SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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RULE 14A-6(E)(2))
[x] Definitive Proxy Statement
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[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
The Kroger Co.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Notes:
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PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
AND
1994 ANNUAL REPORT
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LOGO
LOGO
COVER PRINTED ON RECYCLED PAPER
TO OUR FELLOW SHAREHOLDERS:
The Kroger Co. had an outstanding year in 1994. The highlights included:
.record sales, cash flow, and earnings;
.the largest number of new store openings and expansions in the past six years;
.a new bank credit agreement that lowers the interest rate spread on bank
borrowings and supports expanded investment.
For the year, earnings before an extraordinary item were $268.9 million, or
$2.19 per fully diluted share, compared to $170.8 million, or $1.50 per fully
diluted share, in 1993. After the charge for early debt retirement, Kroger's
net earnings totaled $242.2 million, or $1.98 per share.
Operating cash flow rose 9% to $1.065 billion from $976.8 million in 1993.
Sales totaled $23 billion, a 2.6% increase over the previous year's sales of
$22.4 billion. Food store sales rose 4.9%, while identical food store sales
increased 2.2%--one of the best performances in the grocery industry.
Kroger-brand products continued their extraordinary popularity in 1994. For the
second consecutive year, sales of the Company's 6,000 private label items
increased faster than total corporate revenues. Kroger brands now account for
approximately 20% of grocery sales. Robust sales were generated in Kroger's
rapidly expanding selection of general merchandise items such as diapers, over-
the-counter medications, and personal care products.
Kroger also benefited from increased capital investment. Expenditures for
technology and logistics are reducing costs of operations, distribution and
products. In addition, we have accelerated the pace of new store development.
CAPITAL IMPROVEMENTS AND DEBT REDUCTION
Capital expenditures in 1994 totaled approximately $534 million, a 42% increase
over the prior year. Kroger's food store square footage expanded 4.7% with the
completion of 45 new stores, 17 expansions, and the acquisition of 20 stores.
In addition, 66 existing stores were remodeled. Investments in technology and
logistics to enhance systems totaled $69.4 million.
At the same time, the Company reduced total debt by $350 million to a year-end
total of $3.8 billion. Interest costs declined 16% to $327.6 million. Operating
divisions removed $234 million of working capital in 1994--an impressive
performance in light of the funds required to build, stock, and open all the
new stores during the year. Since 1989, Kroger has reduced working capital from
$426 million to last year's $171 million.
During 1994, Kroger shifted focus from debt refinancing to growth through
significant capital investment. The new bank credit agreement completed in July
supports this growth program. The agreement expands our operating flexibility,
lowers the interest rate spread on bank borrowings, and increases permitted
capital expenditures to $650 million plus a percentage of free cash flow.
OPERATING STRATEGY, 1995-1997
Kroger's primary competitive threat continues to be supercenters, which combine
food, pharmacy, and extensive general merchandise departments in 150,000 to
200,000 square foot facilities. Supercenter growth shows no signs of abating in
1995. However, we are confident that Kroger's combination food and drug store
format is ideally suited to meet the needs of customers. Research shows that
the combination store is the most effective format for serving a "neighborhood"
trade area--the three to five mile radius around the store that is most
convenient for consumers.
1
With food inflation expected to remain low in 1995, our strategy will continue
to emphasize cost reductions and growth through accelerated store expansion.
This strategy embraces the following components:
.Higher returns from existing assets. We expect identical store sales to exceed
food inflation by at least one percent in 1995. Store managers are committed to
cost reductions which will insure that every dollar of sales produces
additional profit. For example, the introduction of self-service bakeries
enables customers to choose their own cookies and doughnuts while reducing
operating costs in those departments. Relocation of produce weigh scales to the
checklane reduces staffing requirements and improves customer service. Expanded
variety and effective merchandising of Kroger brand products generate higher
profits compared to national brands and their lower shelf prices attract value-
conscious shoppers.
.Increased square footage. In 1995, Kroger will invest about $600 million in
capital projects to open or expand 90 stores and remodel 65 existing stores.
This investment will increase food store square footage by 5-6%. Capital
expenditures will exceed $600 million in both 1996 and 1997, continuing the
largest capital expansion in our 112-year history. In addition, the Company
will selectively consider acquisitions which fit with our current geographic
operating areas or help us achieve further market penetration.
We continue to review the performance of all assets and identify opportunities
for capital redeployment. In 1994, Kroger sold seven stores in Alabama and
Mississippi to Delchamps, Inc., and purchased two of their stores in
Mississippi. Early in 1995, our Dillon convenience store group completed the
sale of the 116 store Time Saver Stores division. Proceeds from these
transactions have been allocated to high return projects and debt repayment.
.Implementation of technology and logistics. Hardware and software
installations that reduce operating and distribution costs are key components
of Kroger's growth strategy. Since 1992, more than $120 million has been
committed to achieving technological and logistical projects. Over the next
three years, we will allocate an additional $100 million of total capital
budget for technology and logistics.
The payback from this investment in technology is already substantial. New
front-end systems have significantly improved the efficiency, speed, and
accuracy of checklane operations. Computer assisted work force scheduling
balances store staffing with customer shopping patterns. Systems linking stores
to distribution centers, Kroger manufacturing plants, and outside suppliers
complete the efficiency loop by providing the data necessary to distribute
thousands of products each day while reducing warehouse and shipping costs.
LABOR RELATIONS
In 1994, Kroger successfully negotiated 63 labor contracts. We were able to
extend the duration of a number of these contracts, which gives the Company a
clear picture of future costs. The new contracts also maintain health care
benefits while reducing costs through the introduction of managed care
alternatives. The Company's relationship with the United Food and Commercial
Workers Union, especially at the local level--where it is vitally important--
continues to improve.
COMMUNITY DEVELOPMENT
Community involvement remains a highly visible and sustained corporate
activity. Company personnel serve on the boards of food banks in more than a
half-dozen Kroger cities, and we have teamed up with other companies to assure
a steady supply of products for food bank operations. The Nashville Marketing
Area was the first recipient of the new Leadership Award from the Second
Harvest Food Bank, and Heritage Farm Dairy was named Donor of the Year for its
contribution of more than 1 million quarts of milk to the Nashville Food Bank
since 1983.
2
Thousands of Kroger employees are involved in partnerships with more than 500
schools. Adopt-A-School programs involve Kroger people as tutors, mentors,
field day chaperones, and as coordinators of special events and programs for
countless youngsters.
Kroger divisions and manufacturing plants made cash donations of approximately
$2.9 million to local organizations in 1994. In addition, The Kroger Co.
Foundation made contributions of approximately $1 million. Company units also
donated tons of products for local community events and for emergency relief
efforts such as the severe flooding in Georgia and Florida during the spring of
1994.
DIRECTOR AND EXECUTIVE CHANGES
Ray E. Dillon, Jr., Chairman Emeritus of the Board of Dillon Companies, Inc.,
retired from the Board of Directors, culminating a long and distinguished
career. Ace Dillon's wise counsel and broad knowledge of the industry were a
source of inspiration to his colleagues and many friends. James D. Woods,
Chairman of the Board, President, and Chief Executive Officer of Baker Hughes
Incorporated, was elected to the Board.
At year-end 1994, Donald F. Dufek retired as Senior Vice President--Logistics
after a distinguished 32-year Kroger career. Ronald R. Rice was promoted to
Senior Vice President--Manufacturing, and William T. Boehm was named Vice
President--Logistics. James J. Kobach, Director of Pharmacies at King Soopers,
was promoted to Vice President--Corporate Pharmacy, a new position reflecting
the increasing importance of this segment of the business. In addition, Timothy
F. Brown was promoted to Vice President, Deli/Seafood/Meat Merchandising and
Procurement; Claude A. Moldenhauer was promoted to Vice President, Produce
Merchandising and Procurement; and Herman P. Satterwhite, Jr., was promoted to
Vice President, Facility Engineering.
THE YEAR AHEAD
Kroger management enters 1995 more confident than at any time since the
corporate restructuring six years ago. The Company's 200,000 employees are
dedicated to providing our customers with value, convenience, quality products,
and exceptional service. We expect another year of improved performance from
our existing store base and will generate significant growth through our
accelerating square footage expansion. Investments in technology and logistics
will improve operating efficiencies and reduce costs. We fully anticipate that
the resulting cash flow benefits will result in significant bottom line growth.
It is our firm intention to use that growth to maximize shareholder return and
reward your continued confidence in our Company.
LOGO LOGO
Joseph A. Pichler Chairman Richard L. Bere President and Chief
and Chief Executive Officer Operating Officer
3
PROXY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Cincinnati, Ohio, April 5, 1995
To All Shareholders
of The Kroger Co.:
The annual meeting of shareholders of The Kroger Co. will be held at the REGAL
HOTEL, 150 WEST FIFTH STREET, Cincinnati, Ohio, on May 18, 1995, at 10 A.M.,
for the following purposes:
1. To elect four directors to serve until the annual meeting of
shareholders in 1998 or until their successors have been elected and
qualified;
2. To consider and act upon a proposal to ratify the selection of
auditors for the Company for the year 1995; and
3. To transact such other business as may properly be brought before the
meeting; all as set forth in the Proxy Statement accompanying this
Notice.
Holders of common shares of record at the close of business on March 21, 1995,
will be entitled to vote at the meeting.
YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF THE SHAREHOLDERS REPRESENTED
AT THE MEETING, IN PERSON OR BY PROXY. PLEASE SIGN AND DATE THE ENCLOSED PROXY
AND MAIL IT AT ONCE IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
By order of the Board of Directors,
Paul W. Heldman, Secretary
PROXY STATEMENT
Cincinnati, Ohio, April 5, 1995
The accompanying proxy is solicited by the Board of Directors of The Kroger
Co., and the cost of solicitation will be borne by the Company. The Company
will reimburse banks, brokers, nominees, and other fiduciaries for postage and
reasonable expenses incurred by them in forwarding the proxy material to their
principals. The Company has retained Hill & Knowlton, Inc., 420 Lexington
Avenue, New York, New York to assist in the solicitation of proxies and will
pay such firm a fee estimated at present not to exceed $15,000. Proxies may be
solicited personally, or by telephone, as well as by use of the mails.
Joseph A. Pichler, Patricia Shontz Longe and T. Ballard Morton, Jr., all of
whom are directors of the Company, have been named members of the Proxy
Committee.
The principal executive offices of The Kroger Co. are located at 1014 Vine
Street, Cincinnati, Ohio 45202-1100. Its telephone number is 513-762-4000. This
Proxy Statement and Annual Report, and the accompanying proxy, were first sent
or given to shareholders on April 5, 1995.
As of the close of business on March 21, 1995, the Company's outstanding voting
securities consisted of 111,316,068 shares of Common Stock, the holders of
which will be entitled to one vote per share at the annual meeting. The shares
represented by each proxy will be voted unless the proxy is revoked before it
is exercised. Revocation may be in writing to the Secretary of the Company or
in person at the meeting or by appointment of a subsequent proxy. The laws of
Ohio, under which the Company is organized, provide for cumulative voting for
the election of directors. If notice in writing is given by any shareholder to
the President, a Vice President, or the Secretary of the Company not less than
48 hours before the time fixed for holding the meeting that the shareholder
intends to cumulate votes for the election of directors and if an announcement
of the giving of such notice is made by or on behalf of any such shareholder or
by the Chairman or Secretary upon the convening of the meeting, each
shareholder shall have the right to cumulate votes at such election.
If cumulative voting is in effect, a shareholder voting for the election of
directors may cast a number of votes
4
equal to four times the number of shares held on the record date for a single
nominee or divide them among the nominees in full votes in any manner. Any vote
"FOR" the election of directors will constitute discretionary authority to the
Proxy Committee to cumulate votes to which such proxies relate as it, in its
discretion, shall determine, if cumulative voting is requested.
The effect of broker non-votes and abstentions on matters presented for
shareholder vote is as follows. The election of directors is, pursuant to Ohio
law, determined by plurality; broker non-votes and abstentions, therefore, will
have no effect on such proposal. Ratification by shareholders of the selection
of auditors requires the affirmative vote of the majority of common shares
represented. As such, broker non-votes will have no effect and abstentions will
have the effect of a vote against the proposal.
5
PROPOSALS TO SHAREHOLDERS
ELECTION OF DIRECTORS
(ITEM NO. 1)
The Board of Directors, as now authorized, consists of fifteen members divided
into three classes. Four directors are to be elected at the annual meeting to
serve until the annual meeting in 1998 or until their successors have been
elected by the shareholders, or by the Board of Directors pursuant to the
Company's Regulations, and qualified. Candidates for director receiving the
greatest number of votes cast by holders of shares entitled to vote at a
meeting at which a quorum is present are elected, up to the maximum number of
directors to be chosen at the meeting. The committee memberships stated below
are those in effect as of the date hereof. It is intended that, except to the
extent that authority is withheld, the accompanying proxy will be voted for the
election of the following four persons:
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE CONTINUING UNTIL 1998
JOHN L. CLENDENIN Mr. Clendenin is Chairman of the Board and Chief Executive 60 1986
Officer of BellSouth Corporation, a holding company with
subsidiaries in the telecommunications business. He is a
director of Wachovia Corp.; Equifax Incorporated; National
Service Industries, Inc.; Providian Corporation; RJR Na-
bisco Holdings Corp.; Springs Industries, Inc.; Coca Cola
Enterprises, Inc.; and New York Stock Exchange, Inc. Mr.
Clendenin is chair of the Corporate Responsibility Commit-
tee and vice chair of the Nominating Committee.
PATRICIA SHONTZ Dr. Longe is an Economist and a Senior Partner of The 61 1977
LONGE Longe Company, an economic consulting and investment firm.
She is a director of The Detroit Edison Company; Jacobson
Stores, Inc.; Comerica, Inc.; Comerica Bank & Trust, FSB;
and Warner-Lambert Company. Dr. Longe is a member of the
Compensation and Nominating Committees.
THOMAS H. O'LEARY Mr. O'Leary is Chairman, President and Chief Executive Of- 61 1977
ficer of Burlington Resources Inc., a natural resources
business. He is a director of The BFGoodrich Company. Mr.
O'Leary is chair of the Compensation Committee and a mem-
ber of the Nominating Committee.
JAMES D. WOODS Mr. Woods is Chairman of the Board, President and Chief 63 1994
Executive Officer of Baker Hughes Incorporated, a company
that provides equipment and services to the petroleum and
process industries. He is a director of Varco Internation-
al; Wynn's International Inc.; and Broadway Stores, Inc.
Mr. Woods is a member of the Audit and Corporate Responsi-
bility Committees.
6
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1997
REUBEN V. ANDERSON Mr. Anderson is a member, in the Jackson, Mississippi of- 52 1991
fice, of Phelps Dunbar, a New Orleans law firm. Prior to
joining this law firm, he was a justice of the Supreme
Court of Mississippi. Mr. Anderson is a director of
Trustmark National Bank and BellSouth Corporation. He is
vice chair of the Corporate Responsibility Committee and a
member of the Audit Committee.
RICHARD L. BERE Mr. Bere is President and Chief Operating Officer of Kro- 63 1990
ger. He is vice chair of the Executive Committee and a
member of the Corporate Responsibility Committee.
RAYMOND B. CAREY, Mr. Carey is a retired Chairman of the Board and Chief Ex- 68 1977
JR. ecutive Officer of ADT, Inc., an electronic protection
company. He is a director of Thomas & Betts Corporation
and C.R. Bard. Mr. Carey is chair of the Nominating Com-
mittee, vice chair of the Compensation Committee and a
member of the Executive Committee.
JOHN D. ONG Mr. Ong is Chairman and Chief Executive Officer of The 61 1975
BFGoodrich Company, a chemical and aerospace company. He
is a director of Cooper Industries, Inc.; Ameritech Corpo-
ration; The Geon Company; and ASARCO Inc. Mr. Ong is vice
chair of the Financial Policy Committee and a member of
the Nominating Committee.
JOSEPH A. PICHLER Mr. Pichler is Chairman of the Board and Chief Executive 55 1983
Officer of Kroger. He is a director of The BFGoodrich Com-
pany. Mr. Pichler is chair of the Executive Committee and
a member of the Financial Policy Committee.
MARTHA ROMAYNE SEGER Dr. Seger is a Financial Economist and currently is a Dis- 63 1991
tinguished Visiting Professor at Central Michigan Univer-
sity. From 1991-1993 she was the John M. Olin Distin-
guished Fellow at The Karl Eller Center of the University
of Arizona. She had been a member of the Board of Gover-
nors of the Federal Reserve System from 1984-1991. She is
a director of Amerisure Companies; Amoco Corporation;
Providian Corporation; Fluor Corporation; Johnson Con-
trols, Inc.; Tucson Electric Power Company; and Xerox Cor-
poration. Dr. Seger is a member of the Financial Policy
and Nominating Committees.
7
PROFESSIONAL DIRECTOR
NAME OCCUPATION (1) AGE SINCE
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DIRECTORS WHOSE TERMS OF OFFICE CONTINUE UNTIL 1996
RICHARD W. DILLON Mr. Dillon is Chairman Emeritus of the Board of Dillon 67 1983
Companies, Inc., a wholly-owned subsidiary of Kroger. Mr.
Dillon is a member of the Financial Policy Committee.
LYLE EVERINGHAM Mr. Everingham is the retired Chairman of the Board and 68 1970
Chief Executive Officer of Kroger. He is a director of
Federated Department Stores, Inc.; Cincinnati Milacron
Inc.; and Providian Corporation. Mr. Everingham is a mem-
ber of the Financial Policy and Nominating Committees.
JOHN T. LAMACCHIA Mr. LaMacchia is President, Chief Executive Officer, and a 53 1990
director of Cincinnati Bell Inc., a telecommunications
holding company. He is a director of Multimedia, Inc. Mr.
LaMacchia is chair of the Audit Committee and a member of
the Compensation and Executive Committees.
T. BALLARD MORTON, Mr. Morton is Executive in Residence of the College of 62 1968
JR. Business & Public Administration of the University of
Louisville. He is a director of PNC Bank, Kentucky, Inc.
and LG&E Energy Corp. Mr. Morton is chair of the Financial
Policy Committee and a member of the Audit and Executive
Committees.
KATHERINE D. ORTEGA Ms. Ortega served as an Alternate Representative of the 60 1992
United States to the 45th General Assembly of the United
Nations in 1990-1991. Prior to that, she served as Trea-
surer of the United States. Ms. Ortega is a director of
Diamond Shamrock, Inc.; Ralston Purina Co.; Long Island
Lighting Company; The Paul
Revere Corporation; and Rayonier Inc. She is vice chair of
the Audit Committee and a member of the Corporate Respon-
sibility Committee.
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(1) Except as noted, each of the directors has been employed by his or her
present employer (or a subsidiary) in an executive capacity for at least
five years.
8
INFORMATION CONCERNING THE BOARD OF DIRECTORS
DIRECTORS' COMPENSATION
Each non-employee director is currently paid an annual retainer of $25,000 plus
fees of $1,500 for each board meeting and $1,000 for each committee meeting
attended. Committee chairs receive an additional annual retainer of $4,000.
Directors who are employees of the Company do not receive any compensation for
service as directors. The Company provides accidental death and disability
insurance for directors at a cost to the Company in 1994 of $176 per director.
The Company also provides a major medical plan for directors.
The Company grants to each of its non-employee directors owning a minimum of
1,000 shares of common stock of the Company as of the date of each annual
meeting of shareholders options to purchase 2,000 shares of common stock at an
option price equal to the fair market value of the stock at the date of the
grant, and each non-employee director received a grant on that date. The
options vest in 666, 667 and 667 share amounts on the first, second and third
annual anniversary of the date of grant. As of December 31, 1994, the value of
each grant of options, none of which were exercisable, was $1,490.
The Company has an unfunded retirement program for outside directors. The
retirement benefit is the average compensation for the five calendar years
preceding retirement. Directors who retire from the Board prior to age 70 will
be credited with 50% vesting after five years of service and an additional 10%
for each year served thereafter. Benefits for directors who retire prior to age
70 will commence at the time of retirement from the Board or age 65, whichever
comes later.
COMMITTEES OF THE BOARD
The Board of Directors has a number of standing committees including Audit,
Nominating and Compensation Committees. During 1994, the Audit Committee met
three times, the Nominating Committee met two times, and the Compensation
Committee met four times. Committee memberships are shown on pages 5 through 7
of this Proxy Statement. The Audit Committee reviews external and internal
auditing matters and recommends the selection of the Company's independent
auditors for approval by the Board and ratification by shareholders. The
Compensation Committee determines the compensation of the Company's senior
management and administers its stock option and benefit programs. The
Nominating Committee is responsible for developing criteria for selecting and
retaining members of the Board and seeks out qualified candidates. The Board of
Directors met seven times in 1994. During 1994, all directors attended at least
75% of the number of Board meetings and committee meetings, in the aggregate,
on which such director was a member, with the exception of Mr. Woods.
The Nominating Committee will consider shareholder recommendations for nominees
for membership on the Board of Directors. Recommendations intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1996, together with a description of the proposed nominee's
qualifications and other relevant information, must be submitted in writing to
Paul W. Heldman, Secretary of the Company, and received at the Company's
executive offices not later than December 7, 1995.
CERTAIN TRANSACTIONS
The Company purchased certain private label products to be sold in Company
stores from suppliers represented by two firms in which Mr. Everingham's son,
Mark Everingham, owned a 33% and 50% interest, respectively. The two firms
earned gross revenues of approximately $7,118,822 in fees paid by the suppliers
for services performed by the firms on behalf of the suppliers. In addition,
the two firms earned gross revenues of approximately $1,093,123 in fees paid by
the Company for services performed by those firms on behalf of the Company's
manufacturing division. The management of the Company views these transactions,
and the amounts paid for the services and goods supplied, as fair and
competitive.
The law firm of Gilliland & Hayes, of which Bradley D. Dillon, son of Richard
W. Dillon, is a partner, rendered legal services to a subsidiary of the Company
which resulted in fees paid to the law firm by the
subsidiary in 1994 of $132,879. The management of the Company has determined
that these amounts paid by the Company for the services are fair and
competitive.
In addition, the law firm of Phelps Dunbar, of which Reuben V. Anderson is a
partner, rendered legal services to the Company which resulted in fees paid to
the law firm by the Company in 1994 of $27,584. The management of the Company
has determined that amounts paid by the Company for the services are fair and
competitive.
9
COMPENSATION OF EXECUTIVE OFFICERS
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SUMMARY COMPENSATION
The following table shows the compensation for the past three years of the
Chief Executive Officer and each of the Company's four most highly compensated
executive officers, excluding the Chief Executive Officer (the "named executive
officers"):
SUMMARY COMPENSATION TABLE
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ANNUAL COMPENSATION LONG TERM COMPENSATION(1)
------------------------------ -------------------------
AWARDS
----------------------------
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------
(2) (3) (4) (5) (6)
Joseph A.
Pichler 1994 $430,385 $684,447 $19,511 27,000 $23,023
Chairman
and Chief 1993 $416,923 $582,343 $ 9,127 25,000 $19,249
Executive
Officer 1992 $417,885 $149,484 $ 8,417 20,000 $17,526
Richard L.
Bere 1994 $318,000 $452,330 $20,642 18,000 $24,770
President
and Chief 1993 $306,231 $349,406 $ 9,590 16,000 $20,819
Operating
Officer 1992 $305,769 $108,382 $ 9,142 16,000 $19,434
William J.
Sinkula 1994 $276,246 $297,586 $18,687 15,000 $22,600
Executive
Vice
President 1993 $265,400 $264,701 $ 8,674 13,500 $18,959
and Chief
Financial
Officer 1992 $265,000 $ 85,896 $ 8,319 13,500 $17,763
David B.
Dillon 1994 $290,000 $281,059 15,000 $ 1,650
Executive
Vice
President,1993 $286,833 $201,416 15,000 $ 1,349
and Presi-
dent,
Dillon 1992 $280,000 $129,228 15,000 $ 873
Companies,
Inc.
Patrick J.
Kenney 1994 $250,000 $277,959 $12,840 $ 205,625 15,000 $17,012
Senior
Vice
President 1993 $199,769 $206,415 $ 5,576 15,000 $11,770
1992 $189,769 $ 44,353 $ 5,166 13,000 $ 9,781
- ------
(1) During the period presented, the Company has made no long-term incentive
plan payouts other than restricted stock and stock options.
(2) The 1992 salary of Messrs. Pichler, Bere, Sinkula and Kenney reflects
Kroger's 53 week fiscal year 1992. Mr. Dillon's salary reflects Dillon
Companies' annual compensation based on a 365 day year.
(3) Represents reimbursement for the tax effects of payment for certain
premiums on a policy of life insurance.
(4) Messrs. Pichler, Bere, Sinkula, Dillon and Kenney had 12,000, 6,000, 4,000,
4,000, and 10,000 shares outstanding, respectively at December 31, 1994,
with an aggregate value of $289,500, $144,750, $96,500, $96,500, and
$241,250, respectively. The aggregate value is based on the market price of
the Company's Common Stock on December 31, 1994. Restrictions remaining on
outstanding restricted stock awards to Messrs. Pichler, Bere, Sinkula and
Dillon lapse in 1995. These restrictions relate to stock awarded in 1990.
Restrictions on Mr. Kenney's shares lapse as to 500 shares over each of the
next four years and as to the remaining 8,000 shares in 1999. The Company
is currently prohibited by contract from paying dividends on its Common
Stock but, should this prohibition be lifted, dividends, as and when
declared, would be payable on these shares.
(5) Represents options granted during the respective fiscal year. Options
granted in 1994 vest for equal number of shares in 1995, 1996 and 1997
excluding 5,000 options granted to Mr. Kenney in January 1994. All other
options vest 6 months from grant date. Options terminate in 10 years if not
earlier exercised or terminated. No stock appreciation rights ("SARs") were
granted in any of the three years presented.
(6) These amounts represent the Company's matching contribution under The
Kroger Co. Savings Plan in the amounts of $1,350, $1,800, $1,800 and $900,
respectively, for Messrs. Pichler, Bere, Sinkula and Kenney, the Company's
matching contribution under the Dillon Companies, Inc. Employees' Stock
Ownership and Savings Plan in the amount of $1,650 for Mr. Dillon and
reimbursement of certain premiums for policies of life insurance in the
amounts of $21,673, $22,970, $20,800 and $16,112, respectively, for Messrs.
Pichler, Bere, Sinkula and Kenney.
10
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS
The Company has in effect employee stock option plans pursuant to which
options to purchase Common Stock of the Company are granted to officers and
other employees of the Company and its subsidiaries. The following table shows
option grants in fiscal year 1994 to the named executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM
- ------------------------------------------------------- -----------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SHARE) DATE 0% 5% 10%
- -------------------------------------------------------------------------------
Joseph
A.
Pichler 27,000 1.01% $23.38 5/18/2004 $0 $396,776 $1,005,716
Richard
L.
Bere 18,000 .68% $23.38 5/18/2004 $0 $264,517 $ 670,477
William
J.
Sinkula 15,000 .56% $23.38 5/18/2004 $0 $220,431 $ 558,731
David
B.
Dillon 15,000 .56% $23.38 5/18/2004 $0 $220,431 $ 558,731
Patrick
J.
Kenney 10,000 .38% $23.38 5/18/2004 $0 $146,954 $ 372,487
5,000 .19% $20.57 1/16/2004 $0 $ 64,621 $ 163,819
- ------
(1) No SARs were granted or outstanding during the fiscal year. These options
vest in equal number of shares in 1995, 1996 and 1997, except for the 5,000
share grant to Mr. Kenney which vested six months after the date of grant,
and terminate in 10 years if not earlier exercised or terminated.
The assumptions set forth in the chart above are merely examples and do not
represent predictions of future stock prices or a forecast by the Company with
regard to stock prices.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR AND OPTION/SAR VALUES
The following table shows information concerning the exercise of stock
options during fiscal year 1994 by each of the named executive officers and the
fiscal year-end value of unexercised options:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES TABLE
- ------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-
OPTIONS/SARS THE-MONEY
AT F/Y END (1) OPTIONS/SARS AT
(#) F/Y END (1) ($)
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------
Joseph A. Pichler 0 $ 0 214,080/27,000 $2,299,951/$20,115
Richard L. Bere 0 $ 0 116,777/18,000 $1,158,152/$13,410
William J. Sinkula 0 $ 0 85,500/15,000 $1,693,854/$11,175
David B. Dillon 25,000 $476,575 142,505/15,000 $ 702,652/$11,175
Patrick J. Kenney 0 $ 0 139,703/10,000 $1,683,136/$ 7,450
- ------
(1) No SARs were granted or outstanding during the fiscal year.
LONG-TERM INCENTIVE PLAN AWARDS
The Company provided no Long-Term Incentive Plan awards to any named
executive officer during fiscal year 1994.
11
COMPENSATION COMMITTEE REPORT
The Company has adopted compensation policies applicable to virtually all
levels of its work force, including its executive officers. The policies
require the Company to be competitive in total compensation; to include, as
part of total compensation, opportunities for equity ownership; to use
incentives that offer more than competitive compensation when the Company
achieves superior results and to base incentive payments on earnings before
interest, taxes, depreciation and LIFO charges ("EBITD") and on sales results.
Pursuant to these policies, the Company's compensation plans include grants of
stock options for executive, management, and hourly employees. In determining
the size of option grants to the Chief Executive Officer and the other
executive officers, the Compensation Committee considered, without use of a
formula, competitive practices among retailers, the individual executive
officer's level within Kroger and the level of past awards of stock options and
restricted stock to the individual. Grants of options to the Chief Executive
Officer and the other executive officers are generally lower than those of
their counterparts in the retail industry because the Company grants options to
several thousand management and hourly employees instead of, as is common in
the industry, only a small group of executives.
The Compensation Committee establishes the fixed portion of executive officer
cash compensation, or salary, by considering internal equity and competitor
salary data as described below. Additionally, a large percentage of employees
at all levels of the organization, including executive officers, are eligible
to receive a bonus incentive based upon Company or unit performance. Bonus
potentials for executives are established by level within the Company, and
actual payouts are based on achievement of sales and EBITD targets. Actual
payouts can exceed these potentials if results exceed the targets. In the case
of the executive officers, approximately 50% of total potential cash
compensation is based on Company or unit EBITD and sales performance.
Salary and bonus levels are compared to a grouping of food wholesalers and
retailers, the Wholesale/Retail Compensation Survey, from which the peer group
is selected (see Performance Graph, below), to ensure that executive and
management compensation is competitive. The Committee establishes salaries for
executive officers that generally are at the median of compensation paid by
peer group companies for comparable positions (where data for comparable
positions are available) with a bonus potential that, if realized, would cause
their total cash compensation to be in the upper quartile of peer group
compensation. The Company's outstanding performance in 1994 is reflected by
bonuses paid for all executive officers. Bonus payouts for Messrs. Bere and
Sinkula are based on both Kroger and Dillon operations and were the same
percentage of potential as that for Mr. Pichler as identified below. Mr.
Dillon's bonus payouts are determined with reference to both the Dillon plan
and the Kroger plan and represented 99%, 88% and 57% of his potential during
the past three years. Mr. Rice's bonus payouts are based in part on the
manufacturing group's operations and represented 104%, 102% and 45% of his
potential during the past three years. All other executive officers received
bonus payouts of 124% of potential, compared to 105% and 23% in the prior two
years.
The compensation of Kroger's Chief Executive Officer is determined annually
pursuant to the policies described above. Mr. Pichler's variable compensation
or bonus for the last fiscal year, which represented 119% of his bonus
potential, reflects the extent to which the Company achieved the EBITD and
sales targets that were established by this Committee at the beginning of the
year. Mr. Pichler's bonus for the previous two years represented 105% and 32%,
respectively, of its potential. The value of stock options granted to Mr.
Pichler in the last fiscal year fluctuates based on the Company's performance
in the stock market. Mr. Pichler entered into an employment contract with the
Company which is more particularly described elsewhere in the proxy statement.
That agreement establishes minimum compensation at levels below his total
compensation determined in consideration of the factors identified above.
The Omnibus Budget Reconciliation Act of 1993 places a $1,000,000 limit on the
amount of certain types of compensation for each of the executive officers
which may be tax deductible by the Company. Although the Internal Revenue
Service has yet to issue final regulations on the deductibility limit, the
Company will continue to monitor the presently proposed regulations and will
consider modifications to its compensation programs once final regulations are
adopted. The Company's policy is, primarily, to design and administer
compensation plans which support the achievement of long-term strategic
objectives and enhance shareholder value. Where it is material and supports the
Company's compensation philosophy, the Committee will also attempt to maximize
the amount of compensation expense that is tax-deductible by the Company.
Compensation Committee:
Thomas H. O'Leary, Chair
Raymond B. Carey, Jr., Vice-Chair
John T. LaMacchia
Patricia Shontz Longe
12
PERFORMANCE GRAPH
Set forth below is a line graph comparing the 5-year cumulative total
shareholder return on the Company's Common Stock, based on the market price of
the Common Stock and assuming reinvestment of dividends, with the cumulative
total return of companies on the Standard & Poor's 500 Stock Index and the
largest food companies selected from the Wholesale/Retail Compensation Survey:
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN* OF THE KROGER CO., S&P 500 AND
PEER GROUP**
[GRAPH APPEARS HERE]
Measurement Period S&P
(Fiscal Year Covered) KROGER 500 PEER GROUP
- ------------------- ---------- --------- ----------
Measurement Pt-
12/31/89 $100 $100 $100
FYE 12/31/90 $ 97 $ 97 $105
FYE 12/31/91 $134 $126 $113
FYE 12/31/92 $ 99 $136 $144
FYE 12/31/93 $136 $150 $143
FYE 12/31/94 $164 $152 $152
The Company's fiscal year ends on the Saturday closest to December 31.
- ------
*Total assumes $100 invested on December 31, 1989 in The Kroger Co., S&P 500
Index and the largest food companies selected from the Wholesale/Retail
Compensation Survey (the "Peer Group"), with reinvestment of dividends.
**The Peer Group consists of Albertson's Inc., American Stores Co., Fleming
Companies Inc., Giant Food Inc. (Class A), Great Atlantic & Pacific, Safeway
Inc., Supervalu Inc., The Vons Companies Inc. and Winn-Dixie Stores.
The Company's peer group is composed of the nine largest food companies
measured by total revenue (excluding the Company) within the Wholesale/Retail
Compensation Survey (the "Survey"), which permits a comparison of the return of
the Company's shareholders to that of companies against which executive
compensation levels are measured. The Compensation Committee establishes the
compensation for executives and management by comparison to compensation
reported in the Survey.
Neither the foregoing Compensation Committee Report nor the foregoing
Performance Graph shall be deemed incorporated by reference into any other
filing, absent an express reference thereto.
13
COMPENSATION PURSUANT TO PLANS
The Company maintains various benefit plans which are available to management
and certain other employees. The Company derives the benefit of certain tax
deductions as a result of its contributions to some of the plans. Each of the
executive officers of the Company was eligible to participate in one or more of
the following plans.
THE KROGER CO. EMPLOYEE PROTECTION PLAN
The Company adopted The Kroger Co. Employee Protection Plan ("KEPP") during
fiscal 1988. All management employees, including the executive officers, and
administrative support personnel of the Company with at least one year of
service are covered. KEPP provides for severance benefits and the extension of
Company paid health care in the event an eligible employee actually or
constructively is terminated from employment without cause within two years
following a change of control of the Company (as defined in the plan). For
persons over 40 years of age with more than six years of service, severance pay
ranges from approximately 9 to 18 months' salary and bonus, depending upon
Company pay level and other benefits. KEPP may be amended or terminated by the
Board of Directors at any time prior to a change of control, and will expire in
1998 unless renewed by the Board of Directors.
PENSION PLANS
The Company maintains the Kroger Retirement Benefit Plan, a defined benefit
plan, to provide pension benefits to retired or disabled management employees
and certain groups of hourly personnel. The Plan generally provides for
benefits at age 62 or later equal to 1 1/2% times the years of service, after
attaining age 21, (or, for participants prior to January 1, 1986, after
attaining age 25) times the highest average earnings for any five years during
the ten calendar years preceding retirement, less an offset tied to Social
Security benefits. The Company also maintains an Excess Benefits Plan under
which the Company pays benefits under this formula which exceed the maximum
benefit payable under ERISA by defined benefit plans. The following table gives
examples of annual retirement benefits payable on a straight-life basis under
the Company's retirement program.
YEARS OF SERVICE
FIVE YEAR -----------------------------------------------------------------
VERAGE REMUNERATIONA 15 20 25 30 35 40
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
$ 150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
450,000 101,250 135,000 168,750 202,500 236,250 270,000
650,000 146,250 195,000 243,750 292,500 341,250 390,000
850,000 191,250 255,000 318,750 382,500 446,250 510,000
900,000 202,500 270,000 337,500 405,000 472,500 540,000
1,200,000 270,000 360,000 450,000 540,000 630,000 720,000
1,300,000 292,500 390,000 487,500 585,000 682,500 780,000
No deductions have been made in the above table for offsets tied to Social
Security benefits.
Remuneration earned by Messrs. Pichler, Bere, Sinkula and Kenney in 1994, which
was covered by the Plan was $1,012,727, $667,406, $540,947 and $456,415,
respectively. As of December 31, 1994, they had 7, 37, 15, and 33 years of
credited service, respectively.
DILLON PLANS
Dillon Companies, Inc. and its subsidiaries maintain pension, profit sharing,
stock ownership, and savings plans that provide benefits at levels comparable
to the plans described above. David B. Dillon participates in these plans. In
addition, Mr. Pichler has six years of credited service under certain of the
pension and profit sharing plans, but no further credited service will be
accrued for him under such plans.
14
Under the Dillon Profit Sharing and Savings Plans, Dillon and each of its
subsidiaries contributes a certain percentage of its net income, determined
annually, to its plans to be allocated among its participating employees based
on the percent each such participating employee's total compensation bears to
the total compensation of all participating employees employed by such entity.
On participating employees' termination after the age of 60 (or prior thereto
after 7 years of service), death or disability, they are entitled to their full
account balance. To update and supplement these plans, Dillon and several of
its subsidiaries have adopted Pension Plans for their eligible employees. Under
these plans, the normal retirement benefit for eligible employees is a certain
percentage of average compensation during a certain period of employment
multiplied by the years of credited service (in some of these plans there is a
maximum period of credited service), minus the benefit provided by the Profit
Sharing and Savings Plans (except as may be limited by provisions of ERISA).
The following table shows the estimated annual pension payable upon retirement
to persons covered by Dillon's Pension Plans. Benefits payable under the Profit
Sharing Plan may exceed the amount payable under the Pension Plan, and
participants are entitled to the greater of the two. The table does not reflect
benefits payable under Dillon's Profit Sharing and Savings Plans, since
benefits under those plans are not determined by years of service, and no
deductions have been made in the table for offsets tied to Social Security
benefits.
YEARS OF SERVICE
AVERAGE -----------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
------------ ---------- ---------- ---------- ---------- ---------- ----------
$150,000 $ 33,750 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000
250,000 56,250 75,000 93,750 112,500 131,250 150,000
300,000 67,500 90,000 112,500 135,000 157,500 180,000
400,000 90,000 120,000 150,000 180,000 210,000 240,000
500,000 112,500 150,000 187,500 225,000 262,500 300,000
600,000 135,000 180,000 225,000 270,000 315,000 360,000
700,000 157,500 210,000 262,500 315,000 367,500 420,000
The amounts contributed by Dillon and its subsidiaries pursuant to these
Pension Plans is not readily ascertainable for any individual, and thus is not
set forth with respect to Mr. Dillon. Mr. Dillon has 19 years of credited
service.
EMPLOYMENT CONTRACTS
The Company entered into an amended and restated employment agreement with Mr.
Pichler dated as of July 22, 1993. During his employment, the Company agrees to
pay Mr. Pichler at least $420,000 a year, unless the amount is reduced due to
adverse business conditions. Mr. Pichler's employment may be terminated at the
discretion of the Board of Directors. The contract also provides that the
Company will continue to pay Mr. Pichler's salary to his beneficiary for a
period of five years after a termination of employment resulting from his
death, or will pay to Mr. Pichler his salary for a term equal to the lesser of
five years or until October 4, 2005, if Mr. Pichler's termination of employment
results from his involuntary separation. The Company also has agreed to
reimburse Mr. Pichler for premiums on a policy of life insurance plus the tax
effects of that reimbursement. After his termination of employment for any
reason after age 62 if he is not entitled to receive the salary continuation
described above, Mr. Pichler will, in exchange for his availability to provide
certain consulting services, then receive each year until his death an amount
equal to 25% of the highest salary paid him during the term of this agreement.
15
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of February 10, 1995, the directors of the Company, the named executive
officers and the directors and executive officers as a group, beneficially
owned shares of the Company's Common Stock as follows:
AMOUNT AND
NATURE OF BENEFICIAL
NAME OWNERSHIP
- -------------------------------------------------------------------------------
Reuben V. Anderson................................. 1,000
Richard L. Bere.................................... 207,122(7)(8)
Raymond B. Carey, Jr............................... 5,000
John L. Clendenin.................................. 1,000
David B. Dillon.................................... 261,986(1)(7)(8)
Richard W. Dillon.................................. 193,625(2)
Lyle Everingham.................................... 327,132(3)(7)
Patrick J. Kenney.................................. 160,452(7)(8)
John T. LaMacchia.................................. 1,000
Patricia Shontz Longe.............................. 4,000
T. Ballard Morton, Jr.............................. 10,000
Thomas H. O'Leary.................................. 1,000
John D. Ong........................................ 1,000
Katherine D. Ortega................................ 1,040
Joseph A. Pichler.................................. 419,802(4)(7)(8)
Martha Romayne Seger............................... 1,200
William J. Sinkula................................. 246,270(7)(8)
James D. Woods..................................... 1,000
Directors and Executive Officers as a group (in-
cluding those named above)........................ 2,527,924(5)(6)(7)(8)
- --------------------------------------------------------------------------------
(1) This amount does not include 29,730 shares owned by Mr. Dillon's wife,
13,506 shares in his children's trust or 10,584 shares owned by his
children. Mr. Dillon disclaims beneficial ownership of these shares.
(2) This amount does not include 93,116 shares owned by Mr. Richard Dillon's
wife or 489,800 in his father's trust of which he is a co-trustee. Mr.
Dillon disclaims beneficial ownership of these shares.
(3) This amount does not include 56,453 shares owned by Mr. Everingham's wife.
Mr. Everingham disclaims beneficial ownership of these shares.
(4) This amount does not include 705 shares owned by Mr. Pichler's wife or
1,308 shares owned by his children. Mr. Pichler disclaims beneficial
ownership of these shares.
(5) The figure shown does not include an aggregate of 10,658 additional shares
held by, or for the benefit of, the immediate families or other relatives
of all directors and executive officers as a group not previously listed
above. In each case the director or executive officer disclaims beneficial
ownership of such shares.
(6) No director or executive officer owned as much as 1% of Common Stock of the
Company. The directors and executive officers as a group beneficially owned
2.3% of Common Stock of the Company.
(7) This amount includes shares which represent options exercisable on or
before April 10, 1995, in the following amounts: Mr. Bere, 116,777; Mr.
Dillon, 142,505; Mr. Everingham, 110,000; Mr. Kenney, 139,703; Mr. Pichler,
214,080; Mr. Sinkula, 85,500; and all directors and executive officers as a
group, 1,314,194.
(8) The fractional interest resulting from allocations under Kroger's 401(k)
plan and Dillon's ESOP and 401(k) plan has been rounded to the nearest
whole number.
16
As of February 10, 1995, the following persons reported beneficial ownership of
the Company's Common Stock based on reports on Schedule 13G filed with the
Securities and Exchange Commission or other reliable information as follows:
AMOUNT AND
NATURE OF PERCENTAGE
NAME ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------------------------
The Kroger Co. Savings Plan 1014 Vine Street 14,985,385(1) 13.5%
Cincinnati, OH 45202
The Dillon Cos. Employee Master Trust 700 East 30th Street 8,347,177(1) 7.5%
Hutchinson, KS 67052
- ------
(1) Shares beneficially owned by plan trustees for the benefit of participants
in employee benefit plans.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the New York Stock Exchange. Such officers, directors and shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during fiscal year 1994
all filing requirements applicable to its officers, directors and ten percent
beneficial owners were satisfied except that Mr. John L. Clendenin
inadvertently filed a Form 4, reporting a purchase of 600 shares, 20 days late.
17
SELECTION OF AUDITORS
(ITEM NO. 2)
The Board of Directors, on February 9, 1995, appointed the firm of Coopers &
Lybrand L.L.P. as Company auditors for 1995, subject to ratification by
shareholders. This appointment was recommended by the Company's Audit
Committee, comprised of directors who are not employees of the Company. If the
firm is unable for any reason to perform these services, or if selection of the
auditors is not ratified, other independent auditors will be selected to serve.
Ratification of this appointment requires the adoption of the following
resolution by the affirmative vote of the holders of a majority of the shares
represented at the meeting:
"RESOLVED, That the appointment by the Board of
Directors of Coopers & Lybrand L.L.P. as Company
auditors for 1995 be and it hereby is ratified."
Fees for all audit services provided by Coopers & Lybrand L.L.P. in 1994
totaled $675,283. In addition, fees totaling $1,546,500 were charged for non-
audit services.
A representative of Coopers & Lybrand L.L.P. is expected to be present at the
meeting to respond to appropriate questions and to make a statement if he
desires to do so.
THE BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE FOR THIS PROPOSAL.
-------------
SHAREHOLDER PROPOSALS--1996 ANNUAL MEETING. Shareholder proposals intended for
inclusion in the Company's proxy material relating to the Company's annual
meeting in May 1996 should be addressed to the Secretary of the Company and
must be received at the Company's executive offices not later than December 7,
1995.
-------------
Attached to this Proxy Statement is the Company's 1994 Annual Report which
includes a brief description of the Company's business indicating the general
scope and nature of such business during 1994, together with the audited
financial information contained in the Company's 1994 report to the Securities
and Exchange Commission on Form 10-K. A COPY OF THAT REPORT IS AVAILABLE TO
SHAREHOLDERS ON REQUEST BY WRITING: LAWRENCE M. TURNER, TREASURER, THE KROGER
CO., 1014 VINE STREET, CINCINNATI, OHIO 45202-1100 OR BY CALLING 1-513-762-
1220.
The management knows of no other matters that are to be presented at the
meeting but, if any should be presented, the Proxy Committee expects to vote
thereon according to its best judgment.
By order of the Board
of Directors,
Paul W. Heldman,
Secretary
18
FINANCIAL REPORT 1994
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Kroger Co. has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis and are not misstated due to material
error or fraud. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the report and is responsible for its accuracy and consistency
with the financial statements.
The Company's financial statements have been audited by Coopers & Lybrand
L.L.P., independent certified public accountants, approved by the shareholders.
Management has made available to Coopers & Lybrand L.L.P. all of the Company's
financial records and related data, as well as the minutes of shareholders' and
directors' meetings. Furthermore, management believes that all representations
made to Coopers & Lybrand L.L.P. during its audit were valid and appropriate.
Management of the Company has established and maintains a system of internal
control that provides reasonable assurance as to the integrity of the financial
statements, the protection of assets from unauthorized use or disposition, and
the prevention and detection of fraudulent financial reporting. The system of
internal control provides for appropriate division of responsibility and is
documented by written policies and procedures that are communicated to
employees with significant roles in the financial reporting process and updated
as necessary. Management continually monitors the system of internal control
for compliance. The Company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto. In addition, as part of its audit of
the Company's financial statements, Coopers & Lybrand L.L.P. completed a review
of selected internal accounting controls to establish a basis for reliance
thereon in determining the nature, timing and extent of audit tests to be
applied. Management has considered the internal auditor's and Coopers & Lybrand
L.L.P.'s recommendations concerning the Company's system of internal control
and has taken actions that we believe are cost-effective in the circumstances
to respond appropriately to these recommendations. Management believes that, as
of December 31, 1994, the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which
is publicized throughout the Company. The code of conduct addresses, among
other things, the necessity of ensuring open communication within the Company;
potential conflicts of interests; compliance with all domestic and foreign
laws, including those relating to financial disclosure; and the confidentiality
of proprietary information. The Company maintains a systematic program to
assess compliance with these policies.
JOSEPH A. PICHLER WILLIAM J. SINKULA
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors is composed of five independent
directors. The committee held three meetings during fiscal year 1994. In
addition, members of the committee received and reviewed various reports from
the Company's internal auditor and from Coopers & Lybrand L.L.P. throughout the
year.
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareowner
approval, the selection of the Company's independent public accountant, Coopers
& Lybrand L.L.P. The Audit Committee discussed with the Company's internal
auditor and Coopers & Lybrand L.L.P. the overall scope and specific plans for
their respective audits. The committee also discussed the Company's
consolidated financial statements and the adequacy of the Company's internal
controls. At each meeting, the committee met with the Company's internal
auditor and Coopers & Lybrand L.L.P., in each case without management present,
to discuss the results of their audits, their evaluations of the Company's
internal controls, and the overall quality of the Company's financial
reporting. Those meetings also were designed to facilitate any private
communications with the committee desired by the Company's internal auditor or
Coopers & Lybrand L.L.P.
JOHN T. LAMACCHIA
Chairman--Audit Committee
A-1
THE COMPANY
The Kroger Co. (the "Company") was founded in 1883 and incorporated in 1902. As
of December 31, 1994 the Company was the largest grocery retailer in the United
States based on annual sales. The Company also manufactures and processes food
for sale by its supermarkets. The Company's principal executive offices are
located at 1014 Vine Street, Cincinnati, Ohio 45202 and its telephone number is
(513) 762-4000.
As of December 31, 1994, the Company operated 1,301 supermarkets, most of which
are leased. Of this number, 1,061 supermarkets were operated principally under
the Kroger name in the Midwest and South. Dillon Companies, Inc. ("Dillon"), a
wholly-owned subsidiary of the Company, operated 240 supermarkets directly or
through wholly-owned subsidiaries (the "Dillon Supermarkets"). The Dillon
Supermarkets, principally located in Colorado, Kansas, Arizona and Missouri,
operate under the names "King Soopers", "Dillon Food Stores", "Fry's Food
Stores", "City Market", "Gerbes Supermarkets" and "Sav-Mor".
As of December 31, 1994, the Company, through its Dillon subsidiary, operated
932 convenience stores under the trade names of "Kwik Shop", "Quik Stop
Markets", "Time Saver Stores", "Tom Thumb Food Stores", "Turkey Hill Minit
Markets", "Loaf 'N Jug", and "Mini-Mart". 789 of these stores were Company
owned and operated while 143 were operated through franchise agreements. The
convenience stores offer a limited assortment of staple food items and general
merchandise and, in most cases, sell gasoline.
On January 17, 1995, the Company sold Time Savers Stores, Inc. which operated,
directly or through franchise agreements, a total of 116 convenience stores to
E-Z Serve Convenience Stores, Inc.
The Company intends to develop new food and convenience store locations and
will continue to assess existing stores as to possible replacement, remodeling,
enlarging or closing.
A-2
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:
1994 1993 1992
% OF 1994 -------------- -------------- --------------
SALES 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
A-3
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.
A-4
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
A-5
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.
A-6
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
A-7
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.
A-8
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.
A-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors
The Kroger Co.
We have audited the accompanying consolidated balance sheet of The Kroger Co.
as of December 31, 1994 and January 1, 1994, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the years
ended December 31, 1994, January 1, 1994, and January 2, 1993. 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.
LOGO
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 31, 1995
A-10
CONSOLIDATED BALANCE SHEET
DECEMBER 31, JANUARY 1,
(In thousands of dollars) 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.
A-11
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) (53 WEEKS)
- --------------------------------------------------------------------------------
Sales.................................... $22,959,122 $22,384,301 $22,144,588
----------- ----------- -----------
Costs and expenses
Merchandise costs, including warehousing
and transportation..................... 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, extraordi-
nary loss and cumulative 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 account-
ing..................................... 268,903 170,805 101,160
Extraordinary loss, net of income tax
credit.................................. (26,707) (23,832) (107,103)
Cumulative effect of change in account-
ing, 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 account- (1.49)
ing.................................... ------ ------ ------
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 account- (1.28)
ing.................................... ------ ------ ------
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.
A-12
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 operat-
ing activities:
Extraordinary loss..................... 26,707 23,832 107,103
Cumulative effect of change in account-
ing................................... 159,193
Depreciation and amortization.......... 277,750 263,810 251,822
Amortization of discount on Junior Sub-
ordinated Debentures.................. 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, de-
tailed hereafter...................... 195,931 105,495 45,127
----------- ----------- -----------
Net cash provided by operating activi-
ties................................. 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 op-
tions.................................. 7,056 2,256 1,258
----------- ----------- -----------
Net cash used by financing activities. (297,798) (231,729) (168,414)
----------- ----------- -----------
Net increase (decrease) in cash and tem-
porary cash investments................. (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
=========== =========== ===========
A-13
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.
A-14
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.
A-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
A-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER CHARGES AND CREDITS
During 1994 the Company recorded a $25,100 pre-tax charge to recognize future
lease commitments and losses on equipment in certain San Antonio stores sublet
to Megafoods, Inc. which declared bankruptcy during 1994. The Company had sold
its San Antonio stores to Megafoods in 1993. Also during 1994 the Company
recorded a gain of $25,100 on the disposition of its investment in Hook-SupeRx,
Inc. ("HSI"), as a part of the merger of HSI and a subsidiary of Revco D.S.
after providing for certain tax indemnities related to HSI.
In 1994 the Company donated a portion of its stock investment in HSI, with a
$4,364 pre-tax book value, to The Kroger Co. Foundation. The donation resulted
in a $2,705 after tax expense ($.02 per fully diluted share) and produced a
$5,942 tax benefit ($.04 per fully diluted share).
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%
A-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 cur-
rent 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)
A-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 vary-
ing 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
A-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
certificates of deposit adjusted for reserve requirements, and (C) 1/2% over
the federal funds rate or (ii) an adjusted Eurodollar rate based upon the
London interbank offered rate ("Eurodollar Rate") plus the Applicable
Percentage which varies from .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
A-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
CURVE
YEAR-END ---------------
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%
A-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
A-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 Agree-
ments
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
A-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
A-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 offer-
ing............................... 13,275,000 203,493
Tax benefit from exercise of non-
qualified stock options........... 2,256
----------- -------- ---------- --------
January 1, 1994.................... 118,549,173 308,534 10,901,846 277,244
Exercise of stock options including
restricted stock grants........... 2,023,975 26,473 15,479 376
Sale of treasury shares to the
Company's employee benefit plans.. (3,495) (1,341,094) (34,104)
Tax benefit from exercise of non-
qualified stock options........... 7,056
----------- -------- ---------- --------
December 31, 1994.................. 120,573,148 $338,568 9,576,231 $243,516
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
A-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
A-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. (S)(S) 1961 and 1962
(d) and Chapter 895, Florida Statutes. Fry's believes that it has substantial
meritorious defenses to the claims alleged against it, and Fry's intends to
defend the litigation vigorously. The Company is involved in this and various
other legal actions arising in the normal course of business. Management is of
the opinion that their outcome will not have a material adverse effect on the
Company's financial position or results of operations.
WARRANT DIVIDEND PLAN
On February 28, 1986, the Company adopted a warrant dividend plan in which each
holder of common stock is entitled to one common stock purchase right for each
share of common stock owned. 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.
A-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 Consolidated 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
A-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 employee services during
the year)..................................................... $ 9,181 $10,261
Interest cost on accumulated postretirement benefit obliga-
tions......................................................... 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..................................................... $2,000 $ 9,800
Year-end 1993.................................................. $2,331 $17,135
Year-end 1994.................................................. $4,088 $27,283
A-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 ex-
traordinary loss .... .50 .62 .45 .80 2.37
Extraordinary loss.... (.07) (.02) (.13) (.01) (.24)
---- ---- ---- ---- ----
Primary net earnings per
common share........... .43 .60 .32 .79 2.13
Fully-diluted earnings
per common share:
Earnings before ex-
traordinary loss .... .46 .57 .43 .75 2.19
Extraordinary loss.... (.06) (.02) (.12) (.01) (.21)
---- ---- ---- ---- ----
Fully-diluted net earn-
ings per common share.. .40 .55 .31 .74 1.98
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 ex-
traordinary loss and
cumulative effect of
change in accounting. .30 .27 .23 .79 1.60
Extraordinary loss.... (.09) (.02) (.08) (.03) (.22)
Cumulative effect of (1.63) (1.49)
change in accounting. ----- ----- ----- ----- -----
Primary net earnings
(loss) per common
share.................. (1.42) .25 .15 .76 (.11)
Fully-diluted earnings
(loss) per
common share:
Earnings before ex-
traordinary 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 earn-
ings per common share.. (1.17) .25 .16 .68 .03
A-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONCLUDED
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.
A-31
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
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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)
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(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
operations before ex-
traordinary loss and
cumulative effect of
change in
accounting(A).......... 268,903 170,805 101,160 100,694 83,290
Extraordinary loss (net
of income tax
credit)(B) ............ (26,707) (23,832) (107,103) (20,839) (910)
Cumulative effect of
change in accounting
(net of income tax
credit)(C)............. (159,193)
Net earnings (loss)(A).. 242,196 (12,220) (5,943) 79,855 82,380
Earnings (loss) per
share
Earnings from continu-
ing operations before
extraordinary loss(A). 2.19 1.50 1.11 1.12 .96
Extraordinary loss(B).. (.21) (.19) (1.17) (.23) (.01)
Cumulative effect of
change in
accounting(C)......... (1.28)
Net earnings (loss)(A). 1.98 .03 (.06) .89 .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 com-
mon share.............. (D) (D) (D) (D) (D)
- --------------------------------------------------------------------------------------------
(A) See Other Charges and Credits in the Notes to Consolidated Financial
Statements for information pertaining to 1994 and 1993. 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.
(B) See Extraordinary Loss in the Notes to Consolidated Financial Statements.
(C) See Postretirement Health Care and Life Insurance Benefits in the Notes to
Consolidated Financial Statements.
(D) The Company is prohibited from paying cash dividends under the terms of its
Credit Agreement.
A-32
EXECUTIVE OFFICERS
RICHARD L. BERE THOMAS E. MURPHY
President and Chief Operating Officer Group Vice President
DAVID B. DILLON JACK W. PARTRIDGE, JR.
Group Vice President
Executive Vice President, and President, Dillon Companies, Inc.
PAUL W. HELDMAN JOSEPH A. PICHLER
Chairman of the Board and Chief
Executive Officer
Vice President, Secretary and General Counsel
MICHAEL S. HESCHEL
RONALD R. RICE
Senior Vice President andChief Information Officer
Senior Vice President--Manufacturing
LORRENCE T. KELLAR
Group Vice President WILLIAM J. SINKULA
Executive Vice President and Chief
Financial Officer
PATRICK J. KENNEY
Senior Vice President
LAWRENCE M. TURNER
Vice President and Treasurer
- --------------------------------------------------------------------------------
The Company has a variety of plans designed to allow employees to acquire stock
in Kroger. Employees of Kroger and its subsidiaries own shares through a profit
sharing plan, as well as 401(k) plans and a payroll deduction plan called the
Kroger Stock Exchange. If employees have questions concerning their shares in
the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
Star Bank, N.A. Cincinnati
P.O. Box 5277
Cincinnati, Ohio 45201
Toll Free 1-800-872-3307
Questions concerning any of the other plans should be directed to the
employee's local Human Resources Manager.
SHAREOWNERS: First Chicago Trust Company of New York is Registrar and Transfer
Agent for the Company's Common Stock. For questions concerning changes of
address, etc., individual shareowners should contact:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
201-324-0498
SHAREOWNER UPDATES: The Kroger Co. provides a pre-recorded overview of the
Company's most recent quarter. Call 1-800-4STOCKX or, in Cincinnati, 762-4723.
FINANCIAL INFORMATION: Call (513) 762-1220 to request printed financial
information, including the Company's most recent report on Form 10-Q or 10-K or
press release. Written inquiries should be addressed to Shareholder Relations,
The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100.
- --------------------------------------------------------------------------------
THE KROGER CO. . 1014 VINE STREET . CINCINNATI, OHIO 45202 . (513) 762-4000
DESCRIPTION OF PERFORMANCE GRAPH
Represented in graphical format are the returns on $100 invested in the Company,
the S&P 500 Index and the Peer Group.
PROXY CARD
Below the proxy card, seperated by perforations, is a coupon redeemable for one
free can of the Company's Premium Coffee. On the reverse is a graphical
representation of a flower.
[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE. 1101
----
THE PROXIES ARE DIRECTED TO VOTE AS SPECIFIED BELOW AND IN THEIR DISCRETION ON
ALL OTHER MATTERS COMING BEFORE THE MEETING. EXCEPT AS SPECIFIED TO THE
CONTRARY BELOW, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED BELOW, INCLUDING THE DISCRETION TO CUMULATE VOTES AND FOR
PROPOSAL 2.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES AND FOR PROPOSAL 2.
- --------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS
FOR all nominees (except as marked to the contrary below) [_]
WITHHOLD authority to vote for all nominees [_]
Nominees John L. Clendenin, Patricia Shontz Longe, Thomas H. O'Leary and
James D. Woods.
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
- ----------------------------------
2. APPROVAL OF COOPERS & LYBRAND L.L.P. AS AUDITORS
FOR [_] AGAINST [_] ABSTAIN [_]
- -------------------------------------------------------------------------------
If you wish to vote in accordance with the recommendations of management, all
you need do is sign and return this card. The Proxy Committee cannot vote your
shares unless you sign and return the card.
Please sign exactly as name appears hereon. Joint owners should each sign.
Where applicable, indicate position or representative capacity.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) DATE
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
DID YOU KNOW???
KROGER MANUFACTURING PROCESSES OR PROCURES OVER 6,000 ITEMS WHICH ARE
OFFERED UNDER THE COMPANY'S VARIOUS RETAIL LABELS. Kroger is proud of
its family of private label products. Our company owned manufacturing
facilities and those of our contract suppliers are state of the art
and produce only the highest quality products, preferred by many
Kroger shoppers over the national brand alternative. We invite you to
enjoy one of our best selling private label offerings, PREMIUM COFFEE.
Redeem the coupon below at any Kroger, Dillon, King Soopers, Fry's or
City Market location near you.
[COUPON ART]
- ------------------------------------------------------------------------------
P R O X Y
THE KROGER CO.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD MAY 18, 1995
The undersigned hereby appoints JOSEPH A. PICHLER, PATRICIA SHONTZ LONGE and T.
BALLARD MORTON, JR. and each of them, or if more than one is present and acting
then a majority thereof, proxies, with full power of substitution and revoca-
tion, to vote the common shares of The Kroger Co. which the undersigned is en-
titled to vote at the annual meeting of shareholders, and at any adjournment
thereof, with all the powers the undersigned would possess if personally pres-
ent, including authority to vote on the matters shown on the reverse in the
manner directed, and upon any other matter which may properly come before the
meeting. The undersigned hereby revokes any proxy previously given to vote such
shares at the meeting or at any adjournment.
- ---------------------
PLEASE MARK, SIGN,
DATE AND RETURN THE
PROXY CARD PROMPTLY,
USING THE ENCLOSED
ENVELOPE.
- ---------------------
(CONTINUED, AND TO BE SIGNED, ON OTHER SIDE)
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
DID YOU KNOW???
YOUR COMPANY IS THE WORLD'S LARGEST FLORIST. SEND FLOWERS ANYWHERE IN THE
WORLD BY CALLING
1-800-334-SEND
8 AM-5 PM EST
[ART]