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 31, 1994
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
111,043,613 shares outstanding on
February 10, 1995
6 3/8% Convertible Junior Subordinated New York Stock Exchange
Notes due 1999, face $1000
200,000 notes outstanding
9% Senior Subordinated Notes New York Stock Exchange
due 1999, face $1000
125,000 notes outstanding
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
---------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10K or any amendment to this Form 10K [ ].
The aggregate market value of the Common Stock of The Kroger Co.
held by nonafflilates as of February 10, 1995: $2,841,589,473
Documents Incorporated by Reference:
Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act on or before May 1, 1995, 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 1994. The retail food business in which the
Company is engaged is highly competitive. The Company had
approximately 200,000 full and part-time employees on December 31,
1994. At December 31, 1994, the Company operated 1,301
supermarkets in 24 states.
At December 31, 1994, the Company had 789 Company owned and
directly operated convenience stores in 15 states. Additionally
the Company had 143 franchised convenience stores in five 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 31, 1994, the Company operated 1,301 supermarkets,
the locations of most of which are leased. Of this number, 1,061
supermarkets were operated under the Kroger name principally in the
Midwest, South, Southeast, and Southwest in 16 states (the "Kroger
Supermarkets"). Dillon Companies, Inc. ("Dillon"), a wholly-owned
subsidiary of the Company, operated 240 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 various
names including "Dillon Food Stores," "King Soopers," "Fry's Food
Stores," "Gerbes Supermarkets," "City Market," and "Sav-Mor."
Foodland Distributors is a joint wholesaling venture formed in 1984
by the Company and SUPERVALU Inc. which sells a full line of
grocery and general merchandise products and support services to
independent and chain store retailers, including Kroger, in
Michigan.
The Kroger and Dillon Supermarkets sell national and regional brand
food and grocery products as well as private label products. Over
one-half of these private label items are manufactured by the
Company. The remainder are manufactured by outside vendors to
Kroger specifications. The Dillon Supermarkets also offer private
label items supplied by Topco Associates (a private label buying
group) and private label merchandise supplied by local cooperatives
and wholesalers.
The Company's primary focus is on the combination food and drug
store format, which offers a pharmacy plus a variety of service-
oriented specialty departments in addition to the more traditional
presentation of supermarkets. Combining a food store with a
pharmacy, a typical combination store offers more than 40,000
individual items in a modern format. Specialty departments
including floral, service meat, seafood, pharmacy, expanded health
and beauty care, video rental, book stores, cosmetics, photo
finishing, deli, bakery, cheese, and seasonal nonfood general
merchandise, provide shoppers with a convenient one-stop shopping
opportunity.
The Company's combination stores range from 40,000 to 80,328 square
feet in size with an average size of 51,185 square feet. At
December 31, 1994, combination stores accounted for 58% of the
store base, 71% of supermarket square footage, and 72% 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 and limited
specialty departments, and fewer square feet, continue to be an
important component of the Company's store mix. At December 31,
1994, superstores represented 35% of the store base but only 26% of
the square footage and 25% of the food store sales. Superstores
average 30,921 square feet in size.
Conventional stores are the oldest store format and offer few, if
any, specialty departments. Conventional stores are substantially
smaller in total square footage, averaging 17,211 square feet, and
contributed 3% of total supermarket sales in 1994.
CONVENIENCE STORES
At December 31, 1994, the Company's Dillon convenience store group
operated, directly or through franchise agreements, 932 convenience
stores in 16 states as follows:
No. Stores
Chain Company Owned Franchise Sq. Feet States of Operation
---------- ------------ -------- ------- -------------------
Kwik Shop 174 12 495,000 Iowa, Kansas,
Nebraska,Oklahoma,
Illinois
Quik Stop 117 262,000 California
Time Savers 102 14 297,000 Louisiana
Turkey Hill 220 525,000 Pennsylvania
Loaf 'N Jug 79 224,000 Colorado, New
Mexico, Oklahoma
Mini Mart 109 267,000 Colorado, Montana,
Nebraska, North
Dakota, South
Dakota,Wyoming
Tom Thumb 105 271,000 Alabama, Florida
--- ---------
789 143 2,341,000
Dillon convenience stores averaged 2,560 square feet at December
31, 1994. The average store employs six to seven employees, with
one or two employees on duty at any given time.
Each week, an average of 1,446 customers visit a typical Dillon
convenience store to purchase gasoline and 5,252 customers visit to
purchase groceries. Each gasoline customer spends an average of
$9.06 per visit and each inside store customer spends an average of
$2.07 per visit. The average convenience store carries 3,000
items. About 62% of a convenience store's non-gasoline sales are
generated by five product categories: soft drinks, beer, snacks,
candy, and tobacco products.
Each convenience store division is independently run and requires
little general or administrative corporate support. The
convenience store group has grown primarily by acquisition.
MANUFACTURING OPERATIONS
The Company's 37 food processing facilities supply private label
products to the Company's supermarkets. The Company's dairy
division provides 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 division produces deli items, spices, salad
dressings, jellies, peanut butter, and a host of other grocery
items.
OTHER
The Company plans to incur approximately $50 million in capital
expenditures during the period 1995-1998 to convert
cloroflorocarbon systems and to replace underground storage tanks
at certain locations in order to comply with scheduled changes in
Environmental Protection Agency standards. The expenditures are
capital in nature and are not the result of environmental
uncertainties or cleanup activities.
ITEM 2. PROPERTIES
As of December 31, 1994, the Company operated more than 2,200 owned
or leased supermarkets, convenience stores, distribution
warehouses, and food processing facilities, through store marketing
areas, subsidiaries or affiliates. These facilities are located
principally in the Midwest, South, 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 31, 1994, was $4.599 billion while
the accumulated depreciation was $2.346 billion.
Leased premises generally have base terms ranging from 10 to 25
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.
Fry's Food Stores of Arizona, Inc. ("Fry's"), a subsidiary of the
Company, is currently a defendant and cross-defendant in actions
pending in the U.S. District Court for the Southern District of
Florida entitled Harley S. Tropin v. Kenneth Thenen, et. al., No.
93-2502-CIV-MORENO and Walco Investments, Inc., et. al. v. Kenneth
Thenen, et. al., No. 93-2534-CIV-MORENO. The plaintiff and cross-
claimants in these actions seek unspecified damages against
numerous defendants and cross-defendants, including Fry's.
Plaintiffs and cross-claimants allege that a former employee of
Fry's supplied false information to third parties in connection
with purported sales transactions between Fry's and affiliates of
Premium Sales Corporation or certain limited partnerships. Claims
have been alleged against Fry's for breach of implied contract,
aiding and abetting and conspiracy, conversion and civil theft,
negligent supervision, fraud, and violations of 18 U.S.C. Sections
1961 and 1962 (d) and Chapter 895, Florida Statutes. Fry's
believes that it has substantial meritorious defenses to the claims
alleged against it, and Fry's intends to defend the litigation
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Price Range
--------------------------------------------------------------------------
1994 1993
------------------ --------------------
Quarter High Low High Low
------- ------ ------- --------- ---------
1st 25-7/8 19-3/8 19-1/2 13-3/4
2nd 25-3/8 21-1/8 19-5/8 16-5/8
3rd 26-7/8 23 21-3/4 16-1/4
4th 26-7/8 21-3/4 20-7/8 17-1/2
Main trading market - New York Stock Exchange (Symbol KR)
Number of shareowners at year-end 1994: 67,616
Number of shareowners at February 10, 1995 59,361
Determined by number of shareholders of record
The Company has not paid dividends on its Common Stock for the past
two fiscal years. See Quarterly Data Note to Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
---------------------------------------------------------------------------
December 31, January 1, January 2, December 28, December 29,
----------- ---------- ---------- ------------ -----------
1994 1994 1993 1991 1990
---- ---- ---- ---- ----
52 Weeks 52 Weeks 53 Weeks 52 Weeks 52 Weeks
-------- -------- -------- -------- --------
(In thousands of dollars, except per share amounts)
Sales from continuing operations $22,959,122 $22,384,301 $22,144,588 $21,350,530 $20,260,974
Earnings from continuing opera-
tions before extraordinary loss
and cumulative effect of change
in accounting<F1>............... 268,903 170,805 101,160 100,694 83,290
Extraordinary loss (net of income
tax credit)<F2>. .............. (26,707) (23,832) (107,103) (20,839) (910)
Cumulative effect of change in ac-
counting (net of income tax
credit)<F3> ................ (159,193)
Net earnings (loss)<F1>........... 242,196 (12,220) (5,943) 79,855 82,380
Earnings (loss) per share
Earnings from continuing opera-
tions before extraordinary
loss<F1>.................... 2.19 1.50 1.11 1.12 0.96
Extraordinary loss<F2>......... (.21) (.19) (1.17) (.23) (.01)
Cumulative effect of change in
accounting<F3>.............. (1.28)
Net earnings (loss)<F1> ...... 1.98 0.03 (.06) 0.89 0.95
Total assets..................... 4,707,674 4,480,464 4,303,084 4,114,351 4,118,542
Long-term obligations, including
obligations under capital
leases................... 3,889,194 4,135,013 4,472,978 4,407,764 4,557,838
Shareowners' deficit........... (2,153,684) (2,459,642) (2,700,044) (2,749,183) (2,860,461)
Cash dividends per common share <F4> <F4> <F4> <F4> <F4>
<FN>
<F1> See Other Charges and Credits in the Notes to Consolidated
Financial Statements for information pertaining to 1994 and
1993. During the year ended December 29, 1990 the Company
recorded a pre-tax gain of $26,754 related to the
disposition of an equity investment in an unaffiliated
company.
<F2> See Extraordinary Loss in the Notes to Consolidated
Financial Statements.
<F3> See Postretirement Health Care and Life Insurance Benefits
in the Notes to Consolidated Financial Statements.
<F4> 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 1994 were $5.6 billion
compared to $5.4 billion in the fourth quarter of 1993, a 3.4%
increase. Sales for the full year increased 2.6%. A review of
sales by lines of business for the three years ended December 31,
1994, is as follows
% of 1994
Sales 1994 1993 1992
--------- -------------- -------------- -------------
Amount Change Amount Change Amount Change
----------------------------------------------------------------
(millions of dollars)
Food Stores 93.4% $21,442 +4.9% $20,443 +1.1% $20,199 +3.4%
Convenience Stores 3.9% 898 -5.6% 951 +3.9% 916 +6.0%
Other sales 2.7% 619 -37.5% 990 -3.9% 1,030 +8.0%
------ ------- ------- -------
Total sales 100.0% $22,959 +2.6% $22,384 +1.1% $22,145 +3.7%
Food stores sales for the fourth quarter 1994 were 5.9% ahead of
the fourth quarter 1993. Food stores sales for the full year were
5.4% ahead of 1993 after adjusting for the San Antonio stores sold
during the third quarter of 1993. Sales in identical food stores,
stores that have been in operation and have not been expanded or
relocated for one full year, increased 2.5% in the fourth quarter
and 2.2% for the full year. Management estimates that inflation
accounted for approximately 1% of the 1994 identical store sales
increase. The increase in food stores sales can be attributed
primarily to a 4.7% increase in square footage, price inflation in
pharmaceuticals and certain commodities such as coffee, and the
continuing maturation of the Company's ''combination'' format
stores. The Company's storing program is focused on the combination
food and drug store. These stores combine a food store with a
pharmacy and numerous specialty departments such as floral, video
rental, book stores, etc. The emphasis and on-going development of
this store format have become the primary vehicle by which the
Company expects to increase sales.
Convenience stores sales decreased 5.6% for the year and 4.0%
during the fourth quarter as a result of excluding certain
franchised store sales that were included in reported sales in
prior years. Adjusting 1993 sales to exclude franchise sales from
convenience stores sales would result in an 8.4% increase for the
quarter and a 6.0% increase year-to-date. The fourth quarter and
full year 1994 sales for the seven-company convenience store group
were strengthened by strong identical in-store sales and an
increase in gasoline retail prices. In-store sales in identical
convenience stores increased 5.3% in the fourth quarter 1994 and
4.0% for the full year. Gasoline sales at identical convenience
stores increased 3.9% in the fourth quarter 1994 on a .5% decrease
in gallons sold and increased 2.9% for the year on a 1.6% increase
in gallons sold.
Other sales include outside sales by the Company's manufacturing
divisions and sales of general merchandise to Hook-SupeRx, Inc.
(''HSI'') (See Other Charges and Credits in the Notes to Financial
Statements). HSI completed an expansion of its warehouse in early
1994 and discontinued its purchases from the Company. In 1993,
annual sales to HSI were $472 million. Adjusting other sales to
eliminate sales to HSI would produce increases of 7.4% for the
fourth quarter and 10.2% for the full year.
Total sales for the fourth quarter and year-to-date increased 6.0%
and 5.6%, respectively, after adjusting for the other sales to HSI,
the change in franchise sales accounting, and the exclusion of
sales from the Company's San Antonio stores which were sold in
August 1993.
Total food store square footage increased 4.7%, 3.2% and 2.5% in
1994, 1993, and 1992, respectively. The Company expects to increase
retail food store square footage by approximately 5.5% during 1995
and 1996. Convenience store square footage increased .4% in 1994,
declined .7% in 1993, and increased .2% in 1992. In early 1995, the
Company sold its Time Savers convenience store operations which
will result in a convenience store square footage decline of 12%.
Sales per average square foot for the last three years were:
Total Sales Per
Average Square Foot
-------------------
1994 1993 1992
-------------------
Food Stores $402 $398 $402
Convenience Stores $412 $405 $389
1992's food stores sales per average square foot includes an extra
week which occurs due to the Company's 52/53 week fiscal year.
Without the extra week the amount would have been $394.
The Company continued to build its sales volume in 1994 during a
period of new and formidable competition. The Company achieved this
through new square footage and through the increased productivity
of existing stores. Markets that were especially competitive in the
recent past, such as Toledo and Dayton, Ohio and Michigan have
begun to produce favorable comparable results. The Atlanta, Georgia
market experienced an influx of major new competition during 1994
yet the operating division was still able to produce improved
results. All of these markets helped to offset the challenge that
the Company faced in Indiana with the opening of supercenters in
the marketplace. The Company has been able to offset the effect of
highly competitive areas such as Indiana in 1994, because of its
multi-regional operations. The Company reduced the cost of products
during 1994 through its investment in technology aimed toward
improved store operation, procurement and distribution practices.
This has allowed the Company to pass on some of these lower costs
to the consumer and made the Company more price competitive and
attractive to customers.
It is anticipated that 1995 will be another year of improved
performance from the Company's existing store base as well as
realized contributions from the capital spending program which will
substantially increase the Company's food store square footage
during 1995. Additional investments in technology should continue
to increase operating efficiencies, which can be reinvested into
sales growth through improved service to the customer and more
competitive pricing.
Factors that affected 1994 sales had already begun to impact sales
in 1993. 1993's sales showed an improvement over 1992 from the
rebounding of the Michigan market that sustained a prolonged labor
strike in 1992, increased price competitiveness of the Company, and
private label popularity. Sales in 1992 were improved from 1991
primarily due to the extra week in the fiscal year.
EBITD
-----
The Company's Senior Competitive Advance and Revolving Credit
Facility Agreement (the ''Credit Agreement''), dated as of July 19,
1994, and the indentures underlying approximately $1.5 billion of
publicly issued debt contain various restrictive covenants, many of
which are based on earnings before interest, taxes, depreciation,
LIFO charge, unusual and extraordinary items (''EBITD''). These
covenants are based, among other things, upon generally accepted
accounting principles (''GAAP'') as applied on a date prior to
January 3, 1993. The ability to generate EBITD at levels sufficient
to satisfy the requirements of these agreements is a key measure of
the Company's financial strength. The presentation of EBITD is not
intended to be an alternative to any GAAP measure of performance
but rather to facilitate an understanding of the Company's
performance compared to its debt covenants. At December 31, 1994
the Company was in compliance with all covenants of its Credit
Agreement and publicly issued debt. The Company believes it has
adequate coverage of its debt covenants to continue to respond
effectively to competitive conditions.
During 1994, EBITD, which does not include the effect of Statement
of Financial Accounting Standards (''SFAS'') No. 106, ''Employer's
Accounting for Postretirement Benefits Other Than Pensions'', the
Company's special contribution to The Kroger Co. Foundation, or the
1993 charge related to the disposition of the San Antonio stores,
increased 9.0% to $1.065 billion compared to $977 million in 1993
and $908 million in 1992. 1994's EBITD increase was primarily the
result of increased sales, positive effects from the Company's
accelerated store construction, cost reductions in procurement and
distribution which improved gross margins, and the return on
investments in new technology. 1993's EBITD increase was due in
large part to increased sales combined with an improved gross
profit rate. 1992's EBITD was negatively affected by a Michigan
strike which reduced EBITD by approximately $69 million and was
increased by the extra week in the fiscal year.
Merchandise Costs
-----------------
Merchandise costs include warehousing and transportation expenses
and LIFO charges or credits. The following table shows the relative
effect that LIFO charges have had on merchandising costs as a
percent of sales:
1994 1993 1992
--------------------
Merchandise costs as reported 75.81% 76.43% 77.12%
LIFO charge (credit) .07% (.02%) .03%
------ ------ ------
Merchandise costs as adjusted 75.74% 76.45% 77.09%
The Company's FIFO merchandise costs decreased for the second
consecutive year. 1992's rate was up from 1991 due to a costly
labor strike in Michigan. 1994's gross profit rate was favorably
influenced by the Company's advances in consolidated distribution
and coordinated purchasing, reduced transportation costs as a
percent of sales, and strong private label sales. Merchandise costs
were unfavorably affected by the increase in the LIFO reserve
charge. Merchandise costs also were favorably affected by the
discontinuance of low-margin sales to HSI. Merchandise costs as a
percent of sales adjusted for these sales declined to 75.76% in
1994 from 75.97% in 1993.
The Company expects gross profit rates to improve in the future as
cost savings continue to be realized from increased efficiencies in
logistics, procurement and technology.
Operating, General and Administrative Expenses
----------------------------------------------
Operating, general and administrative expenses as a percent of
sales in 1994, 1993 and 1992 were 18.42%, 17.98% and 17.51%,
respectively. Excluding the effect of SFAS No. 106 and sales to HSI
from 1994, operating, general and administrative expenses were
18.37%. Excluding the effect of SFAS No. 106, sales to HSI, and the
convenience store franchise sales from 1993, operating, general and
administrative expenses as a percent of sales were 18.27%.
Operating, general and administrative expenses were adversely
affected by higher incentive bonuses for both management and store
employees based on improved results as compared to 1993.
Additionally, the up-front costs associated with the opening of new
stores increased operating, general and administrative expenses.
The Company opened, acquired, or expanded 82 food stores in 1994 as
compared to a total of 46 in 1993.
The Company continues to invest in new technologies to improve
efficiencies, lower costs, and increase customer service. Automated
labor scheduling and faster front-end point of sale systems
including coupon validation technology and front-end scaling are
examples of new systems being implemented. Labor negotiations
during 1994 produced peaceful and generally favorable settlements
that will help to improve operating flexibility and contain costs
in the future.
Income Taxes
------------
The effective income tax rates were 36.2%, 39.8% and 41.7% for
1994, 1993 and 1992, respectively. 1994's income tax expense
includes a $5.9 million benefit from the donation to The Kroger Co.
Foundation of an asset that had a market value above the book
value. 1993's income tax expense includes a $4.2 million charge to
increase deferred taxes for the change in the federal income tax
rate.
Net Earnings (Loss)
-------------------
Net earnings (loss) totaled $242.2 million in 1994 compared to
$(12.2) million in 1993 and $(5.9) million in 1992. Earnings in
1994 compared to 1993 and 1992 was affected by: (i) a 1994 pre-tax
charge of $4.4 million offset by a $5.9 million tax credit in
connection with the Company's contribution to The Kroger Co.
Foundation, (ii) a $25.1 million pre-tax charge in 1994 to
recognize future lease commitments and losses on equipment related
to certain San Antonio stores sold to Megafoods, Inc. which
declared bankruptcy during 1994, (iii) a $25.1 million 1994 pre-tax
gain on the disposition of the Company's investment in HSI after
providing for certain tax indemnities related to HSI, (iv) a 1993
charge against earnings of $248.7 million before taxes, $159.2
million after tax, for the cumulative effect, along with an
additional $17.7 million and $19.5 million in 1994 and 1993,
respectively, for the current year's effect of a change in
accounting for retiree health benefits, (v) an after tax
extraordinary loss from the early retirement of debt in 1994 of
$26.7 million compared to $23.8 million in 1993 and $107.1 million
in 1992, (vi) a sixty-seven day strike in Michigan which reduced
pre-tax income by approximately $69 million in 1992, (vii) a pre-
tax LIFO charge in 1994 of $16.1 million versus a credit of $3.2
million in 1993 and a charge of $8.1 million in 1992, (viii) a $4.4
million pre-tax ($2.7 million after tax) one-time charge in 1993
related to a change in the estimated useful life of certain
computer equipment, (ix) a $22.7 million charge ($15 million after
tax) during 1993 in connection with the disposition of the San
Antonio stores, and (x) net interest expense in 1994 of $327.6
million versus $390.0 million in 1993 and $474.8 million in 1992.
Liquidity and Capital Resources
Debt Management and Interest Expense
------------------------------------
Net interest expense declined to $327.6 million in 1994 as compared
to $390.0 million in 1993 and $474.8 million in 1992. The reduction
in interest expense is primarily due to the Company's progress in
refinancing its high-cost, long-term debt and debt reduction. The
Company was successful in placing $1.7 billion of senior
subordinated or senior secured debt during 1992, 1993, and 1994
with an average rate of 9.23% and $200 million of convertible
junior subordinated notes with a rate of 6.375%.
The proceeds from these offerings, and from the issuance of
13,275,000 shares of common stock which netted $203.5 million in
1993, were used to redeem or repurchase, on the open market, $3.3
billion of high yield subordinated debt with an average rate of
13.3% (See ''Repurchase and Redemption of Subordinated Debt'').
The Company entered into a new Credit Agreement on July 19, 1994
which reduced the Company's interest rate spread over LIBOR on its
bank borrowings. The Company's Credit Agreement is a seven year,
$1.75 billion revolving loan which increases the amount the Company
is permitted to expend on capital expenditures compared to the
prior agreement. The Company's initial borrowing under the new
agreement, totaling $745 million, was used to pay the remaining
balance on the old agreement. The average interest rate on the
Company's bank debt, which totaled $979.3 million at year-end 1994
versus $847.0 million at year-end 1993, was 5.57% compared to 4.57%
at the end of 1993 and 5.42% at the end of 1992. The increase is
due to higher market interest rates that were not entirely offset
by the lower interest rate spreads on the Company's new Credit
Agreement. The Company's rate on the bank debt is variable.
The Company currently expects 1995 net interest expense, based on
year-end 1994 rates, to total approximately $330 million. A 1%
change upward in market rates would increase this estimated expense
by approximately $4.8 million. A 1% decrease in market rates would
reduce the estimated expense by approximately $5.9 million.
As a result of these public and bank debt transactions as well as
the 1993 stock issuance, the Company has reduced the weighted
average cost of its long-term debt, including capital leases, to
8.5% versus 11.6% at the beginning of 1990. Long-term debt,
including capital leases and current portion thereof, decreased
$300 million to $3.906 billion at year-end 1994 from $4.206 billion
at year-end 1993. The Company has purchased a portion of the debt
issued by the lenders of certain of its structured financings,
which cannot be retired early, in an effort to effectively further
reduce the Company's interest expense. Excluding the debt incurred
to make these purchases, which are classified as investments, the
Company's long-term debt would be $68.8 million less or $3.837
billion.
Required principal repayments over the next five years decreased to
$670.7 million at year-end 1994 versus $1.048 billion and $534.5
million at year-end 1993 and 1992, respectively. Scheduled debt
maturities for the five years subsequent to 1994, 1993 and 1992
were:
1994 1993 1992
---- ---- ----
(in thousands)
Year 1 $ 7,926 $ 63,053 $ 73,248
Year 2 14,341 111,010 115,017
Year 3 12,875 117,434 111,549
Year 4 15,507 146,784 118,032
Year 5 620,012 609,769 116,669
1994's Year 5 maturities include $125 million of 9% Senior
Subordinated Notes, $200 million of 6 3/8% Convertible Junior
Subordinated Notes, and the remaining $222.6 million of 10% Senior
Subordinated Notes. The Company currently expects to issue a
redemption notice on the 6 3/8% Convertible Junior Subordinated
Notes by December 1995, which, based solely on the current market
price of the Company's common stock, should result in conversion by
virtually all of the holders.
1993's Year 5 maturities include the entire $362.0 million
outstanding under the Company's Working Capital Facility under the
predecessor to the Company's current Credit Agreement, $68.0
million of Facility D under its predecessor Credit Agreement, and
the remaining 11 1/8% Senior Notes outstanding at January 1, 1994
of $138.4 million which were redeemed on March 15, 1994. Maturities
shown for 1992 reflect the restated Credit Agreement dated as of
January 21, 1992.
The Company currently has in place various interest rate hedging
agreements aggregating $2.3 billion. The Company enters into
interest rate hedging agreements to lower funding cost, to
diversify sources of funding and to alter interest rate exposures
arising from mismatches between assets and liabilities. The effect
of these agreements is to: (i) fix the rate on $550 million
floating rate debt, with $200 million of swaps expiring in May
1996, and the remaining $350 million of swaps expiring in July
2001, (ii) swap the contractual interest rate on $350 million of
seven and ten year debt instruments to the rates available on three
to five year fixed rate instruments (upon expiration of the three
to five year swap agreements the fixed contractual rate will become
floating for the remainder of the seven and ten year term of debt),
(iii) swap the contractual interest rate on $825 million of four,
seven and ten year fixed-rate instruments into floating-rate
instruments, and (iv) cap six month LIBOR on $575 million for one
to five years at rates of 4.20% to 6.00%, with $50 million of the
caps expiring in each of July 1995, July 1997 and July 1998, $150
million of the caps expiring in November 1995, and the remaining
$275 million expiring in the first quarter of 1996.
To meet any short-term liquidity needs, the Company's Credit
Agreement provides for borrowings of up to $1.75 billion. The
Company's borrowings under the Credit Agreement are permitted to be
in the form of commercial paper. At December 31, 1994, the Company
had $227.9 million of commercial paper outstanding of the $979.3
million in total bank borrowings. At year-end 1994, after deducting
amounts set aside as backup for the Company's unrated commercial
paper program, $585.0 million was available under the Company's
Credit Agreement to meet short-term liquidity needs. There are no
principal payments required under the Credit Agreement until its
expiration on July 19, 2001.
Common Stock
------------
On March 4, 1993 the Company issued 12,500,000 shares of its common
stock through a public offering. On April 1, 1993, the Company
issued an additional 775,000 shares of its common stock pursuant to
an over-allotment option granted to the underwriters in connection
with the offering. The Company realized $203.5 million on these
issues which was used to repay, purchase, or redeem outstanding
indebtedness of the Company.
Repurchase and Redemption of Subordinated Debt
----------------------------------------------
During 1994 the Company redeemed the remaining outstanding amounts
of its 11 1/8% Senior Notes, its 8 3/4% Senior Subordinated Reset
Notes and its 8 1/4% Convertible Junior Subordinated Debentures.
The Company also repurchased $144.8 million of its various senior
subordinated debt issues and $39.9 million of its 9 1/4% Senior
Secured Debentures. The redemptions and repurchases were effected
using funds from asset sales, the sale of treasury stock to
employee benefit plans, proceeds from new financings, and excess
cash from operations. The outstanding balances of these debt issues
at December 31, 1994 were $1.105 billion for the Senior
Subordinated Debt issues, and $160.2 million for the 9 1/4% Senior
Secured Debentures.
During 1993 the Company repurchased $300.6 million face amount of
Junior Subordinated Discount Debentures with an accreted value of
$285.1 million, $71.2 million Senior Subordinated Debentures,
$111.6 million Senior Notes, and $33.5 million Senior Subordinated
Reset Notes. Additionally, the Company redeemed the remaining
$498.2 million Junior Subordinated Discount Debentures.
During 1992 the Company repurchased $269.9 million face amount of
Junior Subordinated Discount Debentures with an accreted value of
$231.1 million, $343.9 million Senior Subordinated Debentures and
$256.2 million Subordinated Debentures. Additionally, the Company
redeemed $120.5 million Senior Subordinated Debentures and $304.6
million Subordinated Debentures.
Capital Expenditures
--------------------
Capital expenditures totaled $534.0 million for 1994, a 42%
increase over 1993's total of $376.1 million. 1992's capital
outlays were $241.2 million. During 1994 the Company opened,
acquired or expanded 82 food stores and 17 convenience stores
compared to 46 food stores and 10 convenience stores in 1993 and 42
food stores and 19 convenience stores in 1992. The Company also
completed 66 food store and 21 convenience store remodels during
1994. During 1994, 41 food stores were closed or sold including the
sale of seven stores in Alabama and Mississippi to Delchamps. The
Company closed 16 convenience stores during 1994 and, in early
1995, completed the sale of its 116 store Time Savers convenience
store division. The Company expects capital expenditures to
approximate $600 million in 1995 which will allow for food store
square footage growth of approximately 5.5% by opening, expanding
or acquiring approximately 90 food stores. The Company also expects
to complete within-the-wall remodels of 60-70 food stores. The
increased square footage is planned for existing Company markets
where the Company has an established market position and an
existing administrative and logistical network. The Company's
ability to realize its capital expenditures plan will depend, in
part, on its ability to generate continued EBITD growth.
Consolidated Statement of Cash Flows
------------------------------------
During 1994 the Company generated $750.3 million in cash from
operating activities compared to $617.3 million in 1993 and $532.8
million in 1992. The increase from 1993 is primarily due to an
increase in operating net income of $98.1 million. Additionally,
the Company experienced an increase in cash from changes in
operating working capital of $195.9 million as compared to $105.5
million in 1993. This reduction in working capital was due in large
part to increases in accrued expenses and other liabilities. The
increase in 1993 from 1992 is due to an increase in operating net
income of $69.6 million and an increase in cash from changes in
operating assets and liabilities of $105.5 million as compared to
$45.1 million in 1992.
Investing activities used $546.5 million compared to $368.3 million
of cash used in 1993 and $264.3 million of cash used in 1992. The
increase in the use of cash in 1994 is due to an increase in the
level of capital expenditures over 1993 of $157.8 million, and an
increase in the use of cash of $43.5 million for investments and
$8.8 million for 1994 additions to property held for sale, combined
with a decline of $18.5 million in the source of cash from sales of
property, plant and equipment. The increase in investments was
primarily due to the purchase of debt issued by a lender of certain
of the Company's structured financings. (See Liquidity and Capital
Resources) This increase in the use of cash was offset by an
increase in cash proceeds from the sale of investments of $50.5
million over 1993. The increase in 1993 from 1992 is due to an
increase in cash used for capital expenditures and the purchase of
investments offset by reduced expenditures for additions to
property held for sale and increased proceeds from the sale of
property, plant and equipment.
Cash used by financing activities totaled $297.8 million compared
to $231.7 million and $168.4 million in 1993 and 1992,
respectively. The increase in the use of cash during 1994 is due to
a net reduction in proceeds from the sale of common stock and
treasury stock of $192.9 million offset by a 1994 debt reduction of
$304.1 million versus 1993's debt reduction of $423.0 million. The
increase in 1993 from 1992 is due to a larger level of debt
reduction offset by proceeds from the sale of stock and lower debt
prepayment and financing costs incurred.
Other Issues
------------
The Company is party to more than 200 collective bargaining
agreements with local unions representing approximately 150,000 of
the Company's employees. During 1994 the Company negotiated a total
of 63 labor contracts, all of which were settled with no work
stoppages. Typical agreements are 3 to 5 years in duration, and as
such agreements expire, the Company expects to negotiate with the
unions and to enter into new collective bargaining agreements.
There can be no assurance, however, that such agreements will be
reached without work stoppage. A prolonged work stoppage affecting
a substantial number of stores could have a material adverse effect
on the results of the Company's operations. Major union contracts
that will be negotiated in 1995 include the Memphis, Houston,
Indianapolis, and Columbus, Ohio food clerks.
Subsequent Events
-----------------
On January 17, 1995 the Company sold its Time Saver Stores, Inc.
subsidiary to E-Z Serve Convenience Stores, Inc. Time Saver Stores,
Inc. had 1994 sales of $116.7 million and operated 116 convenience
stores, either directly or through franchise agreements, in the
state of Louisiana.
Subsequent to December 31, 1994 and through March 2, 1995 the
Company purchased an additional $95.6 million of its various senior
subordinated debt issues. As adjusted for these open market
purchases, the carrying amount of the Company's senior subordinated
debt was $1.0 billion at March 2, 1995. The Company expects to
incur an after-tax extraordinary loss of approximately $3.2 million
related to these purchases.
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 consolidated financial statements of The Kroger
Co. listed in Item 14(a) of this Form 10-K. 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 31, 1994 and January 1,
1994, and the consolidated results of its operations and its cash
flows for the years ended December 31, 1994, January 1, 1994 and
January 2, 1993, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements,
the Company changed its method of accounting for postretirement
benefit costs other than pensions, as of January 3, 1993.
(Coopers & Lybrand L.L.P.)
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 31, 1995
CONSOLIDATED BALANCE SHEET
(In thousands of dollars) December 31, January 1,
1994 1994
ASSETS
Current assets
Cash and temporary cash investments............... $ 27,223 $ 121,253
Receivables....................................... 270,811 287,925
Inventories:
FIFO cost....................................... 2,053,207 2,001,376
Less LIFO reserve............................... (438,184) (422,097)
---------- ---------
1,615,023 1,579,279
Property held for sale............................ 39,631 37,721
Prepaid and other current assets.................. 199,437 199,652
---------- ---------
Total current assets 2,152,125 2,225,830
Property, plant and equipment, net................... 2,252,663 1,981,308
Investments and other assets......................... 302,886 273,326
--------- ---------
Total Assets $ 4,707,674 $ 4,480,464
========= =========
LIABILITIES
Current liabilities
Current portion of long-term debt................ $ 7,926 $ 63,053
Current portion of obligations under capital leases 8,467 7,962
Accounts payable................................. 1,425,612 1,357,532
Other current liabilities........................ 952,963 822,284
--------- ---------
Total current liabilities...................... 2,394,968 2,250,831
Long-term debt...................................... 3,726,343 3,975,362
Obligations under capital leases.................... 162,851 159,651
Deferred income taxes............................... 172,690 182,891
Other long-term liabilities......................... 404,506 371,371
--------- ---------
Total Liabilities.............................. 6,861,358 6,940,106
--------- ---------
SHAREOWNERS' DEFICIT
Common capital stock, par $1
Authorized: 350,000,000 shares
Issued: 1994 120,573,148 shares
1993 118,549,173 shares.......................... 338,568 308,534
Accumulated deficit................................. (2,248,736) (2,490,932)
Common stock in treasury, at cost
1994 9,576,231 shares
1993 10,901,846 shares........................... (243,516) (277,244)
---------- ---------
Total Shareowners' Deficit.......................... (2,153,684) (2,459,642)
---------- ---------
Total Liabilities and Shareowners' Deficit.......... $4,707,674 $4,480,464
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS AND
ACCUMULATED DEFICIT
Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
1994 1993 1992
(In thousands, except per share amounts) (52 weeks) (52 weeks) (52 weeks)
---------------------------------------------------------------------------------------------------
Sales...................................................... $22,959,122 $22,384,301 $22,144,588
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing and transporta-
tion.................................................... 17,404,940 17,109,060 17,078,839
Operating, general and administrative... 4,228,046 4,024,468 3,877,550
Rent.................................................... 299,473 290,309 288,113
Depreciation and amortization........................... 277,750 263,810 251,822
Net interest expense.................................... 327,550 389,991 474,849
Other charges........................................... 22,725
---------- ----------- ----------
Total $22,537,759 $22,100,363 $21,971,173
----------- ----------- -----------
Earnings before tax expense, extraordinary loss and cumula-
tive effect of change in accounting..................... 421,363 283,938 173,415
Tax expense................................................ 152,460 113,133 72,255
------------ ------------ -----------
Earnings before extraordinary loss and cumulative effect of
change in accounting..................................... 268,903 170,805 101,160
Extraordinary loss, net of income tax credit............... (26,707) (23,832) (107,103)
Cumulative effect of change in accounting, net of income tax
credit................................................... (159,193)
------------ ------------ -----------
Net earnings (loss)................................. $ 242,196 $ (12,220)$ (5,943)
============ ============ ===========
Accumulated Deficit
Beginning of year........................................$ (2,490,932) $ (2,475,561)$(2,460,725)
Net earnings (loss)..................................... 242,196 (12,220) (5,943)
Sales of treasury stock below average cost.............. (3,151) (8,893)
------------- ------------ -----------
End of year.............................................$ (2,248,736) $ (2,490,932)$(2,475,561)
============= ============ ===========
Primary earnings (loss) per Common Share
Earnings before extraordinary loss and cumulative effect
of change in accounting............................. $ 2.37 $ 1.60 $ 1.11
Extraordinary loss..................................... (.24) (.22) (1.17)
Cumulative effect of change in accounting.............. (1.49)
------------ ----------- -----------
Net earnings (loss).................................... $ 2.13 $ (.11) $ (.06)
============ ============ ===========
Average number of common shares used in primary
calculation........................................... 113,537 106,711 91,364
Fully-diluted earnings (loss) per Common Share
Earnings before extraordinary loss and cumulative effect
of change in accounting.............................$ 2.19 $ 1.50 $ 1.11
Extraordinary loss..................................... (.21) (.19) (1.17)
Cumulative effect of change in accounting.............. (1.28)
------------- ------------- -----------
Net earnings (loss)....................................$ 1.98 $ .03 $ (.06)
============= ============= ===========
Average number of common shares used in fully-diluted
calculation........................................... 129,714 124,293 91,452
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
1994 1993 1992
(In thousands of dollars) (52 Weeks) (52 Weeks) (53 Weeks)
------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings (loss).................................... $ 242,196 $ (12,220) $ (5,943)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Extraordinary loss.................................. 26,707 23,832 107,103
Cumulative effect of change in accounting........... 159,193
Depreciation and amortization....................... 277,750 263,810 251,822
Amortization of discount on Junior Subordinated Deben-
tures............................................. 64,198 112,321
Amortization of deferred financing costs............ 15,305 15,051 10,660
Gain on sale of investment.......................... (25,099)
Loss on sale of property, plant and equipment....... (3,672) 1,004 3,541
LIFO charge (credit)................................ 16,087 (3,172) 8,143
Non-cash contribution............................... 4,364
Other changes, net.................................. 694 140
Net increase in cash from changes in operating assets
and liabilities, detailed hereafter.............. 195,931 105,495 45,127
---------- ---------- ----------
Net cash provided by operating activities........ 750,263 617,331 532,774
---------- ---------- ----------
Cash Flows From Investing Activities:
Capital expenditures.................................. (533,965) (376,138) (241,234)
Proceeds from sale of property, plant and equipment... 21,819 40,296 6,562
Additions to property held for sale................... (19,694) (10,900) (26,291)
Increase in other investments......................... (65,124) (21,602) (3,375)
Proceeds from sale of investment...................... 50,469
-------- -------- --------
Net cash used by investing activities............ (546,495) (368,344) (264,338)
-------- ------- --------
Cash Flows From Financing Activities:
Debt prepayment costs................................ (24,696) (33,484) (136,613)
Financing charges incurred........................... (22,868) (18,159) (39,695)
Principal payments under capital lease obligations... (8,249) (7,557) (6,561)
Proceeds from issuance of long-term debt............. 902,979 724,826 1,354,666
Reductions in long-term debt......................... (1,207,125) (1,147,807) (1,393,435)
Proceeds from issuance of capital stock.............. 24,753 212,015 3,167
Proceeds from sale of treasury stock................. 30,609 36,277 48,843
Capital stock reacquired............................. (257) (96) (44)
Tax benefit of non-qualified stock options........... 7,056 2,256 1,258
---------- ---------- ----------
Net cash used by financing activities............. (297,798) (231,729) (168,414)
---------- ---------- ----------
Net increase (decrease) in cash and temporary cash invest-
ments.................................................. (94,030) 17,258 100,022
Cash and Temporary Cash Investments:
Beginning of year..................................... 121,253 103,995 3,973
---------- --------- ----------
End of year........................................... $ 27,223 $ 121,253 $ 103,995
========== ========= ==========
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
Years Ended December 31, 1994, January 1, 1994 and January 2, 1993
1994 1993 1992
(In thousands of dollars) (52 Weeks) (52 Weeks) (53 Weeks)
----------------------------------------------------------------------------------------
Increase (Decrease) In Cash From Changes In Operating
Assets And Liabilities:
Inventories (FIFO)............................... $ (51,831) $ (12,239) $ (21,328)
Receivables...................................... 17,114 (12,752) (14,092)
Prepaid and other current assets................. (5,749) (10,993) (18,186)
Accounts payable................................. 68,080 59,902 29,935
Accrued expenses................................. 110,290 8,037 53,078
Deferred income taxes............................ (4,170) 2,175 (34,331)
Other liabilities................................ 62,197 71,365 50,051
--------- ---------- ---------
$ 195,931 $ 105,495 $ 45,127
========= ========== =========
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
reclassified to conform to the 1994 presentation.
Segments of Business
--------------------
The Company operates primarily in one business segment retail food
and drug stores. This segment represents more than 90% of
consolidated revenue, operating profit and identifiable assets. The
Company also manufactures and processes food for sale by its
supermarkets and operates convenience stores.
Inventories
-----------
Inventories are stated at the lower of cost (principally LIFO) or
market. Approximately 89% of inventories for 1994 and 1993 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 10 to 40 years and equipment depreciation is based on
lives varying from three to 15 years. Leasehold improvements are
amortized over their useful lives which vary from four to 25 years.
Interest Rate Hedging Agreements
--------------------------------
The Company uses interest rate swaps and caps to hedge a portion of
its variable rate borrowings against increases 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.
Deferred Income Taxes
---------------------
Deferred income taxes are recorded to reflect the tax consequences
on future years of differences between the tax bases of assets and
liabilities and their financial reporting bases. The types of
differences that give rise to significant portions of deferred
income tax liabilities or assets relate to: property, plant and
equipment, inventories, accruals for restructuring and other
charges and accruals for compensation-related costs. Deferred
income taxes are classified as a net current and noncurrent asset
or liability based on the classification of the related asset or
liability for financial reporting. A deferred tax asset or
liability that is not related to an asset or liability for
financial reporting is classified according to the expected
reversal date. (See Taxes Based on Income footnote.)
Consolidated Statement of Cash Flows
------------------------------------
For purposes of the Consolidated Statement of Cash Flows, the
Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be temporary cash
investments.
Cash paid during the year for interest and income taxes was as
follows:
1994 1993 1992
------------------------------
Interest.......................... $329,570 $329,495 $367,126
Income taxes...................... 131,156 92,745 48,195
PROPERTY, PLANT AND EQUIPMENT, NET
----------------------------------
Property, plant and equipment, net consists of:
1994 1993
-----------------------
Land.................................... $ 280,797 $ 209,784
Buildings and land improvements......... 803,839 670,204
Equipment............................... 2,539,312 2,372,998
Leaseholds and leasehold improvements... 733,019 699,868
Leased property under capital leases.... 241,884 234,114
----------- ---------
4,598,851 4,186,968
Accumulated depreciation and amortization (2,346,188) (2,205,660)
---------- ----------
$2,252,663 $1,981,308
Substantially all property, plant and equipment collateralizes debt
of the Company. (See Debt Obligations footnote.)
INVESTMENTS AND OTHER ASSETS
----------------------------
Investments and other assets consists of:
1994 1993
--------- --------
Deferred financing costs............... $ 99,094 $110,684
Goodwill............................... 47,518 51,192
Investments in Debt Securities......... 68,752 19,773
Other.................................. 87,522 91,677
--------- --------
$ 302,886 $273,326
The Company is amortizing deferred financing costs using the
interest method. Substantially all goodwill is amortized on the
straight-line method over forty years. Investments in Debt
Securities are held at their amortized cost and the Company intends
to hold them to maturity.
OTHER CHARGES AND CREDITS
-------------------------
During 1994 the Company recorded a $25,100 pre-tax charge to
recognize future lease commitments and losses on equipment in
certain San Antonio stores sublet to Megafoods, Inc. which declared
bankruptcy during 1994. The Company had sold its San Antonio stores
to Megafoods in 1993. Also during 1994 the Company recorded a gain
of $25,100 on the disposition of its investment in Hook-SupeRx,
Inc. (''HSI''), as a part of the merger of HSI and a subsidiary of
Revco D.S. after providing for certain tax indemnities related to
HSI.
In 1994 the Company donated a portion of its stock investment in
HSI, with a $4,364 pre-tax book value, to The Kroger Co.
Foundation. The donation resulted in a $2,705 after tax expense
($.02 per fully diluted share) and produced a $5,942 tax benefit
($.04 per fully diluted share).
On June 14, 1993, the Company announced its intention to dispose of
15 San Antonio, Texas stores. The Company recognized a pre-tax
charge of $22,725 in connection with the disposition. Severance
pay, unemployment benefits costs and loss on sale of assets are
included in this charge.
OTHER CURRENT LIABILITIES
-------------------------
Other current liabilities consists of:
1994 1993
--------------------
Salaries and wages......................... $279,100 $252,210
Taxes, other than income taxes............. 138,428 122,852
Interest................................... 51,728 62,494
Other...................................... 483,707 384,728
-------- --------
$952,963 $822,284
TAXES BASED ON INCOME
---------------------
The provision for taxes based on income consists of:
1994 1993 1992
---------------------------
Federal
Current....................... $127,393 $ 92,863 $ 80,934
Deferred...................... 2,184 2,174 (34,331)
-------- -------- --------
129,577 95,037 46,603
State and local.................. 22,883 18,096 25,652
-------- -------- --------
152,460 113,133 72,255
Tax credit from extraordinary loss (17,075) (14,607) (65,644)
Tax credit from cumulative effect of
change in accounting......... (89,546)
-------- ------- --------
$135,385 $ 8,980 $ 6,611
Tax laws enacted in 1993 increased federal income tax rates
retroactive to the beginning of 1993. Deferred taxes have been
adjusted to reflect the increased federal income tax rates. This
adjustment increased the deferred tax provision by $4,200 in 1993.
Targeted job tax credits reduced the tax provision by $3,240 in
1994, $2,608 in 1993 and $3,378 in 1992.
A reconciliation of the statutory federal rate and the effective
rate is as follows:
1994 1993 1992
-----------------
Statutory rate............................... 35.0% 35.0% 34.0%
State income taxes, net of federal tax benefit 3.5 4.1 9.8
Tax credits.................................. (1.2) (1.0) (2.1)
Tax rate change effect on deferred taxes..... 1.5
Other, net................................... (1.1) .2
----- ----- -----
36.2% 39.8% 41.7%
The tax effects of significant temporary differences and
carryforwards that comprise deferred tax balances were as follows:
1994 1993
-----------------------------------------------------------------
Current deferred tax assets:
Compensation related costs............. $ 30,823 $ 25,902
Insurance related costs................ 26,182 34,023
Inventory related costs................ 17,474 19,523
Alternative minimum tax credit
carryforwards ....................... 13,971
Other.................................. 28,145 17,054
--------- ----------
102,624 110,473
--------- ----------
Current deferred tax liabilities:
Compensation related costs............. (21,818) (26,001)
Lease accounting....................... (5,145) (5,408)
Inventory related costs................ (23,053) (17,568)
Other.................................. (6,475) (9,331)
--------- ----------
(56,491) (58,308)
--------- ----------
Current deferred taxes, net (in prepaid and
other current assets).................. $ 46,133 $ 52,165
Long-term deferred tax assets:
Compensation related costs.............. $ 105,208 $ 99,170
Insurance related costs................. 28,337 21,021
Lease accounting........................ 22,885 22,269
Other................................... 7,134 6,798
--------- ----------
163,564 149,258
--------- ----------
Long-term deferred tax liabilities:
Depreciation............................ (284,957) (285,104)
Compensation related costs.............. (11,310) (5,267)
Lease accounting........................ (9,146) (11,391)
Deferred charges........................ (8,859) (9,735)
Other................................... (21,982) (20,652)
--------- ----------
(336,254) (332,149)
--------- ----------
Long-term deferred taxes, net........... $(172,690) $(182,891)
DEBT OBLIGATIONS
Long-term debt consists of:
1994 1993
---------- ----------
Variable rate Revolving Credit Facility, due 2001.... $ 979,253
Variable rate Senior Term Facility, due in varying
amounts through 1998............................. $ 386,208
Variable rate Working Capital Facility, due 1998..... 361,954
Variable rate Facility D, due 1997 and 1998.......... 98,796
9 1/4% Senior Secured Debentures, due 2005........... 160,150 200,000
8 1/2% Senior Secured Debentures, due 2003........... 200,000 200,000
11 1/8% Senior Notes, due 1998....................... 138,386
8 3/4% Senior Subordinated Reset Notes, due 1999..... 66,513
9% Senior Subordinated Notes, due 1999............... 125,000 125,000
9 3/4% Senior Subordinated Debentures, due 2004...... 126,550 175,000
9 3/4% Senior Subordinated Debentures, due 2004,
Series B......................................... 70,000 100,000
9 7/8% Senior Subordinated Debentures, due 2002...... 211,150 250,000
6% to 9 5/8% Senior Subordinated Notes, due 1999
to 2009.......................................... 349,602 238,182
10% Senior Subordinated Notes, due 1999.............. 222,550 250,000
6 3/8% Convertible Junior Subordinated Notes,
due 1999.......................................... 200,000 200,000
8 1/4% Convertible Junior Subordinated Debentures,
due 2011......................................... 170,000
10% Mortgage loans, with semi-annual payments due
through 2004..................................... 608,163 609,223
5 1/10% to 10 1/4% Industrial Revenue Bonds, due
in varying amounts through 2021................... 206,095 211,270
7 7/8% to 12 7/8% mortgages, due in varying
amounts through 2017............................... 253,301 232,469
3 1/2% to 12% notes, due in varying amounts
through 2011...................................... 22,455 25,414
---------- ----------
Total debt........................................... 3,734,269 4,038,415
Less current portion................................. 7,926 63,053
---------- ----------
Total long-term debt................................. $3,726,343 $3,975,362
The aggregate annual maturities and scheduled payments of long-term
debt for the five years subsequent to 1994 are:
1995................................... $ 7,926
1996................................... $ 14,341
1997................................... $ 12,875
1998................................... $ 15,507
1999................................... $620,012
Credit Agreement
----------------
The Company entered into a new Senior Competitive Advance and
Revolving Credit Facility Agreement, dated as of July 19, 1994 (the
''Credit Agreement''). This agreement replaced the credit agreement
dated as of January 19, 1992. The following constitutes only a
summary of the principal terms and conditions of the Credit
Agreement. Reference is directed to the Credit Agreement attached
as an exhibit to the Company's Current Report on Form 8-K dated
July 20, 1994.
The Credit Agreement provides for a seven-year $1,750,000 Senior
Competitive Advance and Revolving Credit Facility (the
''Facility'').
The Credit Agreement expires on July 19, 2001 and is not otherwise
subject to amortization.
Interest Rates
--------------
Borrowings under the Facility bear interest at the option of the
Company at a rate equal to either (i) the highest, from time to
time, of (A) the average of the publicly announced prime rate of
Chemical Bank and Citibank, N.A., (B) 1/2% over a moving average of
secondary market morning offering rates for 3 month certificates of
deposit adjusted for reserve requirements, and (C) 1/2% over the
federal funds rate or (ii) an adjusted Eurodollar rate based upon
the London interbank offered rate (''Eurodollar Rate'') plus the
Applicable Percentage which varies from .25% to .625% based upon
the Company's achievement of a financial ratio. At December 31,
1994, the Applicable Percentage was .50% for Eurodollar Rate
advances and declined to .40% on January 17, 1995. The Company also
pays a facility fee (''Facility Fee'') based on the entire
$1,750,000 Facility which varies from .15% to .375% based upon the
Company's achievement of a financial ratio. The Facility Fee at
December 31, 1994 was .25% and declined to .225% on January 17,
1995.
Collateral
----------
The Company's obligations under the Facility are collateralized by
a pledge of a substantial portion of the Company's and certain of
its subsidiaries' assets, including substantially all of the
Company's and such subsidiaries' inventory and equipment and the
stock of all subsidiaries. Such assets also collateralize the
Company's obligations under its existing or hereafter issued senior
secured debt.
Prepayment
----------
The Company may prepay the Facility, in whole or in part, at any
time, without a prepayment penalty.
Certain Covenants
-----------------
The Credit Agreement contains covenants which, among other things,
(i) restrict investments, capital expenditures, and other material
outlays and commitments relating thereto, (ii) restrict the
incurrence of debt, including the incurrence of debt by
subsidiaries, (iii) restrict dividends and payments, prepayments,
and repurchases of capital stock, (iv) restrict mergers and
acquisitions and changes of business or conduct of business, (v)
restrict transactions with affiliates, (vi) restrict certain sales
of assets, (vii) restrict changes in accounting treatment and
reporting practices except as permitted under generally accepted
accounting principles, (viii) require the maintenance of certain
financial ratios and levels, including fixed charge coverage ratios
and total debt ratios, and (ix) require the Company to maintain
interest rate protection providing that at least 50% of the
Company's indebtedness for borrowed money is maintained at a fixed
rate of interest.
Interest Rate Protection Program
--------------------------------
The Company uses derivatives to limit its exposure to rising
interest rates and to adjust the duration of its debt portfolio.
The guidelines the Company follows are: (i) no more than 30% (up to
a maximum of $1,100,000) of debt will bear interest at a floating
rate, (ii) no more than 30% of its debt will bear interest in the
1-6 year range based on initial maturity, (iii) a minimum of 40% of
its debt will bear interest in the 7 year or longer range based on
initial maturity, (iv) the portfolio of derivatives will contain no
leveraged products, and (v) the portfolio will not be driven by
profit motive or sensitivity to current mark-to-market status. The
Company's compliance with these guidelines is reviewed semi-
annually with the Financial Policy Committee of the Company's Board
of Directors.
The Company currently has in place various interest rate hedging
agreements with notional amounts aggregating $2,650,000. The effect
of these agreements is to: (i) fix the rate on $550,000 floating
rate debt, with $200,000 of swaps expiring in May 1996, and the
remaining $350,000 of swaps expiring in July 2001, for which the
Company pays an average rate of 7.22% and receives 6 month LIBOR,
(ii) swap the contractual interest rate on $350,000 of seven and
ten year debt instruments to the rates available on three to five
year fixed rate instruments (upon expiration of the three to five
year swap agreements the fixed contractual rate will become
floating for the remainder of the seven and ten year term of debt),
for which the Company pays an average rate of 5.69% and receives an
average rate of 7.04%, (iii) swap the contractual interest rate on
$825,000 of four, seven and ten year fixed-rate instruments into
floating-rate instruments, for which the Company pays 6 month LIBOR
and receives an average rate of 5.96%, and (iv) cap six month LIBOR
on $575,000 for one to five years at rates of 4.20% to 6.00%, with
$50,000 of the caps expiring in each of July 1995, July 1997 and
July 1998, $150,000 of the caps expiring in November 1995 and the
remaining $275,000 expiring in the first quarter of 1996. Interest
expense was reduced $15,124 and $12,454 in 1994 and 1993,
respectively and increased $2,707 in 1992 as a result of the
Company's hedging program.
The present value of the estimated annual effect on future interest
expense of the Company's derivative portfolio, based on 6 month
LIBOR of 7.00% as in effect at year-end and the forward yield curve
at year-end is:
Forward Yield
Year-End Curve
LIBOR -------------
LIBOR
at 7.0% Amount Rate
-------- ------- -----
1995 ........................... $ 8,020 $ 8,318 7.68%
1996 ........................... (3,650) (9,920) 8.49%
1997 ........................... (6,900) (14,590) 8.29%
1998 ........................... (6,230) (12,560) 8.18%
1999 ........................... (6,530) (10,290) 7.79%
2000 ........................... (5,510) (8,300) 8.10%
2001 ........................... (2,010) (3,570) 8.14%
2002 ........................... (930) (3,040) 8.13%
2003 ........................... (410) (950) 8.14%
--------- ---------
$ (24,150) $ (54,902)
(See Fair Value of Financial Instruments footnote.)
9 1/4% Senior Secured Debentures
--------------------------------
On January 25, 1993, the Company issued $200,000 of 9 1/4% Senior
Secured Debentures (the ''9 1/4 % Senior Secureds''). As of
December 31, 1994, the Company has repurchased $39,850 of this
issue. The 9 1/4% Senior Secureds become due on January 1, 2005.
The 9 1/4% Senior Secureds are redeemable at any time on or after
January 1, 1998 in whole or in part at the option of the Company.
The redemption prices commence at 104.625% and are reduced by
1.156% annually until January 1, 2002 when the redemption price is
100%.
8 1/2% Senior Secured Debentures
--------------------------------
On July 1, 1993, the Company issued $200,000 of 8 1/2% Senior
Secured Debentures (the ''8 1/2% Senior Secureds''). The 8 1/2%
Senior Secureds become due on June 15, 2003. The 8 1/2% Senior
Secureds are redeemable at any time on or after June 15, 1998 in
whole or in part at the option of the Company. The redemption
prices commence at 104.250% and are reduced by 1.4165% annually
until June 15, 2001 when the redemption price is 100%.
11 1/8% Senior Notes
--------------------
The 11 1/8% Senior Notes were redeemed on March 15, 1994.
8 3/4% Senior Subordinated Reset Notes
--------------------------------------
The 8 3/4% Senior Subordinated Reset Notes were redeemed on June
15, 1994.
Senior Subordinated Indebtedness
--------------------------------
Senior Subordinated Indebtedness consists of the following: (i)
$125,000 9% Senior Subordinated Notes due August 15, 1999. This
issue is redeemable at any time on or after August 15, 1996 in
whole or in part at the option of the Company at par. (ii) $175,000
9 3/4% Senior Subordinated Debentures due February 15, 2004. This
issue is redeemable at any time on or after February 15, 1997 in
whole or in part at the option of the Company. The redemption
prices commence at 104.875% in 1997 and are reduced by 1.625%
annually until 2000 when the redemption price is 100%. During 1994
the Company repurchased $48,450 of the 9 3/4% Senior Subordinated
Debentures. (iii) $100,000 9 3/4% Senior Subordinated Debentures
due February 15, 2004, Series B. This issue is redeemable at any
time on or after February 15, 1997 in whole or in part at the
option of the Company. The redemption prices commence at 104.875%
in 1997 and are reduced by 1.625% annually until 2000 when the
redemption price is 100%. During 1994 the Company repurchased
$30,000 of the 9 3/4% Senior Subordinated Debentures, Series B.
(iv) $250,000 9 7/8% Senior Subordinated Debentures due August 1,
2002. This issue is 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 repurchased $38,850 of the 9 7/8% Senior Subordinated
Debentures in 1994. (v) $349,602 6% to 9 5/8% Senior Subordinated
Notes due March 15, 1999 to October 15, 2009. Portions of these
issues are subject to early redemption by the Company. (vi)
$250,000 10% Senior Subordinated Notes due May 1, 1999. This issue
is not subject to early redemption by the Company. The Company
repurchased $27,450 of the 10% Senior Subordinated Notes during
1994. The proceeds from these offerings, together with proceeds
from the sale of common stock were used to repay, purchase or
redeem outstanding indebtedness of the Company.
6 3/8% Convertible Junior Subordinated Notes
--------------------------------------------
The $200,000 of 6 3/8% Convertible Junior Subordinated Notes (the
''6 3/8% Convertibles'') become due December 1, 1999. The 6 3/8%
Convertibles are convertible into shares of the Company's common
stock at a conversion price of $18.68 at any time at the option of
the holder. The 6 3/8% Convertibles are redeemable, in whole or in
part, at the option of the Company at any time after December 17,
1992 at the scheduled redemption prices. The redemption prices
commence at 106.375% and are reduced by .9105% annually each
December 1 thereafter until 1999, when the 6 3/8% Convertibles
mature, except that, until December 8, 1995, the 6 3/8%
Convertibles cannot be redeemed by the Company unless the closing
price of the Company's common stock equals or exceeds 150% of the
then effective conversion price per share at least 20 out of 30
consecutive trading days ending within 10 days prior to mailing of
the redemption notice. The Company has reserved 10,706,638 shares
of common stock for future conversion of the 6 3/8% Convertibles.
8 1/4% Convertible Junior Subordinated Debentures
-------------------------------------------------
The Convertible Junior Subordinated Debentures (the ''8 1/4%
Convertibles'') were redeemed on October 24, 1994.
Redemption Event
----------------
Subject to certain conditions (including repayment in full of all
obligations under the Credit Agreement or obtaining the requisite
consents under the Credit Agreement), the Company's publicly issued
debt will be subject to redemption, in whole or in part, at the
option of the holder upon the occurrence of a redemption event,
upon not less than five days' notice prior to the date of
redemption, at a redemption price equal to the default amount, plus
a specified premium. ''Redemption Event'' is defined in the
indentures as the occurrence of (i) any person or group, together
with any affiliate thereof, beneficially owning 50% or more of the
voting power of the Company or (ii) any one person or group, or
affiliate thereof, succeeding in having a majority of its nominees
elected to the Company's Board of Directors, in each case, without
the consent of a majority of the continuing directors of the
Company.
Mortgage Financing
------------------
During 1989 the Company completed a $612,475, 10% mortgage
financing of 127 of its retail properties, distribution warehouse
facilities, food processing facilities and other properties (the
''Properties''), with a net book value of $325,327 held by thirteen
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 have a maturity of 15 years. The Properties are
subject to the liens of Secured Finance Inc. The mortgage loans are
subject to semi-annual payments of interest and principal on
$150,000 of the borrowing based on a 30-year payment schedule and
interest only on the remaining $462,475 principal amount. The
unpaid principal amount will be due on December 15, 2004.
Commercial Paper
----------------
Under the Credit Agreement the Company is permitted to issue up to
$1,750,000 of unrated commercial paper and borrow up to $1,750,000
from the lenders under the Credit Agreement on a competitive bid
basis. The total of unrated commercial paper, $229,473 at December
31, 1994, and competitive bid borrowings, $491,000 at December 31,
1994, however, may not exceed $1,750,000. All commercial paper and
competitive bid borrowings must be supported by availability under
the Credit Agreement. These borrowings have been classified as
long-term because the Company expects that during 1995 these
borrowings will be refinanced using the same type of securities.
Additionally, the Company has the ability to refinance the short-
term borrowings under the Facility which matures July 19, 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash And Short-term Investments
-------------------------------
The carrying amount approximates fair value because of the short
maturity of those instruments.
Long-term Investments
---------------------
The fair values of these investments are estimated based on quoted
market prices for those or similar investments.
Long-term Debt
--------------
The fair value of the Company's long-term debt, including the
current portion thereof, is estimated based on the quoted market
price for the same or similar issues.
Interest Rate Protection Agreements
-----------------------------------
The fair value of these agreements is based on the net present
value of the future cash flows using the forward interest rate
yield curve in effect at the respective years-end. If the swaps and
caps were cancelled as of the respective years-end the result would
have been a net cash outflow for 1994 and a net cash inflow for
1993. The swaps and caps are linked to the Company's debt
portfolio. The decline in the value of the swaps and caps relates
to an increase in market rates during 1994, the receipt of $15,124
in proceeds from interest rate protection agreements during 1994,
and a decline in the fair value of linked debt of approximately
$58,000. (See Accounting Policies and Debt Obligations footnotes.)
The estimated fair values of the Company's financial instruments
are as follows:
1994 1993
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
Cash and short-term investments $ 27,223 $ 27,223 $ 121,253 $ 121,253
Long-term investments for which it is
Practicable....................... $ 68,752 $ 68,752 $ 19,734 $ 36,516
Not Practicable................... $ 38,672 $ ---- $ 39,625 $ ----
Long-term debt for which it is
Practicable....................... $ 2,273,165 $ 2,375,293 $ 2,113,081 $ 2,261,420
Not Practicable................... $ 1,461,104 $ ---- $ 1,925,334 $ ----
Interest Rate Protection Agreements
Variable rate pay swaps........... $ ---- $ (92,925) $ ---- $ 46,784
Fixed rate pay swaps.............. $ ---- $ 15,572 $ ---- $ (4,003)
Interest rate caps................ $ ---- $ 22,451 $ ---- $ 2,531
----------- ----------- ----------- -----------
$ ---- $ (54,902) $ ---- $ 45,312
The investments for which it was not practicable to estimate fair
value relate to equity investments in unrelated entities for which
there is no market and investments in real estate development
partnerships for which there is no market.
It was not practicable to estimate the fair value of $979,253 of
long-term debt outstanding under the Company's Credit Agreement.
There is no market for this debt. The remaining long-term debt that
it was not practicable to estimate relates to Industrial Revenue
Bonds of $206,095, various mortgages of $253,301, and other notes
of $22,455 for which there is no market.
LEASES
------
The Company operates primarily in leased facilities. Lease terms
generally range from 10 to 25 years with options to renew at
varying terms. Certain of the leases provide for contingent
payments based upon a percent of sales.
Rent expense (under operating leases) consists of:
1994 1993 1992
------ ------ ------
Minimum rentals.................... $288,499 $275,336 $270,763
Contingent payments................ 10,974 14,973 17,350
-------- -------- --------
$299,473 $290,309 $288,113
Assets recorded under capital leases consists of:
1994 1993
-------- --------
Distribution and manufacturing facilities $ 38,742 $ 38,742
Store facilities......................... 203,142 195,372
Less accumulated amortization............ (112,403) (106,273)
-------- --------
$129,481 $127,841
Minimum annual rentals for the five years subsequent to 1994 and in
the aggregate are:
Capital Operating
Leases Leases
------- ---------
1995................................... $ 29,110 $ 314,401
1996................................... 28,384 302,465
1997................................... 27,584 287,616
1998................................... 26,935 274,571
1999................................... 26,644 257,221
Thereafter............................. 227,054 2,116,480
--------- -----------
365,711 $ 3,552,754
Less estimated executory costs included
in capital leases.................... (24,982)
---------
Net minimum lease payments under capital
leases................................ 340,729
Less amount representing interest........ (169,411)
---------
Present value of net minimum lease payments
under capital leases................... $ 171,318
EXTRAORDINARY LOSS
------------------
The extraordinary loss in 1994, 1993 and 1992 relates to premiums
paid to retire certain indebtedness early and the write-off of
related deferred financing costs.
EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Primary earnings (loss) per common share equals net earnings (loss)
divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options. Fully
diluted earnings per common share equals net earnings plus, for
1994 and 1993, after-tax interest incurred on the 8 1/4%
Convertibles, up to the date of their redemption on October 24,
1994, and on the 6 3/8% Convertibles of $14,805 and $16,065,
respectively, divided by common shares outstanding after giving
effect to dilutive stock options and, for 1993 and 1994, shares
assumed to be issued on conversion of the Company's convertible
securities. The convertible securities are not included in the
fully diluted earnings per share calculation for 1992 because they
are anti-dilutive.
PREFERRED STOCK
---------------
The Company has authorized 5,000,000 shares of voting cumulative
preferred stock; 2,000,000 were available for issuance at December
31, 1994. The stock has a par value of $100 and is issuable in
series. Under the Credit Agreement, the Company is prohibited from
issuing shares of preferred stock.
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 31, 1994, changes in common
stock were:
Issued In Treasury
----------------------- -----------------------
Shares Amount Shares Amount
-------------------------------------------------
December 29, 1991......................... 103,757,096 $121,970 16,090,120 $410,428
Exercise of stock options including
restricted stock grants................. 620,904 6,233 82,299 1,252
Sale of treasury shares to the Company's
employee benefit plans.................. (25,082) (3,246,690) (82,819)
Tax benefit from exercise of non-qualified
stock options........................... 1,257
----------- -------- ----------- -------
January 2, 1993........................... 104,378,000 104,378 12,925,729 328,861
Exercise of stock options including
restricted stock grants................. 896,173 10,658 9,342 62
Sale of treasury shares to the Company's
employee benefit plans.................. (12,251) (2,033,225) (51,679)
Shares issued through public offering..... 13,275,000 203,493
Tax benefit from exercise of non-qualified
stock options........................... 2,256
----------- -------- ---------- --------
January 1, 1994........................... 118,549,173 308,534 10,901,846 277,244
Exercise of stock options including
restricted stock grants................. 2,023,975 26,473 15,479 376
Sale of treasury shares to the Company's
employee benefit plans.................. (3,495) (1,341,094) (34,104)
Tax benefit from exercise of non-qualified
stock options........................... 7,056
----------- -------- ---------- --------
December 31, 1994......................... 120,573,148 $338,568 9,576,231 $243,516
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 31, 1994 and January 1, 1994, 6,088,924 and
706,759 shares of common stock, respectively, were available for
future options. Options may be granted under the 1985, 1987, 1988,
1990 and 1994 plans until 1995, 1997, 1998, 2000 and 2004,
respectively, and generally will expire 10 years from the date of
grant. Options granted prior to May 1994 become exercisable six
months from the date of grant. Options granted beginning in May
1994 vest in one year to three years. At December 31, 1994, options
for 9,725,292 shares were exercisable. All grants outstanding
become immediately exercisable upon certain changes of control of
the Company.
Changes in options outstanding under the stock option plans,
excluding restricted stock grants, were:
Shares Subject Option Price
To Option Range Per
Share
--------------------------------
Outstanding, December 29, 1991.... 7,693,031 $ 3.24 $23.44
Granted........................... 5,172,145 $ 11.75 $19.69
Exercised......................... (561,629) $ 3.24 $18.57
Cancelled or expired.............. (101,850) $ 9.13 $23.44
----------
Outstanding, January 2, 1993...... 12,201,697 $ 4.69 $23.44
Granted........................... 314,865 $ 17.50 $21.13
Exercised......................... (784,658) $ 4.69 $18.69
Cancelled or expired.............. (123,545) $ 9.13 $23.44
----------
Outstanding, January 1, 1994...... 11,608,359 $ 4.92 $23.44
Granted........................... 2,666,175 $ 20.57 $25.32
Exercised......................... (1,878,973) $ 4.92 $23.44
Cancelled or expired.............. (89,679) $ 9.13 $25.32
----------
Outstanding, December 31, 1994 12,305,882 $ 4.92 $25.32
In addition to stock options, the Company may grant stock
appreciation rights (SARs). In general, the eligible optionees are
permitted to surrender the related option and receive shares of the
Company's common stock and/or cash having a value equal to the
appreciation on the shares subject to the options. The appreciation
of SARs is charged to earnings in the current period based upon the
market value of common stock. As of December 31, 1994 and January
1, 1994 there were no SARs outstanding.
The Company also may grant limited stock appreciation rights
(LSARs) to executive officers in tandem with the related options.
LSARs operate in the same manner as SARs but are exercisable only
following a change of control of the Company. As of December 31,
1994 and January 1, 1994, there were no LSARs outstanding.
Also, the Company may grant restricted stock awards to eligible
employee participants. In general, a restricted stock award
entitles an employee to receive a stated number of shares of common
stock of the Company subject to forfeiture if the employee fails to
remain in the continuous employ of the Company for a stipulated
period. The holder of an award shall be entitled to the rights of a
shareowner except that the restricted shares and the related rights
to vote or receive dividends may not be transferred. The award is
charged to earnings over the period in which the employee performs
services and is based upon the market value of common stock at the
date of grant. As of December 31, 1994 and January 1, 1994, awards
related to 95,509 and 101,217 shares, respectively, were
outstanding.
The Company may grant performance units, either in conjunction with
or independent of a grant of stock options. Performance units
entitle a grantee to receive payment in common stock and/or cash
based on the extent to which performance goals for the specified
period have been satisfied. As of December 31, 1994, and January 1,
1994, there were no performance units outstanding.
Incentive shares may be granted which consist of shares of common
stock issued subject to achievement of performance goals. No
incentive shares were outstanding as of December 31, 1994 and
January 1, 1994.
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 settled all tax years through 1983
with the Internal Revenue Service. The Internal Revenue Service has
completed its examination of the Company's tax returns for 1984
through 1986 and the Company has made payments based on its
proposed settlement. Efforts to settle unresolved issues for years
1984 through 1986 with the Appeals Division of the Internal Revenue
Service have been unsuccessful. As a result the Company has filed a
petition with the United States Tax Court. 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 premiums. The liability for workers'
compensation risks is accounted for on a present value basis.
Actual claim settlements and expenses incident thereto may differ
from the provisions for loss. Property risks have been underwritten
by a subsidiary and are reinsured in unrelated insurance companies.
Operating divisions and subsidiaries have paid premiums, and the
insurance subsidiary has provided loss allowances, based upon
actuarially determined estimates.
LITIGATION Fry's Food Stores of Arizona, Inc. (''Fry's''), a
subsidiary of the Company, is currently a defendant and cross-
defendant in actions pending in the U.S. District Court for the
Southern District of Florida entitled Harley S. Tropin v. Kenneth
Thenen, et. al., No. 93-2502-CIV-MORENO and Walco Investments,
Inc., et. al. v. Kenneth Thenen, et. al., No. 93-2534-CIV-MORENO.
The plaintiff and cross-claimants in these actions seek unspecified
damages against numerous defendants and cross-defendants, including
Fry's. Plaintiffs and cross-claimants allege that a former employee
of Fry's supplied false information to third parties in connection
with purported sales transactions between Fry's and affiliates of
Premium Sales Corporation or certain limited partnerships. Claims
have been alleged against Fry's for breach of implied contract,
aiding and abetting and conspiracy, conversion and civil theft,
negligent supervision, fraud, and violations of 18 U.S.C. Sections
1961 and 1962 (d) and Chapter 895, Florida Statutes. Fry's believes
that it has substantial meritorious defenses to the claims alleged
against it, and Fry's intends to defend the litigation vigorously.
The Company is involved in this and various other legal actions
arising in the normal course of business. Management is of the
opinion that their outcome will not have a material adverse effect
on the Company's financial position or results of operations.
WARRANT DIVIDEND PLAN
---------------------
On February 28, 1986, the Company adopted a warrant dividend plan
in which each holder of common stock is entitled to one common
stock purchase right for each share of common stock owned. When
exercisable, the nonvoting rights entitle the registered holder to
purchase one share of common stock at a price of $60 per share. The
rights will become exercisable, and separately tradeable, ten days
after a person or group acquires 20% or more of the Company's
common stock. In the event the rights become exercisable and
thereafter the Company is acquired in a merger or other business
combination, each right will entitle the holder to purchase common
stock of the surviving corporation, for the exercise price, having
a market value of twice the exercise price of the right. Under
certain other circumstances, including the acquisition of 25% or
more of the Company's common stock, each right will entitle the
holder to receive upon payment of the exercise price, shares of
common stock with a market value of two times the exercise price.
At the Company's option, the rights, prior to becoming exercisable,
are redeemable in their entirety at a price of $.025 per right. The
rights are subject to adjustment and expire March 19, 1996.
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 1994 and 1993. The assets are invested
in cash and short-term investments or listed stocks and bonds,
including $89,635 and $85,389 of common stock of The Kroger Co. at
the end of 1994 and 1993, respectively. The status of the plans at
the end of 1994 and 1993 was:
1994 1993
------------------
Actuarial present value of benefit obligations:
Vested employees........................... $528,204 $541,563
Non-vested employees....................... 27,299 16,229
-------- --------
Accumulated benefit obligations............. 555,503 557,792
Additional amounts related to projected
salary increases.......................... 111,635 103,301
-------- --------
Projected benefit obligations............... 667,138 661,093
Plan assets at fair value...................... 705,982 768,115
-------- --------
Plan assets in excess of projected benefit
obligations................................. $ 38,844 $107,022
Consisting of:
Unamortized transitional asset.............. $ 32,394 $ 41,790
Unamortized prior service cost and net gain (8,188) 65,702
Adjustment required to recognize minimum
liability.................................. 7,820 7,966
Prepaid (accrued) pension cost in Conso-
lidated Balance Sheet...................... 6,818 (8,436)
-------- --------
$ 38,844 $107,022
The components of net periodic pension income for 1994, 1993 and
1992 are as follows:
1994 1993 1992
----------------------------
Service cost.................... $ 18,959 $ 17,752 $17,237
Interest cost................... 47,778 48,601 45,774
Return on assets................ 23,935 (141,143) (35,664)
Net amortization and deferral... (103,495) 68,041 (40,384)
-------- --------- -------
Net periodic pension income for
the year...................... $ (12,823) $ (6,749) $(13,037)
Assumptions:
Discount rate................. 8.5% 7.25% 8.5%
Salary Progression rate....... 5.5% 4.25% 5.5%
Long-term rate of return on plan
assets...................... 9.5% 9.5% 10.0%
1994 and 1993 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 31,
1994 and January 1, 1994, respectively. However, for the
calculation of periodic pension income for 1994 and 1993 the
assumptions in the table above for 1993 and 1992, respectively,
were used. The 1995 calculation of periodic pension income will be
based on the assumptions in the table above for 1994.
The Company also administers certain defined contribution plans for
eligible union and non-union employees. The cost of these plans for
1994, 1993 and 1992 was $24,298, $20,388 and $16,371, 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 1994, 1993 and 1992 were $87,711, $86,377 and $85,010,
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
1994, 1993 and 1992, the combined payments for these benefits were
$10,996, $12,266 and $9,538, respectively.
As of January 3, 1993 the Company implemented SFAS No. 106 using
the immediate recognition approach. This new standard requires that
the expected cost of retiree benefits be charged to expense during
the years that the employees render service rather than the
Company's past practice of recognizing these costs on a cash basis.
As part of adopting the new standard, the Company recorded in 1993,
a one-time, non-cash charge against earnings of $248,739 before
taxes ($159,193 after taxes). This cumulative adjustment as of
January 3, 1993 represents the discounted present value of expected
future retiree benefits attributed to employees' service rendered
prior to that date.
The following table sets forth the postretirement benefit plans
combined status at December 31, 1994 and January 1, 1994:
1994 1993
-------- --------
Accumulated postretirement benefit
obligation (APBO)
Retirees.............................. $ 91,162 $99,306
Fully eligible active participants.... 41,604 55,095
Other active participants............. 111,021 113,974
--------- --------
$ 243,787 $268,375
Less unrecognized net gain (loss)..... 34,288 (4,876)
--------- --------
Accrued postretirement benefit cost... $278,075 $263,499
The components of net periodic postretirement benefit costs are as
follows:
1994 1993
-------- --------
Service costs (benefits attributed to
employer services during the year) $ 9,181 $10,261
Interest cost on accumulated post-
retirement benefit obligations 19,743 19,607
------- -------
$28,924 $29,868
The significant assumptions used in calculating the APBO are as
follows:
Health Care Trend Rate
-----------------------------
Discount Years to
Rate Initial Ultimate Ultimate
-------- ------- -------- --------
Transition Obligation 8% 15% 6% 15
Year-end 1993 7.25% 13% 4.5% 13
Year-end 1994 8.50% 12.3% 4.5% 12
The impact of a one percent increase in the medical trend rate is
as follows:
Periodic
Cost APBO
-------------------
Transition Obligation $2,000 $ 9,800
Year-end 1993 $2,331 $ 17,135
Year-end 1994 $4,088 $ 27,283
QUARTERLY DATA (UNAUDITED)
Quarter Total
--------------------------------------------
First Second Third Fourth Year
1994 (12 weeks) (12 weeks) (16 weeks) (12 weeks) (52 weeks)
-----------------------------------------------------------------------------------
Sales $5,328,804 $5,394,228 $6,650,257 $5,585,833 $22,959,122
Merchandise costs 4,052,901 4,081,213 5,052,997 4,217,829 17,404,940
Extraordinary loss (8,332) (2,645) (15,175) (555) (26,707)
Net earnings 47,358 67,333 36,022 91,483 242,196
Primary earnings per
common share:
Earnings before
extraordinary loss .50 .62 .45 .80 2.37
Extraordinary loss (.07) (.02) (.13) (.01) (.24)
---- ---- ---- ---- ----
Primary net earnings per
common share .43 .60 .32 .79 2.13
Fully-diluted earnings
per common share:
Earnings before
extraordinary loss .46 .57 .43 .75 2.19
Extraordinary loss (.06) (.02) (.12) (.01) (.21)
---- ---- ---- ---- ----
Fully-diluted net earnings
per common share .40 .55 .31 .74 1.98
1993
-------------------------------------------------------------------------------------
Sales $5,173,926 $5,329,373 $6,478,645 $5,402,357 $22,384,301
Merchandise costs 3,964,439 4,074,455 4,968,568 4,101,598 17,109,060
Extraordinary loss (9,042) (2,136) (8,834) (3,820) (23,832)
Cumulative effect of
change in accounting (159,193) (159,193)
Net earnings (loss) (138,771) 27,485 16,375 82,691 (12,220)
Primary earnings (loss)
per common share:
Earnings before extra-
ordinary loss and
cumulative effect of
change in accounting .30 .27 .23 .79 1.60
Extraordinary loss (.09) (.02) (.08) (.03) (.22)
Cumulative effect of
change in accounting 1.63) (1.49)
----- ----- ---- ----
Primary net earnings (loss)
per common share (1.42) .25 .15 .76 (.11)
Fully-diluted earnings (loss)
per common share:
Earnings before extraordinary
loss and cumulative effect
of change in accounting .29 .27 .23 .71 1.50
Extraordinary loss (.08) (.02) (.07) (.03) (.19)
Cumulative effect of change
in accounting (1.38) (1.28)
----- ---- ---- ---- -----
Fully-diluted net earnings per
common share (1.17) .25 .16 .68 .03
The third quarter 1994 earnings include a $4,364 pre-tax charge
($2,705 after tax) offset by a $5,942 tax credit in connection with
the Company's contribution to The Kroger Co. Foundation. Also
included in third quarter 1994 earnings is a $25,100 pre-tax charge
to recognize future lease commitments and losses on equipment in
certain San Antonio stores sold to Megafoods, Inc. which declared
bankruptcy during the third quarter of 1994. The Company sold its
San Antonio stores to Megafoods in the 1993 third quarter. Also
during the third quarter of 1994 the Company recorded a $25,100
pre-tax gain on the disposition of its investment in HSI after
providing for certain tax indemnities related to HSI. Third quarter
1994 includes a $9,000 pre-tax LIFO charge as compared to a $4,000
pre-tax LIFO credit in the third quarter 1993. First quarter 1993
reflects an after tax charge of $159,153 for the cumulative effect
of a change in accounting for postretirement health care and life
insurance benefits. Second quarter 1993 includes a $22,725 charge
in connection with the disposition of 15 San Antonio stores. The
extraordinary loss in the four quarters of 1994 and 1993 relates to
expenses associated with the early retirement of debt.
Common Stock Price Range
1994 1993
--------------- ----------------
Quarter High Low High Low
-------------------------------------------------------------------
1st 25 7/8 19 3/8 19 1/2 14
2nd 25 3/8 21 1/8 19 5/8 16 5/8
3rd 26 7/8 23 21 3/4 16 1/4
4th 26 7/8 21 3/4 20 7/8 17 1/2
Under the Company's Credit Agreement dated July 19, 1994, 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.
One of the Company's Directors, Mr. John L. Clendenin,
inadvertently filed a Form 4, reporting a purchase of 600 shares,
20 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
10, 1995. Except as otherwise noted below, each person has held
such office for at least five years and was elected to his present
office at the 1994 Organizational Meeting of the Board of Directors
held May 19, 1994, and will hold such office at the discretion of
the Board for the ensuing year until removed or replaced.
Recent
Name Age Employment History
---- --- ------------------
Richard L. Bere 63 Mr. Bere was elected President
and Chief Operating Officer on
September 13, 1990. Prior to
this he was elected Senior Vice
President effective July 15,
1989. Before his election he
was Vice President of the
Company's Southland Marketing
Area. Mr. Bere joined the
Company in 1957.
David B. Dillon 43 Mr. Dillon was elected Executive
Vice President on September 13,
1990, and Chairman of the Board
of Dillon Companies, Inc. on
September 8, 1992. Prior to
this he was elected President of
Dillon Companies, Inc. on
April 22, 1988. Before his
election he was appointed
President of Dillon Companies,
Inc.
Paul W. Heldman 43 Mr. Heldman was elected Secretary
on May 21, 1992, and Vice
President and General Counsel
effective June 18, 1989. Prior to
his election he held various
positions in the Company's Law
Department. Mr. Heldman joined
the Company in 1982.
Michael S. Heschel 53 Mr. Heschel was elected Senior
Vice President - Information
Systems and Services on February
10, 1994. He was elected Group
Vice President - Management
Information Services on July 18,
1991. Prior to this Mr. Heschel
served as Chairman and Chief
Executive Officer of Security
Pacific Automation Company. From
1985 to 1990 he was Vice President
of Baxter International, Inc.
Lorrence T. Kellar 57 Mr. Kellar was elected Group Vice
President on July 18, 1986. He
was elected Vice President and
Treasurer on October 2, 1981. He
has been with the Company since
1965.
Patrick J. Kenney 58 Mr. Kenney was elected Senior Vice
President on September 13, 1990.
Prior to his election, he was
President of the Company's Texas
Marketing Area. Mr. Kenney joined
the Company in 1955.
Thomas E. Murphy 52 Mr. Murphy was elected Group Vice
President effective October 24,
1986. He was appointed Vice
President and Senior Counsel on
November 7, 1982. Mr. Murphy has
been with the Company since
July 1, 1974.
Jack W. Partridge, Jr.49 Mr. Partridge was elected Group
Vice President on December 7,
1989. Prior to his election, he
was appointed Vice President -
Public Affairs in 1980. Mr.
Partridge joined the Company in
1975.
Joseph A. Pichler 55 Mr. Pichler was elected Chairman
of the Board on September 13,
1990, and Chief Executive Officer
effective June 17, 1990. He was
elected President and Chief Operat
ing Officer on October 24, 1986,
and Executive Vice President on
July 16, 1985. He joined Dillon
Companies, Inc. in 1980 as
Executive Vice President and was
elected President of Dillon
Companies, Inc. in 1982.
Ronald R. Rice 59 Mr. Rice was elected Senior Vice
President on May 19, 1994. He was
elected Group Vice President and
appointed President, Manufacturing
on April 16, 1992. He 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.
William J. Sinkula 64 Mr. Sinkula was elected Executive
Vice President on September 13,
1990. He was elected Senior Vice
President on September 23, 1988,
and Group Vice President on
January 3, 1983. He has been with
the Company since 1979. Mr.
Sinkula serves as the Chief
Financial Officer.
Lawrence M. Turner 47 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.
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 30, 1995 By (*Joseph A. Pichler)
Joseph A. Pichler, Chairman
of the Board of Directors and
Chief Executive Officer
Dated: March 30, 1995 By (*William J. Sinkula)
William J. Sinkula
Executive Vice President and
Chief Financial Officer
Dated: March 30, 1995 By (*W. Rodney McMullen)
Rodney McMullen
Vice President - Financial
Services and Control 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 30th
day of March, 1995.
(*Reuben V. Anderson) Director
Reuben V. Anderson
(*Richard L. Bere) Director, President and
Richard L. Bere Chief Operating Officer
(*Raymond B. Carey, Jr.) Director
Raymond B. Carey, Jr.
(*John L. Clendenin) Director
John L. Clendenin
------------------------ Director
Richard W. Dillon
(*Lyle Everingham) Director
Lyle Everingham
(*John T. LaMacchia) Director
John T. LaMacchia
(*Patricia Shontz Longe) Director
Patricia Shontz Longe
(*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
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 31, 1994
and January 1, 1994
Consolidated Statement of Operations and Accumulated
Deficit for the years ended December 31, 1994,
January 1, 1994 and January 2, 1993
Consolidated Statement of Cash Flows for the years
ended December 31, 1994, January 1, 1994
and January 2, 1993
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 19, 1994, the Company filed a Current Report on Form 8-K
disclosing its unaudited earnings for the third quarter 1994.
(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 the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
4.1 Instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries are not filed
as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets
of the Company. The Company undertakes to file these
instruments with the Commission upon request
10.1 Material Contracts - Third Amended and Restated
Employment Agreement dated as of July 22, 1993,
between the Company and Joseph A. Pichler -
Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended October 9,
1993.
11.1 Statement Regarding Computation of Per Share Earnings
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Annual Reports on Form 11-K for The Kroger Co. Savings
Plan and the Dillon Companies, Inc. Employee Stock
Ownership Plan and Trust for the Year 1994 will be
filed by amendment on or before May 1, 1995.
EXHIBIT 11.1
COMPUTATION OF CONSOLIDATED EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
Fiscal Years Ended
----------------------------------------
December 31, January 1, January 2,
1994 1994 1993
------------ ---------- ---------
(52 weeks) (52 weeks) (53 weeks)
Earnings before extraordinary loss and
cumulative effect of change in accounting. $268,903 $170,805 $101,160
Extraordinary loss. . . . . . . . . . . . . . (26,707) 23,832) 107,103)
Cumulative effect of change in accounting . . (159,193)
----------- ---------- ----------
Net earnings (loss) for common stock. . . . . $242,196 $(12,220) $ (5,943)
=========== ========== ==========
PRIMARY <F1>
-------
Weighted average common and dilutive
common equivalent shares:
Common stock outstanding . . . . . . . . 109,911 104,003 89,258
Stock options. . . . . . . . . . . . . . 3,626 2,708 2,106
---------- --------- ---------
113,537 106,711 91,364
========== ======== =========
Primary earnings from continuing
operations per share . . . . . . . . . . . $ 2.37 $ 1.60 $ 1.11
Primary results of extraordinary
loss per share . . . . . . . . . . . . . . (.24) (.22) (1.17)
Primary results of cumulative effect of
change in accounting . . . . . . . . . . . (1.49)
--------- --------- ---------
Primary net earnings (loss) per share . . . . $ 2.13 $ (.11) $ (.06)
========= ========= =========
FULLY DILUTED <F2>
-------------
Weighted average common shares
and all other dilutive securities:
Common stock outstanding . . . . . . . . 109,911 104,003 89,258
Stock options. . . . . . . . . . . . . . 3,933 3,216 2,194
Convertible debt . . . . . . . . . . . . 15,870 17,074
-------- ------- -------
129,714 124,293 91,452
======== ========= =========
Fully diluted earnings from
continuing operations per share (2). . . . $ 2.19 $ 1.50 $ 1.11
Fully diluted results of extraordinary
loss per share . . . . . . . . . . . . . . (.21) (.19) (1.17)
Fully diluted results of cumulative effect
change in accounting (1.28)
------- --------- ---------
Fully diluted net earnings (loss)
per share. . . . . . . . . . . . . . . . . $ 1.98 $ .03 $ (.06)
======== ========= =========
<FN>
<F1> The Convertible Junior Subordinated Debentures issued in
March 1991 and the Convertible Junior Subordinated
Notes issued in December 1992 are not included in the
computation of primary earnings per share since they are not
common stock equivalents. They are not included in the
fully diluted earnings per share calculation for the year
ended January 2, 1993, because they are anti-dilutive.
<F2> Earnings used to calculate fully diluted earnings per share
have been adjusted to reflect the tax effected interest
expense of $14.8 million for the year ended December 31,
1994, that would have been avoided in connection with the
assumed conversion of the 6-3/8% Convertible Junior
Subordinated Notes and the 8-1/4% Convertible Junior
Subordinated Debentures prior to their redemption on
October 24, 1994.
Exhibit 12.1
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES OF
THE KROGER CO. AND CONSOLIDATED SUBSIDIARY COMPANIES AND
UNCONSOLIDATED COMPANIES AS IF CONSOLIDATED FOR THE FIVE FISCAL
YEARS ENDED DECEMBER 31, 1994
Five Years Ended
-----------------------------------------------------------------------
December 31, January 1, January 2, December 29, December 29,
1994 1994 1993 1991 1990
(52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
------------ ---------- ----------- ----------- -------------
(in thousands of dollars)
Earnings
Earnings (loss) from
continuing operations
before tax expense
(credit), extraordinary
loss and cumulative
effect of change in
accounting . . . . . . . . $421,363 $283,938 $173,415 $168,595 $142,203
Fixed charges.. . . . . . . 500,599 556,008 640,004 687,227 708,455
Capitalized interest . . . (2,521) 230 (960) 122 (39)
--------- -------- --------- -------- ---------
$919,441 $840,176 $812,459 $855,944 $850,619
========= ======== ========= ======== =========
Fixed Charges
Interest . . . . . . . . . $331,097 $391,693 $476,932 $536,485 $565,540
Portion of rental pay-
ments deemed to be
interest . . . . . . . . . 169,502 164,315 163,072 150,741 142,915
-------- -------- -------- -------- ---------
$500,599 $556,008 $640,004 $687,226 $708,455
======== ======== ======== ======== =========
Ration of Earnings to
Fixed Charges. . . . . . . 1.8 1.5 1.3 1.2 1.2
Dollar Deficiency of
Coverage . . . . . . . . . N/A N/A N/A N/A N/A
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
Name State of Incorporation
---- ----------------------
Agri-Products, Inc. Arkansas
Bluefield Beverage Company Ohio
Country Oven, Inc. Ohio
Dillon Companies, Inc. Kansas
Also Doing Business As:
Dillon Food Stores N/A*
Dillon Stores Division, Inc. N/A*
Gerbes Supermarkets N/A*
King Soopers, Inc. N/A*
Sav-Mor N/A*
Turkey Hill Dairy, Inc. N/A*
Turkey Hill Minit Markets N/A*
Drug Distributors, Inc. Indiana
Eight Holdings, Inc. Delaware
Eleven Holdings, Inc. Delaware
Embassy International, Inc. Ohio
Fifteen Holdings, Inc. Delaware
Five Holdings, Inc. Delaware
Four Holdings, Inc. Delaware
Fourteen Holdings, Inc. Delaware
Ft. Wayne Food Stores, Inc. Ohio
Gateway Freightline, Inc. Ohio
Also Doing Business As:
GFL N/A*
Illinois Gateway Freightline, Inc. N/A*
Henke & Pillot, Inc. Texas
Henpil, Inc. Texas
Inter-American Foods, Inc. Ohio
J.V. Distributing, Inc. Michigan
Jubilee Products, Inc. Ohio
Kroger Realty Co. Ohio
MANUCO Incorporated Ohio
Nine Holdings, Inc. Delaware
One Holdings, Inc. Delaware
Pace Dairy Foods Company Ohio
Peyton's-Southeastern, Inc. Tennessee
Also Doing Business As:
Peyton's Mid-South Company N/A*
Supermarket Merchandisers Co. N/A*
Pontiac Foods, Inc. South Carolina
Second Synchro Realty, Inc. Delaware
Seven Holdings, Inc. Delaware
Six Holdings, Inc. Delaware
South Bend Food Stores, Inc. Ohio
Southern Ice Cream Specialties, Inc. Ohio
Superx Drugs Corporation Michigan
Also Doing Business As:
The Kroger Co. of Michigan N/A*
Ten Holdings, Inc. Delaware
Third Synchro Realty, Inc. Delaware
Thirteen Holdings, Inc. Delaware
Thoroughbred Brokerage Company Ohio
Three Holdings, Inc. Delaware
Topvalco, Inc. Ohio
Twelve Holdings, Inc. Delaware
Two Holdings, Inc. Delaware
Vine Court Assurance Incorporated Vermont
Wydiv, Inc. Texas
* Not Incorporated - Constitutes an assumed and/or fictitious name.
EXHIBIT 21.1
SUBSIDIARIES OF THE KROGER CO.
-----------------------------
Subsidiaries of Dillon Companies, Inc.
-------------------------------------
Name State of Incorporation
---- ----------------------
City Market, Inc. Colorado
Also Doing Business As:
Circle Super N/A*
Delight Distributing and Sales Co., Inc. Louisiana
(Subsidiary of Time Saver Stores, Inc.)
Dillon Real Estate Co., Inc. Kansas
Fry's Food Stores, Inc. California
Fry's Food Stores of Arizona, Inc. California
(Subsidiary of Fry's Food Stores, Inc.)
Fry's Leasing Company, Inc. Arizona
(Subsidiary of Fry's Food Stores of
Arizona, Inc.)
Jackson Ice Cream Co., Inc. Kansas
Jero, Inc. Wyoming
(Subsidiary of Mini Mart, Inc.)
Junior Food Stores of West Florida, Inc. Florida
Also Doing Business As:
Tom Thumb Food Stores N/A*
Kwik Shop, Inc. Kansas
Loaf 'N Jug, Inc. Colorado
Mini Mart, Inc. Wyoming
Quik Stop Markets, Inc. California
Time Saver Stores, Inc. Kansas
Wells Aircraft, Inc. Kansas
(Subsidiary of Dillon Real Estate Co., Inc.)
* Not Incorporated - Constitutes an assumed and/or fictitious name.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of The Kroger Co. on Form S-8 (File No. 2-73674), Form
S-8 (File No. 2-55898), Form S-8 (File No. 2-93982), Form S-8 (File
No. 2-98858), Form S-8 (File No. 33-00343), Form S-8 (File No. 33-
2056), Form S-8 (File No. 33-20734), Form S-8 (File No. 33-26174),
Form S-8 (File No. 33-29640), Form S-8 (File No. 33-25698), Form S-
8 (File No. 33-29271), Form S-8 (File No. 33-33122), Form S-8 (File
No. 33-29405), Form S-8 (File No. 33-38121), Form S-8 (File No. 33-
38122), Form S-3 (File No. 33-54826), Form S-8 (File No. 33-53747),
Form S-8 (File No. 33-55501), and Form S-3 (File No. 33-64192) of
our report dated January 31, 1995, on our audits of the
consolidated financial statements of The Kroger Co. as of December
31, 1994, and January 1, 1994, and for the years ended December 31,
1994, January 1, 1994, and January 2, 1993, which report is
included in this Annual Report on Form 10-K.
(Coopers & Lybrand L.L.P.)
COOPERS & LYBRAND L.L.P.
Cincinnati, Ohio
March 20, 1995
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, That each of the undersigned
directors of THE KROGER CO. (the "Company") hereby makes,
constitutes and appoints PaulW. Heldman and Bruce M. Gack, or
either of them, his or her true and lawful attorneys-in-fact to
sign and execute for and on his or her behalf the Company's annual
report on Form 10-K, and any and all amendments thereto, to be
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, in such form as they,
or either of them, may approve and to do any and all other acts
which said attorneys-in-fact, or either of them, may deem necessary
or desirable to enable The Kroger Co. to comply with said Act or
the rules and regulations thereunder.
IN WITNESS WHEREOF, the undersigned directors have hereunto set
their hands as of the 9th day of February, 1995.
(Reuben V. Anderson (James D. Woods)
Reuben V. Anderson James D. Woods
(Katherine D. Ortega) (John T. LaMacchia)
Katherine D. Ortega John T. LaMacchia
(John L. Clendenin) (Martha R. Seger)
John L. Clendenin Martha Romayne Seger
(T. Ballard Morton, Jr.) (Raymond B. Carey, Jr.)
T. Ballard Morton, Jr. Raymond B. Carey, Jr.
(Lyle Everingham) (John D. Ong)
Lyle Everingham John D. Ong
(Joseph A. Pichler)
Joseph A. Pichler
(Richard L. Bere)
Richard L. Bere
(Patricia Shontz Longe)
Patricha Shontz Longe
EXHIBIT 24.1 (Continued)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company") does
hereby severally make, constitute and appoint Paul W. Heldman and
Bruce M. Gack, or either of them, his true and lawful attorneys-in-
fact to sign and execute for and on his behalf the Company's annual
report on Form 10-K, and any and all amendments thereto, to be
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, in such form as they,
or either of them, may approve and to do any and all other acts
which said attorneys-in-fact, or either of them, may deem necessary
or desirable to enable The Kroger Co. to comply with said Act or
the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(Rodney McMullen) February 2, 1995
Rodney McMullen
Vice President -
Financial Services and Control and
Principal Accounting Officer
EXHIBIT 24.1 (Continued)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company")
does hereby severally make, constitute and appoint Paul W. Heldman
and Bruce M. Gack, or either of them, his true and lawful
attorneys-in-fact to sign and execute for and on his behalf the
Company's annual report on Form 10-K, and any and all amendments
thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in
such form as they, or either of them, may approve and to do any and
all other acts which said attorneys-in-fact, or either of them, may
deem necessary or desirable to enable The Kroger Co. to comply with
said Act or the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(Joseph A. Pichler) February 2, 1995
Joseph A. Pichler
Chief Executive Officer
EXHIBIT 24.1(Continued)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company")
does hereby severally make, constitute and appoint Paul W. Heldman
and Bruce M. Gack, or either of them, his true and lawful
attorneys-in-fact to sign and execute for and on his behalf the
Company's annual report on Form 10-K, and any and all amendments
thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in
such form as they, or either of them, may approve and to do any and
all other acts which said attorneys-in-fact, or either of them, may
deem necessary or desirable to enable The Kroger Co. to comply with
said Act or the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(William J. Sinkula) February 2, 1995
William J. Sinkula
Executive Vice President
EXHIBIT 24.1(Continued)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned officer of THE KROGER CO. (the "Company")
does hereby severally make, constitute and appoint Paul W. Heldman
and Bruce M. Gack, or either of them, his true and lawful
attorneys-in-fact to sign and execute for and on his behalf the
Company's annual report on Form 10-K, and any and all amendments
thereto, to be filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, in
such form as they, or either of them, may approve and to do any and
all other acts which said attorneys-in-fact, or either of them, may
deem necessary or desirable to enable The Kroger Co. to comply with
said Act or the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand.
(Richard L. Bere) February 2, 1995
Richard L. Bere
President and
Chief Operating Officer