash and short-term investments or listed stocks and bonds,
including $135,274 and $94,229 of common stock of The Kroger Co. at the end of
1997 and 1996, respectively. The status of the plans at the end of 1997 and 1996
was:
1997 1996
-------------------
Actuarial present value of benefit obligations:
Vested employees........................................... $ 768,261 $686,203
Non-vested employees....................................... 50,499 40,837
---------- --------
Accumulated benefit obligations............................ 818,760 727,040
Additional amounts related to projected salary increases... 124,696 147,057
---------- --------
Projected benefit obligations.............................. 943,456 874,097
Plan assets at fair value................................... 1,095,118 947,725
---------- --------
Plan assets in excess of projected benefit obligations...... $ 151,662 $ 73,628
========== ========
Consisting of:
Unamortized transitional asset............................. $ 5,914 $ 14,456
Unamortized prior service cost and net gain................ 132,369 40,860
Adjustment required to recognize minimum liability......... 12,398 13,619
Prepaid pension cost in Consolidated Balance Sheet......... 981 4,693
---------- --------
$ 151,662 $ 73,628
========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The components of net periodic pension expense (income) for 1997, 1996 and
1995 are as follows:
1997 1996 1995
-------------------------------
Service cost.................................. $ 26,682 $ 25,977 $ 20,249
Interest cost................................. 67,701 61,090 57,218
Return on assets.............................. (191,755) (110,819) (211,942)
Net amortization and deferral................. 105,055 28,785 131,360
--------- --------- ---------
Net periodic pension expense (income) for the
year......................................... $ 7,683 $ 5,033 $ (3,115)
========= ========= =========
Assumptions:
Discount rate................................ 7.25% 7.75% 7.25%
Salary Progression rate...................... 3.75% 4.75% 4.25%
Long-term rate of return on plan assets...... 9.5% 9.5% 9.5%
1997 and 1996 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 27, 1997 and December 28, 1996,
respectively. However, for the calculation of periodic pension expense for 1997
and 1996 the assumptions in the table above for 1996 and 1995, respectively,
were used. The 1998 calculation of periodic pension expense will be based on
the assumptions in the table above for 1997.
The Company also administers certain defined contribution plans for
eligible union and non-union employees. The cost of these plans for 1997, 1996
and 1995 was $22,445, $21,278 and $24,902, 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 1997, 1996 and 1995 were $83,506,
$88,758 and $90,872, 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
1997, 1996, and 1995, the combined payments for these benefits were $13,304,
$10,634 and $10,025, respectively.
The following table sets forth the postretirement benefit plans combined
status at December 27, 1997 and December 28, 1996:
1997 1996
-------- --------
Accumulated postretirement benefit obligation (APBO)
Retirees.................................................... $105,678 $ 96,262
Fully eligible active participants.......................... 40,542 53,387
Other active participants................................... 84,522 103,523
-------- --------
230,742 253,172
Unrecognized net gain....................................... 75,389 59,762
-------- --------
Accrued postretirement benefit cost......................... $306,131 $312,934
======== ========
The components of net periodic postretirement benefit costs are as follows:
1997 1996 1995
------- ------- -------
Service costs (benefits attributed to employee serv-
ices during the year).............................. $ 9,463 $ 9,557 $ 9,344
Interest cost on accumulated postretirement benefit
obligations........................................ 19,608 18,006 20,662
Net amortization and deferral....................... (2,586) (991) (725)
------- ------- -------
$26,485 $26,572 $29,281
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant assumptions used in calculating the APBO are as follows:
HEALTH CARE TREND RATE
-------------------------
DISCOUNT YEARS TO
RATE INITIAL ULTIMATE ULTIMATE
-------- ------- -------- --------
Year-end 1995................................ 7.25% 10.0% 5.0% 7
Year-end 1996................................ 7.75% 9.3% 5.0% 6
Year-end 1997................................ 7.25% 5.0% 5.0% N/A
The effect of a one percent increase in the medical trend rate is as
follows:
PERIODIC
COST APBO
-----------------
Year-end 1995.................................................. $4,037 $32,209
Year-end 1996.................................................. $4,114 $23,942
Year-end 1997.................................................. $2,734 $20,464
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income," and
No. 131 "Disclosure about Segments of an Enterprise and Related Information".
The Company has not yet determined what effect, if any, these statements will
have.
QUARTERLY DATA (UNAUDITED)
QUARTER
---------------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
1997 (12 WEEKS) (12 WEEKS) (16 WEEKS) (12 WEEKS) (52 WEEKS)
- -------------------------------------------------------------------------------------
Sales................... $6,139,413 $6,231,794 $7,686,639 $6,509,502 $26,567,348
Merchandise costs....... 4,626,389 4,682,365 5,789,948 4,897,679 19,996,381
Extraordinary loss...... (5,210) (3,033) (803) (23,330) (32,376)
Net earnings............ 87,050 105,104 95,727 123,775 411,656
Basic earnings per com-
mon share:
Earnings before ex-
traordinary loss .... .36 .43 .38 .58 1.75
Extraordinary loss.... (.02) (.01) (.09) (.13)
---- ---- ---- ---- ----
Basic net earnings per
common share........... .34 .42 .38 .49 1.62
Diluted earnings per
common share:
Earnings before ex-
traordinary loss .... .35 .41 .37 .56 1.69
Extraordinary loss.... (.02) (.01) (.09) (.12)
---- ---- --- ---- ----
Diluted net earnings per
common share........... .33 .40 .37 .47 1.57
1996
- -------------------------------------------------------------------------------------
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
Basic earnings per com-
mon share:
Earnings before ex-
traordinary loss .... .31 .31 .29 .50 1.41
Extraordinary loss.... (.01) (.01)
---- ---- ---- ---- ----
Basic net earnings per
common share........... .31 .31 .28 .50 1.40
Diluted earnings per
common share:
Earnings before ex-
traordinary loss .... .30 .30 .28 .48 1.36
Extraordinary loss.... (.01)
---- ---- ---- ---- ----
Diluted net earnings per
common share........... .30 .30 .28 .48 1.35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
Common Stock Price Range
1997 1996
----------------- ------------------
QUARTER HIGH LOW HIGH LOW
-----------------------------------------------------
1st............. 28 1/8 22 11/16 19 13/16 16 3/4
2nd............. 29 1/8 23 13/16 22 18 3/4
3rd............. 31 1/16 27 1/8 22 1/2 18 9/16
4th............. 37 5/16 28 1/2 23 3/4 20 3/8
The number of shareowners of record of common stock as of March 9, 1998,
was 46,973.
Under the Company's Credit Agreement dated May 28, 1997, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is set forth in Item
No. 1, Election of Directors, of the definitive proxy statement to be filed by
the Company with the Securities and Exchange Commission and is hereby
incorporated by reference into this Form 10-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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
1997 all filing requirements applicable to its officers, directors and ten
percent beneficial owners were satisfied except that Mr. Ronald R. Rice
inadvertently filed an amended Form 5, reporting a gift of 600 shares by a trust
under which he is a trustee and a beneficiary, 24 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 6, 1998. Except as otherwise
noted below, each person has held office for at least five years and was elected
to that office at the 1997 Organizational Meeting of the Board of Directors held
May 15, 1997. Each officer will hold office at the discretion of the Board for
the ensuing year until removed or replaced.
Recent
Name Age Employment History
- ---- --- ------------------
Warren F. Bryant 52 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 46 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 46 Mr. Heldman was elected Senior Vice President
effective October 5, 1997, Secretary on May 21,
1992, and Vice President and General Counsel
effective June 18, 1989. Prior to his election he
held various positions in the Company's Law
Department. Mr. Heldman joined the Company in
1982.
Michael S. Heschel 56 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.
Lynn Marmer 45 Ms. Marmer was elected Group Vice President
effective January 19, 1998. Prior to her election,
Ms. Marmer was an attorney in the Company's Law
Department. Ms. Marmer joined the Company in 1997.
Before joining the Company she was a partner in
the law firm of Dinsmore & Shohl.
Don W. McGeorge 43 Mr. McGeorge was elected Senior Vice President
effective August 10, 1997. Prior to his election,
Mr. McGeorge was President of the Company's
Columbus Marketing Area effective December 29,
1996; and prior thereto President of the Company's
Michigan Marketing Area effective June 20, 1993.
Before this he served in a number of key
management positions with the Company, including
Vice President of Merchandising of the Company's
Nashville Marketing Area. Mr. McGeorge joined the
Company in 1977.
W. Rodney McMullen 37 Mr. McMullen was elected Senior Vice President
effective October 5, 1997, 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.
Joseph A. Pichler 58 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 62 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.
James R. Thorne 51 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 50 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.
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 27, 1997 and December 28, 1996
Consolidated Statement of Operations and Accumulated Deficit for the years
ended December 27, 1997, December 28, 1996, and December 30, 1995
Consolidated Statement of Cash Flows for the years ended December 27, 1997,
December 28, 1996, and December 30, 1995
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 22, 1997, the Company filed a current report on Form 8-K
disclosing its unaudited earnings for the third quarter 1997
(c) Exhibits
3.1 Amended Articles of Incorporation and Regulations of the Company are
hereby incorporated by reference to Exhibits 4.1 and 4.2 of the
Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552
4.1 Instruments defining the rights of holders of long-term debt of the
Company and its subsidiaries are not filed as Exhibits because the
amount of debt under each instrument is less than 10% of the
consolidated assets of the Company. The Company undertakes to file
these instruments with the Commission upon request
10.1 Material Contracts - Third Amended and Restated Employment Agreement
dated as of July 22, 1993, between the Company and Joseph A. Pichler
is 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 Co. Savings Plan and the
Dillon Companies, Inc. Employee Stock Ownership Plan and Trust for
the Year 1997 will be filed by amendment on or before April 27, 1998
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 23, 1998 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: March 23, 1998 By (*W. Rodney McMullen)
W. Rodney McMullen
Senior Vice President and
Chief Financial Officer
Dated: March 23, 1998 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 23th day of March, 1998.
(*Reuben V. Anderson) Director
Reuben V. Anderson
(*John L. Clendenin) Director
John L. Clendenin
(*David B. Dillon) President, Chief Operating
David B. Dillon Officer, and Director
(*John T. LaMacchia) Director
John T. LaMacchia
(*Edward M. Liddy) Director
Edward M. Liddy
(*Patricia Shontz Longe) Director
Patricia Shontz Longe
(*Clyde R. Moore) Director
Clyde R. Moore
(*T. Ballard Morton, Jr). Director
T. Ballard Morton, Jr.
_______________________ Director
Thomas H. O'Leary
(*John D. Ong) Director
John D. Ong
(Katherine D. Ortega) Director
Katherine D. Ortega
(*Joseph A. Pichler) Chairman of the Board of
Joseph A. Pichler Directors, Chief Executive
Officer, and Director
(*Martha Romayne Seger) Director
Martha Romayne Seger
(*James D. Woods) Director
James D. Woods
*By: (Paul W. Heldman)
Paul W. Heldman
Attorney-in-fact