of the consolidated financial statements.
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET ~~(in~~
(in millions, except per share amounts)
(unaudited)
August 18, February 3, 2001 2001 -------------------- -------------------- ASSETS Current assets Cash.................................................................. $ 137 $ 161 Receivables........................................................... 649 687 Inventories........................................................... 4,039 4,063 Prepaid and other current assets...................................... 331 501 --------- --------- Total Current Assets.............................................. 5,156 5,412 Property, plant and equipment, net....................................... 9,429 8,813 Goodwill, net............................................................ 3,625 3,639 Other assets............................................................. 317 315 --------- --------- Total Assets...................................................... $ 18,527 $ 18,179 ========= ========= LIABILITIES Current liabilities Current portion of long-term debt including obligations under capital leases................................................... $ 350 $ 336 Accounts payable...................................................... 3,118 3,009 Salaries and wages.................................................... 536 603 Other current liabilities............................................. 1,621 1,434 --------- --------- Total Current Liabilities......................................... 5,625 5,382 Long-term debt including obligations under capital leases................ 8,212 8,210 Other long-term liabilities.............................................. 1,472 1,498 --------- --------- Total Liabilities................................................. 15,309 15,090 --------- --------- SHAREOWNERS' EQUITY Preferred stock, $100 par, 5 shares authorized and unissued.......................................................... -- -- Common stock, $1 par, 1,000 shares authorized: 898 shares issued in 2001 and 891 shares issued in 2000................................. 898 891 Additional paid-in capital............................................... 2,140 2,092 Retained earnings........................................................ 1,663 1,104 Common stock in treasury, at cost, 96 shares in 2001 and 76 shares in 2000..................................................... (1,483) (998) --------- --------- Total Shareowners' Equity......................................... 3,218 3,089 --------- --------- Total Liabilities and Shareowners' Equity......................... $ 18,527 $ 18,179 ========= =========
~~--------------------------------------------------------------------------------~~

May 25, 2002

February 2, 2002

ASSETS

Current assets
Cash    $ 185    $ 161
Receivables    641    679
Inventories    4,193    4,178
Prepaid and other current assets    324    494


Total current assets    5,343    5,512
Property, plant and equipment, net    10,033    9,657
Goodwill, net    3,572    3,594
Other assets    313    324


Total Assets    $ 19,261    $ 19,087


LIABILITIES

Current liabilities
Current portion of long-term debt including obligations under capital leases    $ 455    $ 436
Accounts payable    3,266    3,005
Salaries and wages    540    584
Other current liabilities    1,430    1,460


Total current liabilities    5,691    5,485
Long-term debt including obligations under capital leases    7,961    8,412
Other long-term liabilities    1,818    1,688


Total Liabilities    15,470    15,585


Commitments and Contingencies (Note 11)
SHAREOWNERS’ EQUITY

Preferred stock, $100 par, 5 shares authorized and unissued    —      —
Common stock, $1 par, 1,000 shares authorized: 904 shares issued in 2002 and 901 shares issued in 2001    904    901
Additional paid-in capital    2,256    2,217
Accumulated other comprehensive loss    (31 )    (33 )
Accumulated earnings    2,509    2,147
Common stock in treasury, at cost, 112 shares in 2002 and 106 shares in 2001    (1,847 )    (1,730 )


Total Shareowners’ Equity    3,791    3,502


Total Liabilities and Shareowners’ Equity    $ 19,261    $ 19,087


The accompanying notes are an integral part
of the consolidated financial statements.
2 4
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS ~~(in~~
(in millions)
(unaudited)
Two Quarters Ended ------------------------------------------------ August 18, August 12, 2001 2000 ----------------------- ---------------------- Cash Flows From Operating Activities: Net earnings.................................................................. $ 559 $ 308 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary loss......................................................... -- 2 Depreciation............................................................... 509 487 Goodwill amortization...................................................... 57 54 Non-cash items............................................................. 4 261 Deferred income taxes...................................................... 65 189 Other...................................................................... 30 34 Changes in operating assets and liabilities net of effects from acquisitions of businesses: Inventories............................................................ 22 140 Receivables............................................................ 52 54 Accounts payable....................................................... 292 170 Other.................................................................. 235 250 --------- --------- Net cash provided by operating activities.......................... 1,825 1,949 --------- --------- Cash Flows From Investing Activities: Capital expenditures.......................................................... (1,148) (838) Proceeds from sale of assets.................................................. 25 68 Payments for acquisitions, net of cash acquired............................... (85) (67) Other......................................................................... 12 (75) --------- --------- Net cash used by investing activities.............................. (1,196) (912) --------- --------- Cash Flows From Financing Activities: Proceeds from issuance of long-term debt...................................... 1,290 525 Reductions in long-term debt.................................................. (1,292) (1,360) Financing charges incurred.................................................... (14) (7) Decrease in book overdrafts................................................... (198) (48) Proceeds from issuance of capital stock....................................... 46 37 Treasury stock purchases...................................................... (485) (310) --------- --------- Net cash used by financing activities.............................. (653) (1,163) --------- --------- Net decrease in cash and temporary cash investments............................... (24) (126) Cash and temporary investments: Beginning of year.......................................................... 161 281 --------- --------- End of quarter............................................................. $ 137 $ 155 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest..................................... $ 358 $ 356 Cash paid during the year for income $ 143 $ 77 taxes................................. Non-cash changes related to purchase acquisitions: Fair value of assets acquired.......................................... $ 53 $ 91 Goodwill recorded...................................................... $ 45 $ 30 Value of stock issued.................................................. $ -- $ -- Liabilities assumed.................................................... $ 14 $ 54
~~--------------------------------------------------------------------------------~~

First Quarter Ended


May 25, 2002

May 26, 2001

Cash Flows From Operating Activities:
Net earnings    $ 362    $ 304
Adjustments to reconcile net earnings to net cash provided by operating activities:
Cumulative effect of an accounting change    16    —
Extraordinary loss    3    —
Depreciation    323    288
Goodwill amortization    —      31
Non-cash items    —      2
Deferred income taxes    75    (15 )
Other    16    21
Changes in operating assets and liabilities net of effects from acquisitions of businesses:
Inventories    (27 )    (142 )
Receivables    38    29
Accounts payable    284    66
Other    206    32


Net cash provided by operating activities    1,296    616


Cash Flows From Investing Activities:
Capital expenditures    (781 )    (618 )
Proceeds from sale of assets    20    13
Payments for acquisitions, net of cash acquired    (109 )    (67 )
Other    158    18


Net cash used by investing activities    (712 )    (654 )


Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt    503    1,014
Reductions in long-term debt    (935 )    (738 )
Financing charges incurred    (12 )    (16 )
Increase in book overdrafts    (23 )    47
Proceeds from issuance of capital stock    24    34
Treasury stock purchases    (117 )    (304 )


Net cash provided (used) by financing activities    (560 )    37


Net increase (decrease) in cash and temporary cash investments    24    (1 )
Cash and temporary investments:
Beginning of year    161    161


End of quarter    $ 185    $ 160


Supplemental disclosure of cash flow information:
Cash paid during the year for interest    $ 208    $ 210
Cash paid during the year for income taxes    $ 134    $ 126
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired    $ 109    $ 42
Goodwill recorded    $ —      $ 37
Liabilities assumed    $ —      $ 12
The accompanying notes are an integral part
of the consolidated financial statements.
3 5
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~------------------------------------------~~
Certain prior year amounts have been reclassified to conform to ~~current-year~~current year presentation and all amounts presented are in millions except per share amounts.
1.    BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of The Kroger Co. and its subsidiaries. The ~~year-end~~February 2, 2002 balance sheet ~~includes Kroger's February 3, 2001 balance sheet, which~~ was derived from audited financial statements, and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles. Significant intercompany transactions and balances have been eliminated. References to the ~~"Company"~~“Company” in these consolidated financial statements mean the consolidated company.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments)~~, which~~ that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ~~("SEC"~~(“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to SEC regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the fiscal ~~2000~~2001 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on May ~~2, 2001.~~ 1, 2002.
The unaudited information included in the consolidated financial statements for the ~~second quarter and two~~first quarters ended ~~August 18,~~May 25, 2002 and May 26, 2001 ~~and August 12, 2000~~ includes the results of operations of the Company for the ~~12-week and 28-week~~16 week periods then ended.
2.    MERGER-RELATED COSTS
The Company is continuing ~~to implement~~the process of implementing its integration plan relating to recent mergers. Total pre-tax merger-related costs incurred were $2 during the second quarter of 2001, and $2 during the second quarter of 2000. Year-to-date pre-tax merger-related costs were $4 in 2001 and $11 in 2000. The following table presents the components of the pre-tax merger-related costs:
2nd Quarter Ended Two Quarters Ended --------------------------------------------------------------- August 18, August 12, August 18, August 12, 2001 2000 2001 2000 --------------- ------------------------------- --------------- CHARGES RECORDED AS CASH EXPENDED Distribution consolidation................................ $ -- $ -- $ -- $ 1 Administration integration................................ -- -- -- 4 ----- ----- ----- ----- 5 OTHER CHARGES Administration integration................................ 2 2 4 6 ----- ----- ----- ----- Total merger-related costs................................... $ 2 $ 2 $ 4 $ 11 ===== ===== ===== ===== TOTAL CHARGES Distribution consolidation................................ $ -- $ -- $ -- $ 1 Administration integration................................ 2 2 4 10 ----- ----- ----- ----- Total merger-related costs................................... $ 2 $ 2 $ 4 $ 11 ===== ===== ===== =====
4 6 Distribution Consolidation Represents costs to consolidate distribution operations and eliminate duplicate facilities. The year-to-date costs in 2000 represent severance costs incurred and paid. Administration Integration Includes labor and severance costs related to employees identified for termination in the integration. During ~~each of~~ the first ~~and second~~ quarters of ~~2001,~~2002 and ~~the second quarter of 2000,~~2001, the Company incurred pre-tax non-cash merger-related costs ~~totaling~~of $2 resulting from ~~issuing~~the issuance of restricted stock related to merger synergies. The year-to-date 2000 pre-tax costs include approximately $6 resulting from issuing restricted stock related to merger synergies, and charges of $4 for severance payments recorded as cash was expended. The restrictionsstock. Restrictions on the stock awards ~~lapse to~~lapsed based on the ~~extent~~achievement of synergy goals. All synergy-based awards were earned provided that ~~synergy goals are achieved.~~ recipients were still employed by the Company on the stated restriction lapsing date.
The following table is a summary of the changes in accruals related to various business combinations:
Facility Employee Incentive Awards Closure Costs Severance and Contributions ----------------- -------------- --------------------- Balance at January 29, 2000....................................... $ 130 $ 29 $ 29 Additions...................................................... -- -- 10 Payments....................................................... (17) (11) (4) ------ ------ ------ Balance at February 3, 2001....................................... 113 18 35 Additions...................................................... -- -- 4 Payments....................................................... (14) (8) (9) ------ ------ ------ Balance at August 18, 2001........................................ $ 99 $ 10 $ 30 ====== ====== ======

Facility Closure Costs

Employee Severance

Incentive Awards and Contributions

Balance at February 3, 2001      $ 113    $ 18      $ 35
Additions      —      —        4
Payments      (19 )    (3 )      (9 )



Balance at February 2, 2002      94    15      30
Additions      —      —        2
Payments      (5 )    (5 )      —



Balance at May 25, 2002      $ 89    $ 10      $ 32



3.    ONE-TIME ITEMS
In addition to the merger-related costs described ~~above,~~in Note 2, the Company incurred pre-tax one-time expenses of ~~$24~~$3 and ~~$89 for year-to-date~~$14 during the first quarters of 2002 and 2001, respectively. Also in the first quarter 2002, the Company recorded pre-tax one-time income of $7 resulting from the revaluation of excess energy purchase contracts. These items were included in merchandise costs and operating, general and administrative expense in 2001 and 2000, respectively. The one-time items incurred during 2001 included approximately $5 related primarily to product costs for excess capacity included as merchandise costs. The remaining $19 in ~~2001~~operating, general and administrative expense in 2002. Net pre-tax income of $4 was included in operating, general and administrative expense in the first quarter 2002 compared to $11 of pre-tax expense in the first quarter 2001. The remaining $3 of pre-tax expense recorded in the first quarter 2001 was included in merchandise costs. Details of these charges are:
4
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

First Quarter Ended

May 25, 2002

May 26, 2001
One-time items in merchandise costs
Costs related to mergers    $ —      $ 3


   —      3
One-time items in operating, general and administrative expense
Costs related to mergers    3    11
Revaluation of energy contracts    (7 )    —


   (4 )    11
Total one-time items    $ (4 )    $ 14


Costs related to mergers
Approximately $3 of product costs for excess capacity was included as merchandise costs in the first quarter 2001. The remaining $11 of expenses in the first quarter 2001, and the $3 of expenses in the first quarter 2002, primarily related to employee severance and system conversion costs. All of the costs during 2001 represented cash expenditures. The one-time items incurred during the second quarter of 2001 totaled approximately $9. The second quarter, 2001, items included approximately $2 recorded as merchandise costs and ~~approximately $7 recorded~~were included as operating, general and administrative ~~costs.~~expenses. All of the costs in 2001 and $2 of the costs in 2002 represented cash expenditures.
Energy contracts
During March through May 2001, the Company entered into four separate commitments to purchase electricity from one of its utility suppliers in southern California. At the inception of the contracts, forecasted electricity usage indicated that it was probable that all of the electricity would be utilized in the operations of the Company. The ~~one-time items incurred during 2000 included approximately $19~~Company, therefore, accounted for ~~inventory write-downs included~~the contracts in accordance with the normal purchases and normal sales exception under Statement of Financial Accounting Standards (“SFAS”) No. 133, as ~~merchandise costs.~~amended, and no amounts were initially recorded in the financial statements related to these purchase commitments.
During the third quarter 2001, the Company determined that one of the contracts, and a portion of a second contract, provided for supplies in excess of the Company’s expected demand for electricity. This precluded use of the normal purchases and normal sales exception under SFAS No. 133 for those contracts, and required the contracts to be marked to fair value through current-period earnings. The Company, therefore, recorded a pre-tax charge of $81 in the third quarter 2001 to accrue liabilities for the estimated fair value of these contracts through December 2006. The remaining ~~$70~~portion of the second contract was re-designated as a cash flow hedge of future purchases. The other two purchase commitments continue to qualify for the normal purchases and normal sales exception under SFAS No. 133.
SFAS No. 133 requires the excess contracts to be revalued through current-period earnings each quarter. Due to an increase in ~~2000 was included~~the forward market prices for electricity in southern California during the first quarter 2002, the Company recorded pre-tax income of $7 to mark the excess contracts to estimated fair value as of May 25, 2002. Details of these liabilities follow:
Balance at February 2, 2002    $ 78
Net payments (settlement of excess purchase commitments)    (5 )
Revaluation (change in liabilities due to increase in forward market prices)    (7 )

Balance at May 25, 2002    $ 66

5
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4.    RESTRUCTURING CHARGES
On December 11, 2001, the Company outlined a Strategic Growth Plan that will support additional investment in our core business to increase sales and market share. As part of the plan to reduce operating, general and administrative costs, the Company has eliminated over 1,400 of the approximately 1,500 positions targeted for reduction under the Plan. The Company also has merged the Nashville division office and distribution center into the Atlanta and Louisville divisions. Restructuring charges related to the ~~closing~~Plan totaled $13, pre-tax, in the first quarter 2002. The majority of ~~stores, severance~~these expenses related to ~~headcount reductions,~~severance agreements, distribution center consolidation and ~~other miscellaneous~~conversion costs. ~~Of the $70, $15~~Approximately $9 represented cash ~~expenditures~~expenditures.
The following table is a summary of changes in the accruals associated with the Strategic Growth Plan:

Severance & Other Costs

Balance at February 2, 2002    $ 37
Additions    13
Payments    (25 )

Balance at May 25, 2002    $ 25

5.    GOODWILL
As more fully described in Note 9, the Company adopted SFAS No. 142 on February 3, 2002. Adoption of this standard eliminated the amortization of goodwill. In 2001, goodwill generally was amortized over 40 years. Goodwill amortization expense totaled $31 in the first quarter, 2001. The transitional impairment review required by SFAS No. 142 resulted in a $26 pre-tax loss to write-off the jewelry store division goodwill based on its implied fair value. Impairment primarily resulted from the recent operating performance of the division and ~~$55 represented charges that were accrued~~review of the division’s projected future cash flows on a discounted basis, rather than on an undiscounted basis, as was the standard under SFAS No. 121, prior to adoption of SFAS No. 142. This loss was recorded as a cumulative effect of an accounting change, net of a $10 tax benefit.
The following table summarizes changes in the Company’s goodwill balance during the ~~quarters.~~ first quarter 2002:
Balance at February 2, 2002    $ 3,594
Cumulative effect of an accounting change    (26 )
Reclassifications    4

Balance at May 25, 2002    $ 3,572

6
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table adjusts net earnings, net earnings per basic common share and net earnings per diluted common share for the adoption of SFAS No. 142:

First Quarter Ended


May 25, 2002

May 26, 2001

Reported net earnings    $ 362    $ 304
Add back:
Goodwill amortization    —      31
Tax effect    —      (4 )
Cumulative effect of an accounting change(1)    16    —


Adjusted net earnings    $ 378    $ 331


Add back:
Extraordinary loss(1)    3    —


Adjusted earnings before extraordinary loss    $ 381    $ 331


Reported net earnings per basic common share    $ 0.46    $ 0.37
Add back:
Goodwill amortization    —      0.04
Tax effect(2)    —      —
Cumulative effect of an accounting change(1)    0.02    —


Adjusted net earnings per basic common share    $ 0.48    $ 0.41


Add back:
Extraordinary loss(1)(2)    —      —


Adjusted earnings before extraordinary loss    $ 0.48    $ 0.41


Average number of shares used in basic calculation    793    812
Reported net earnings per diluted common share    $ 0.45    $ 0.36
Add back:
Goodwill amortization    —      0.04
Tax effect(2)    —      —
Cumulative effect of an accounting change(1)    0.02    —


Adjusted net earnings per diluted common share    $ 0.47    $ 0.40


Add back:
Extraordinary loss(1)(2)    —      —


Adjusted earnings before extraordinary loss    $ 0.47    $ 0.40


Average number of shares used in diluted calculation    809    833
(1) Amounts are net of tax.
(2) Earnings per share effect rounds to zero cents per share.
7
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6.    COMPREHENSIVE INCOME
Comprehensive income is as follows:

First Quarter Ended


May 25, 2002

May 26, 2001

Net earnings    $ 362    $ 304
Cumulative effect of adoption of SFAS No. 133, net of tax    —      (6 )
Unrealized gain on hedging activities, net of tax    2    —


Comprehensive income    $ 364    $ 298


During the first ~~quarter~~quarters of ~~2000, we recorded a pre-tax impairment charge~~2002 and 2001, other comprehensive income consisted of ~~$191. We identified impairment losses for assets~~market value adjustments to ~~be disposed of, assets~~reflect derivative instruments designated as cash flow hedges at fair value, pursuant to ~~be held and used, and certain investments in former suppliers that have experienced financial difficulty and with whom supply arrangements have ceased. 4.~~SFAS No. 133.
7.    INCOME TAXES
The effective income tax rate differs from the expected statutory rate primarily due to the effect of state ~~taxes and non-deductible goodwill. 5.~~taxes.
8.    EARNINGS PER COMMON SHARE ~~Diluted earnings~~
Earnings per common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock ~~options.~~ options and warrants.
The following table provides a reconciliation of earnings before extraordinary loss and cumulative effect of an accounting change and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share:

First Quarter Ended
May 25, 2002

First Quarter Ended
May 26, 2001

Earnings (Numerator)

Shares (Denominator)

Per Share Amount

Earnings (Numerator)

Shares (Denominator)

Per Share Amount
Basic earnings per common share      $ 381      793    $ 0.48      $ 304      812    $ 0.37
Dilutive effect of stock options and warrants      —        16         —        21





Diluted earnings per common share      $ 381      809    $ 0.47      $ 304      833    $ 0.36





The Company had options outstanding for approximately 21 and 11 shares in the first quarter 2002 and first quarter 2001, respectively, that were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect on earnings per share. 5 7
For the Quarter Ended For the Quarter Ended August 18, 2001 August 12, 2000 ----------------------------------------- ----------------------------------------- Earnings Shares Per Share Earnings Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------------------------------------------------------------------------------- Basic earnings per common share....... $ 256 805 $ 0.32 $ 208 824 $ 0.25 Dilutive effect of stock options and warrants.......................... -- 22 -- 23 -------- -------- -------- -------- Diluted earnings per common share.... $ 256 827 $ 0.31 $ 208 847 $ 0.25 ======== ======== ======== ========
For the Two Quarters Ended For the Two Quarters Ended August 18, 2001 August 12, 2000 ----------------------------------------- ----------------------------------------- Earnings Shares Per Share Earnings Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------------------------------------------------------------------------------- Basic earnings per common share....... $ 559 809 $ 0.69 $ 308 828 $ 0.37 Dilutive effect of stock options and warrants.......................... -- 21 -- 21 -------- -------- -------- -------- Diluted earnings per common share.... $ 559 830 $ 0.67 $ 308 849 $ 0.36 ======== ======== ======== ========
6.
9.    RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," became effective for the Company as of February 4, 2001. SFAS No. 133, as amended, defines derivatives, requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met. Initial adoption of this new accounting standard resulted in the Company recording a liability of $9 million with a corresponding charge recorded as additional paid-in capital, net of income tax effects. An accumulated other comprehensive loss caption was not utilized due to the immateriality of the balance. In accordance with SFAS No. 133, derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as "cash flow" hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of related tax effects. The ineffective portion of the cash flow hedge, if any, is recognized in current-period earnings. Other comprehensive income is reclassified to current-period earnings when the hedged transaction affects earnings. The Company assesses, both at inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively. As of August 18, 2001, year-to-date derivative instrument liability totaled $15 million. These instruments are designated as, and are considered, effective cash flow hedges. Hedge ineffectiveness was not material during the quarter ended August 18, 2001. A corresponding charge was recorded as a part of additional paid-in capital, net of income tax effects. 6 8
Emerging Issues Task Force (EITF) Issue Nos. ~~00-14, "Accounting~~00-22, “Accounting for ~~Certain Sales Incentives;" 00-22, "Accounting for "Points"~~‘Points’ and Certain Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future;"” and ~~00-25, "Vendor Income Statement Characterization of~~01-09, “Accounting for Consideration ~~from~~Given by a Vendor to a ~~Retailer" become~~Customer (Including a Reseller of Vendor’s Products),” became effective for ~~The Kroger Co. beginning in~~ the ~~first quarter of~~Company on February 3, 2002. These issues address the appropriate accounting for certain vendor contracts and loyalty programs. The ~~Company continues to assess the effect these new standards will have on the financial statements. The Company expects the~~ adoption of ~~these standards will~~this standard did not have a material effect on ~~our~~the Company’s financial statements.
SFAS No. 141, ~~"Business~~“Business Combinations,~~" and SFAS No. 142, "Goodwill and Other Intangible Assets," were~~” was issued by the Financial Accounting Standards Board (“FASB”) in ~~late~~ June of 2001. ~~SFAS 141 is effective for~~This standard requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method
8
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of accounting. The Statement also addresses the recognition of intangible assets in a business combination. Adoption of SFAS No. 141 did not have a material effect on the Company’s financial statements.
SFAS No. 142, “Goodwill and Other Intangible Assets,” was issued by the FASB in June of 2001. The Statement addresses the accounting for intangible assets acquired outside of a business combination. The Statement also addresses the accounting for goodwill and other intangible assets subsequent to initial recognition. SFAS No. 142 provides that goodwill no longer will be amortized and instead will be tested for impairment on an annual basis.
The Company adopted SFAS No. 142 on February 3, 2002. Accordingly, the Company performed a transitional impairment review of its goodwill, which totaled $3,594 as of February 3, 2002. The review was performed at the operating division level. Generally, fair value represented a multiple of earnings before interest, taxes, depreciation, amortization, LIFO charge, extraordinary items and one-time items (“EBITDA”) or discounted projected future cash flows. Impairment was indicated when the carrying value of a division, including goodwill, exceeded its fair value. The Company determined that the carrying value of the jewelry store division, which included $26 of goodwill, exceeded its fair value. Impairment was not indicated for the goodwill associated with the other operating divisions.
The fair value of the jewelry store division was subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. As a result of this analysis, the Company determined that the jewelry store division goodwill was entirely impaired. Impairment primarily resulted from the recent operating performance of the division and review of the division’s projected future cash flows on a discounted basis, rather than on an undiscounted basis, as was the standard under SFAS No. 121, prior to adoption of SFAS No. 142. Accordingly, the Company recorded a $16 charge, net of a $10 tax benefit, as a cumulative effect of an accounting change in the first quarter, 2001.
SFAS No. 143, “Asset Retirement Obligations,” was issued by the FASB in August of 2001. This standard addresses obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 will become effective for the Company on February 3, 2002. The Company is currently analyzing the effect the adoption of these standards will have on its financial statements. Statement on Financial Accounting Standards ("SFAS") No. 143, "Asset Retirement Obligations," was issued by the Financial Accounting Standards Board in August of 2001. SFAS 143 will become effective for The Kroger Co. on February 2, 2003. The ~~company~~Company currently is ~~currently~~ analyzing the effect this standard will have on its financial statements. 7.
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” was issued by the FASB in August of 2001. This standard replaces SFAS No. 121 and APB No. 30 and amends APB No. 51. SFAS No. 144 became effective for the Company on February 3, 2002. Adoption of this standard did not have a material effect on the Company’s financial statements.
SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued by the FASB in April 2002. SFAS No. 145 becomes effective for the Company on February 2, 2003. The Company currently is analyzing the effect this standard will have on its financial statements.
10.    GUARANTOR SUBSIDIARIES ~~Certain of the Company's Senior Notes and Senior Subordinated Notes~~
The Company’s outstanding public debt (the ~~"Guaranteed Notes"~~“Guaranteed Notes”) ~~are~~is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and certain ~~Kroger~~of its subsidiaries (the ~~"Guarantor Subsidiaries"~~“Guarantor Subsidiaries”). At ~~August 18, 2001,~~May 25, 2002, a total of approximately ~~$6.0~~$6.7 billion of Guaranteed Notes ~~were~~was outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are direct or indirect wholly owned subsidiaries of ~~Kroger.~~The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pretax earnings, cash flow, and equity. Therefore, the non-guarantor ~~subsidiaries'~~subsidiaries’ information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, but the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws). 7
9
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables present summarized financial information as of ~~August 18, 2001~~May 25, 2002 and February ~~3, 2001~~2, 2002 and for the quarters ended ~~August 18,~~May 25, 2002 and May 26, 2001:
Condensed Consolidating
Balance Sheets
As of May 25, 2002

The Kroger Co.

Guarantor Subsidiaries

Eliminations

Consolidated
Current assets
Cash      $ 23    $ 162    $ —      $ 185
Receivables      305    336    —      641
Net inventories      385    3,808    —      4,193
Prepaid and other current assets      28    296    —      324




Total current assets      741    4,602    —      5,343
Property, plant and equipment, net      1,043    8,990    —      10,033
Goodwill, net      21    3,551    —      3,572
Other assets      657    (344 )    —      313
Investment in and advances to subsidiaries      10,959    —      (10,959 )    —




Total assets      $ 13,421    $ 16,799    $ (10,959 )    $ 19,261




Current liabilities
Current portion of long-term debt including obligations under capital leases      $ 438    $ 17    $ —      $ 455
Accounts payable      234    3,032    —      3,266
Other current liabilities      420    1,550    —      1,970




Total current liabilities      1,092    4,599    —      5,691
Long-term debt including obligations under capital leases      7,614    347    —      7,961
Other long-term liabilities      924    894    —      1,818




Total liabilities      9,630    5,840    —      15,470




Shareowners’ Equity      3,791    10,959    (10,959 )    3,791




Total liabilities and shareowners’ equity      $ 13,421    $ 16,799    $ (10,959 )    $ 19,261




10
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Consolidating
Balance Sheets
As of February 2, 2002

The Kroger Co.

Guarantor Subsidiaries

Eliminations

Consolidated
Current assets
Cash      $ 25    $ 136    $ —      $ 161
Receivables      145    534    —      679
Net inventories      386    3,792    —      4,178
Prepaid and other current assets      236    258    —      494




Total current assets      792    4,720    —      5,512
Property, plant and equipment, net      1,151    8,506    —      9,657
Goodwill, net      21    3,573    —      3,594
Other assets      639    (315 )    —      324
Investment in and advances to subsidiaries      11,173    —      (11,173 )    —




Total assets      $ 13,776    $ 16,484    $ (11,173 )    $ 19,087




Current liabilities
Current portion of long-term debt including obligations under capital leases      $ 412    $ 24    $ —      $ 436
Accounts payable      246    2,759    —      3,005
Other current liabilities      685    1,359    —      2,044




Total current liabilities      1,343    4,142    —      5,485
Long-term debt including obligations under capital leases      8,022    390    —      8,412
Other long-term liabilities      909    779    —      1,688




Total liabilities      10,274    5,311    —      15,585




Shareowners’ Equity      3,502    11,173    (11,173 )    3,502




Total liabilities and shareowners’ equity      $ 13,776    $ 16,484    $ (11,173 )    $ 19,087




11
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Consolidating
Statements of Income
For the 16 Week Quarter May 25, 2002

The Kroger Co.

Guarantor Subsidiaries

Eliminations

Consolidated

Sales      $ 2,211    $ 13,717      $ (261 )    $ 15,667
Merchandise costs, including warehousing and transportation      1,802    9,881      (245 )    11,438




Gross profit      409    3,836      (16 )    4,229
Operating, general and administrative      364    2,524      —      2,888
Rent      51    169      (16 )    204
Depreciation and amortization      27    296      —      323
Merger related costs and restructuring charges      (1 )    16      —      15




Operating profit (loss)      (32 )    831      —      799
Interest expense      (180 )    (9 )      —      (189 )
Equity in earnings of subsidiaries      497    —        (497 )    —




Earnings before tax expense      285    822      (497 )    610
Tax expense (benefit)      (80 )    309      —      229




Earnings before extraordinary loss and cumulative effect of an accounting change      365    513      (497 )    381
Extraordinary loss, net of income tax benefit      (3 )    —        —      (3 )




Earnings before cumulative effect of an accounting change      362    513      (497 )    378
Cumulative effect of an accounting change      —      (16 )      —      (16 )




Net earnings      $ 362    $ 497      $ (497 )    $ 362




12
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Consolidating
Statements of Income
For the 16 Week Quarter May 26, 2001

The Kroger Co.

Guarantor Subsidiaries

Eliminations

Consolidated
Sales      $ 2,124    $ 13,227      $ (249 )    $ 15,102
Merchandise costs, including warehousing and transportation      1,687    9,580      (233 )    11,034




Gross profit      437    3,647      (16 )    4,068
Operating, general and administrative      291    2,550      —      2,841
Rent      53    165      (16 )    202
Depreciation and amortization      32    287      —      319
Merger related costs and restructuring charges      2    —        —      2




Operating profit (loss)      59    645      —      704
Interest expense      194    12      —      206
Equity in earnings of subsidiaries      386    —        (386 )    —




Earnings before tax expense      251    633      (386 )    498
Tax expense (benefit)      (53 )    247      —      194




Earnings before extraordinary loss and cumulative effect of an accounting change      304    386      (386 )    304
Extraordinary loss, net of income tax benefit      —      —        —      —




Earnings before cumulative effect of an accounting change      304    386      (386 )    304
Cumulative effect of an accounting change      —      —        —      —




Net earnings      $ 304    $ 386      $ (386 )    $ 304




13
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Condensed Consolidating
Statements of Cash Flows
For the 16 Week Quarter May 25, 2002

The Kroger Co.

Guarantor Subsidiaries

Consolidated

Net cash (used) provided by operating activities      $ 688    $ 608    $ 1,296



Cash flows from investing activities:
Capital expenditures      (52 )    (729 )    (781 )
Other      79    (10 )    69



Net cash used by investing activities      27    (739 )    (712 )



Cash flows from financing activities:
Proceeds from issuance of long-term debt      503    —      503
Reductions in long-term debt      (885 )    (50 )    (935 )
Proceeds from issuance of capital stock      24    —      24
Capital stock reacquired      (117 )    —      (117 )
Other      (28 )    (7 )    (35 )
Net change in advances to subsidiaries      (214 )    214    —



Net cash provided (used) by financing activities      (717 )    157    (560 )



Net (decrease) increase in cash and temporary cash investments      (2 )    26    24
Cash and temporary investments:
Beginning of year      25    136    161



End of year      $ 23    $ 162    $ 185



Condensed Consolidating
Statements of Cash Flows
For the 16 Week Quarter May 26, 2001

The Kroger Co.

Guarantor Subsidiaries

The Kroger Co.

Net cash provided by operating activities      $ (113 )    $ 729      $ 616



Cash flows from investing activities:
Capital expenditures      (29 )    (589 )      (618 )
Other      (35 )    (1 )      (36 )



Net cash used by investing activities      (64 )    (590 )      (654 )



Cash flows from financing activities:
Proceeds from issuance of long-term debt      1,014    —        1,014
Reductions in long-term debt      (721 )    (17 )      (738 )
Proceeds from issuance of capital stock      34    —        34
Capital stock reacquired      (304 )    —        (304 )
Other      (6 )    37      31
Net change in advances to subsidiaries      156    (156 )      —



Net used by financing activities      173 �� (136 )      37



Net decrease in cash and temporary cash investments      (4 )    3      (1 )
Cash and temporary investments:
Beginning of year      25    136      161



End of year      $ 21    $ 139      $ 160



14
THE KROGER CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11.    COMMITMENTS AND 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 ~~August 12, 2000. CONDENSED CONSOLIDATING BALANCE SHEETS AS OF AUGUST 18, 2001~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Current assets Cash............................................... $ 21 $ 116 $ -- $ 137 Receivables........................................ 112 537 -- 649 Inventories........................................ 388 3,651 -- 4,039 Prepaid and other current assets................... (23) 354 -- 331 ---------- ---------- ---------- ---------- Total current assets.......................... 498 4,658 -- 5,156 Property, plant and equipment, net..................... 1,040 8,389 -- 9,429 Goodwill, net.......................................... 2 3,623 -- 3,625 Other assets........................................... 653 (336) -- 317 Investment in and advances to subsidiaries............. 10,689 -- (10,689) -- ---------- ---------- ---------- ---------- Total assets.................................. $ 12,882 $ 16,334 $ (10,689) $ 18,527 ========== ========== ========== ========== Current liabilities Current portion of long-term debt including obligations under capital leases................. $ 315 $ 35 $ -- $ 350 Accounts payable................................... 242 2,876 -- 3,118 Other current liabilities.......................... 632 1,525 -- 2,157 ---------- ---------- ---------- ---------- Total current liabilities..................... 1,189 4,436 -- 5,625 Long-term debt including obligations under capital leases............................... 7,826 386 -- 8,212 Other long-term liabilities............................ 649 823 -- 1,472 ---------- ---------- ---------- ---------- Total liabilities............................. 9,664 5,645 -- 15,309 ---------- ---------- ---------- ---------- Shareowners' Equity.................................... 3,218 10,689 (10,689) 3,218 ---------- ---------- ---------- ---------- Total liabilities and shareowners' equity..... $ 12,882 $ 16,334 $ (10,689) $ 18,527 ========== ========== ========== ==========
8 ~~10 CONDENSED CONSOLIDATING BALANCE SHEETS AS OF FEBRUARY 3, 2001~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated ---------------- ----------------- ---------------------------------- Current assets Cash............................................... $ 25 $ 136 $ -- $ 161 Receivables........................................ 134 553 -- 687 Inventories........................................ 340 3,723 -- 4,063 Prepaid and other current assets................... 148 353 -- 501 ---------- ---------- ---------- ---------- Total current assets.......................... 647 4,765 -- 5,412 Property, plant and equipment, net..................... 866 7,947 -- 8,813 Goodwill, net.......................................... 1 3,638 -- 3,639 Other assets........................................... 653 (338) -- 315 Investment in and advances to subsidiaries............. 10,670 -- (10,670) -- ---------- ---------- ---------- ---------- Total assets.................................. $ 12,837 $ 16,012 $ (10,670) $ 18,179 ========== ========== ========== ========== Current liabilities Current portion of long-term debt including obligations under capital leases................. $ 287 $ 49 $ -- $ 336 Accounts payable................................... 251 2,758 -- 3,009 Other current liabilities.......................... 449 1,588 -- 2,037 ---------- ---------- ---------- ---------- Total current liabilities..................... 987 4,395 -- 5,382 Long-term debt including obligations under capital leases............................... 7,808 402 -- 8,210 Other long-term liabilities............................ 953 545 -- 1,498 ---------- ---------- ---------- ---------- Total liabilities............................. 9,748 5,342 -- 15,090 ---------- ---------- ---------- ---------- Shareowners' Equity.................................... 3,089 10,670 (10,670) 3,089 ---------- ---------- ---------- ---------- Total liabilities and shareowners' equity..... $ 12,837 $ 16,012 $ (10,670) $ 18,179 ========== ========== ========== ==========
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.
Insurance—The Company’s workers’ compensation risks are self-insured in certain states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation—The Company is involved in various legal actions arising in the normal course of business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material effect on the financial position of the Company.
Purchase Commitment—The Company indirectly owns a 50% interest in the Santee Dairy (“Santee”) and has a product supply arrangement with Santee that requires the Company to purchase 9 ~~11 CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE 12-WEEK QUARTER ENDED AUGUST 18, 2001~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Sales.................................................. $ 1,588 $ 10,092 $ (195) $ 11,485 Merchandising costs, advertising, warehousing, and transportation..................................... 1,275 7,239 (183) 8,331 Operating, general and administrative.................. 309 1,868 -- 2,177 Rent................................................... 45 125 (12) 158 Depreciation and amortization.......................... 6 240 -- 246 Merger-related costs .................................. 2 -- -- 2 ---------- ---------- ---------- ---------- Operating profit (loss)....................... (49) 620 -- 571 Interest expense....................................... (142) (10) -- (152) Equity in earnings of subsidiaries..................... 372 -- (372) -- ---------- ---------- ---------- ---------- Earnings before income tax expense and 181 610 (372) 419 extraordinary loss.......................... Tax expense (benefit).................................. (75) 238 -- 163 ---------- ---------- ---------- ---------- Earnings before extraordinary loss............ 256 372 (372) 256 Extraordinary loss, net of income tax benefit.......... -- -- -- -- ---------- ---------- ---------- ---------- Net earnings.................................. $ 256 $ 372 $ (372) $ 256 ========== ========== ========== ==========
~~CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE 12-WEEK QUARTER ENDED AUGUST 12, 2000~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Sales.................................................. $ 1,495 $ 9,686 $ (164) $ 11,017 Merchandising costs, advertising, warehousing, and transportation..................................... 1,181 7,022 (152) 8,051 Operating, general and administrative.................. 230 1,829 -- 2,059 Rent................................................... 43 124 (12) 155 Depreciation and amortization.......................... 23 211 -- 234 Merger-related costs .................................. 2 -- -- 2 ---------- ---------- ---------- ---------- Operating profit (loss)....................... 16 500 -- 516 Interest expense....................................... (145) (10) -- (155) Equity in earnings of subsidiaries..................... 277 -- (277) -- ---------- ---------- ---------- ---------- Earnings before income tax expense and extraordinary loss.......................... 148 490 (277) 361 Tax expense (benefit).................................. (62) 213 -- 151 ---------- ---------- ---------- ---------- Earnings before extraordinary loss............ 210 277 (277) 210 Extraordinary loss, net of income tax benefit.......... (2) -- -- (2) ---------- ---------- ---------- ---------- Net earnings.................................. $ 208 $ 277 $ (277) $ 208 ========== ========== ========== ==========
10 ~~12 CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE TWO QUARTERS ENDED AUGUST 18, 2001~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Sales.................................................. $ 3,712 $ 23,319 $ (444) $ 26,587 Merchandising costs, advertising, warehousing, and transportation..................................... 2,963 16,819 (416) 19,366 Operating, general and administrative.................. 594 4,418 -- 5,012 Rent................................................... 103 290 (28) 365 Depreciation and amortization.......................... 39 527 -- 566 Merger-related costs .................................. 4 -- -- 4 ---------- ---------- ---------- ---------- Operating profit (loss)....................... 9 1,265 -- 1,274 Interest expense....................................... (336) (21) -- (357) Equity in earnings of subsidiaries..................... 758 -- (758) -- ---------- ---------- ---------- ---------- Earnings before income tax expense and 431 1,244 (758) 917 extraordinary loss.......................... Tax expense (benefit).................................. (128) 486 -- 358 ---------- ---------- ---------- ---------- Earnings before extraordinary loss............ 559 758 (758) 559 Extraordinary loss, net of income tax benefit.......... -- -- -- -- ---------- ---------- ---------- ---------- Net earnings.................................. $ 559 $ 758 $ (758) $ 559 ========== ========== ========== ==========
~~CONDENSED CONSOLIDATING STATEMENTS OF INCOME FOR THE TWO QUARTERS ENDED AUGUST 12, 2000~~
Guarantor The Kroger Co. Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ Sales.................................................. $ 3,484 $ 22,233 $ (371) $ 25,346 Merchandising costs, advertising, warehousing, and transportation..................................... 2,757 16,137 (343) 18,551 Operating, general and administrative.................. 628 4,180 -- 4,808 Rent................................................... 92 292 (28) 356 Depreciation and amortization.......................... 51 490 -- 541 Merger-related costs and asset impairment charges ..... 11 191 -- 202 ---------- ---------- ---------- ---------- Operating profit (loss)....................... (55) 943 -- 888 Interest expense....................................... (335) (26) -- (361) Equity in earnings of subsidiaries..................... 519 -- (519) -- ---------- ---------- ---------- ---------- Earnings before income tax expense and 129 917 (519) 527 extraordinary loss.......................... Tax expense (benefit).................................. (181) 398 -- 217 ---------- ---------- ---------- ---------- Earnings before extraordinary loss............ 310 519 (519) 310 Extraordinary loss, net of income tax benefit.......... (2) -- -- (2) ---------- ---------- ---------- ---------- Net earnings.................................. $ 308 $ 519 $ (519) $ 308 ========== ========== ========== ==========
11 ~~13 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR TWO QUARTERS ENDED AUGUST 18, 2001~~
Guarantor The Kroger Co. Subsidiaries Consolidated -------------- ------------ ------------ Net cash provided by operating activities.............. $ 805 $ 1,020 $ 1,825 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures............................ (85) (1,063) (1,148) Other........................................... (80) 32 (48) ---------- ---------- ---------- Net cash used by investing activities.................. (165) (1,031) (1,196) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt........ 1,290 -- 1,290 Reductions in long-term debt.................... (1,262) (30) (1,292) Proceeds from issuance of capital stock......... 46 -- 46 Treasury stock purchases........................ (485) -- (485) Other........................................... (214) 2 (212) Net change in advances to subsidiaries.......... (19) 19 -- ---------- ---------- ---------- Net cash used by financing activities.................. (644) (9) (653) ---------- ---------- ---------- Net (decrease) increase in cash and temporary cash investments........................................ (4) (20) (24) Cash and temporary investments: Beginning of year............................... 25 136 161 ---------- ---------- ---------- End of year..................................... $ 21 $ 116 $ 137 ========== ========== ==========
~~CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE TWO QUARTERS ENDED AUGUST 12, 2000~~
Guarantor The Kroger Co. Subsidiaries Consolidated -------------- ------------ ------------ Net cash provided by operating activities.............. $ 797 $ 1,152 $ 1,949 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures............................ (20) (818) (838) Other........................................... (68) (6) (74) ---------- ---------- ---------- Net cash used by investing activities.................. (88) (824) (912) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt........ 525 -- 525 Reductions in long-term debt.................... (1,301) (59) (1,360) Proceeds from issuance of capital stock......... 37 -- 37 Treasury stock purchases........................ (310) -- (310) Other........................................... (9) (46) (55) Net change in advances to subsidiaries.......... 341 (341) -- ---------- ---------- ---------- Net cash used by financing activities.................. (717) (446) (1,163) ---------- ---------- ---------- Net decrease in cash and temporary cash investments........................................ (8) (118) (126) Cash and temporary investments: Beginning of year............................... 30 251 281 ---------- ---------- ---------- End of year..................................... $ 22 $ 133 $ 155 ========== ========== ==========
12 ~~14 ITEM~~million gallons of fluid milk and other products annually. The product supply agreement expires on July 29, 2007. Upon acquisition of Ralphs/Food 4 Less, Santee became excess capacity and a duplicate facility. The joint venture is managed independently and has a board comprised of an equal number of members from each partner, plus one independent member. When there is a split vote, this member generally votes with the other partner.
12.    OTHER EVENTS
On May 22, 2002, the Company entered into a new $1,950 revolving credit facility, comprised of a Five-Year Credit Agreement and a 364-Day Credit Agreement (collectively the “New Credit Agreement”). The Five Year Credit Agreement, a $700 facility, terminates on May 22, 2007, unless extended or earlier terminated. The 364-Day Credit Agreement, a $1,250 facility, terminates on May 21, 2003 unless extended, converted into a one-year term loan, or earlier terminated by the Company. The Company terminated its previous $1,875 Five-Year Credit Agreement and $812.5 364-Day Credit Agreement (collectively the “Old Credit Agreement”) upon entering into the New Credit Agreement. Borrowings under the New Credit Agreement bear interest as described in the Credit Agreement, which is incorporated herein by reference to Exhibits 99.1 and 99.2 of Kroger’s Current Report on Form 8-K dated May 24, 2002. At May 25, 2002, the Applicable Margin for the 364-Day facility was .625% and for the Five-Year facility was .600%. The Facility Fee for the 364-Day facility was .125% and for the Five-Year facility was .150%. The Credit Agreement contains covenants, which among other things require the maintenance of certain financial ratios, including fixed charge coverage ratios and leverage ratios.
As a result of the early termination of the $1,875 Five-Year Credit Agreement in the first quarter 2002, the Company recorded an after-tax extraordinary loss of $3 for the write-off of the related deferred financing costs.
13.     SUBSEQUENT EVENTS
On June 17, 2002, the Company issued $350, 6.20% Senior Notes due in 2012.
On June 27, 2002, the Company filed a shelf registration statement with the SEC for the issuance of up to $2,000 of securities.
15
Item 2.    ~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the consolidated financial statements.
RESULTS OF OPERATIONS
Total sales for the ~~second~~first quarter of ~~2001~~2002 increased ~~4.2%~~3.7% to ~~$11.5 billion while year-to-date sales increased 4.9% to $26.6~~$15.7 billion. The increase in sales is attributable to an increase in comparable and identical store sales, ~~and~~including fuel, an increase in the number of stores ~~due to new store openings~~ and ~~acquisitions.~~the implementation of Kroger’s Strategic Growth Plan. Identical food store sales, which ~~include~~includes stores that have been in operation and have not been expanded or relocated for four quarters, grew ~~0.8%~~0.6% from the ~~second~~first quarter of ~~2000.~~2001. Comparable food ~~stores~~store sales, which ~~include~~includes relocations and expansions, increased ~~1.6%~~1.3% over the prior year. Excluding sales at supermarket fuel centers, comparable food store sales grew 0.6% and identical food store sales were slightly positive at 0.04%.
A portion of the increase in sales was due to an increase in the number of stores. During the ~~second~~first quarter of ~~2001,~~2002, we opened, acquired, relocated or expanded 3834 food stores, remodeled 2232 food stores and closed 1917 food stores. We operated ~~2,392~~2,429 food stores at ~~August 18, 2001~~May 25, 2002 compared to ~~2,338~~2,380 food stores at ~~August 12, 2000.~~May 26, 2001. As of ~~August 18, 2001,~~May 25, 2002, food store square footage totaled ~~128~~131 million. This represents an increase of ~~4.0%~~3.4% over ~~August 12, 2000.~~ May 26, 2001.
The gross profit rate during the ~~second~~first quarter, excluding one-time expenses and the effect of LIFO, was ~~27.6%~~27.1% in ~~2001~~2002 and 27.0% in ~~2000. On this~~2001. During the first quarter of 2002, no one-time items were included in merchandise costs compared to $3 million of one-time expense incurred during the same ~~basis, our year-to-date~~period of 2001. Including these costs, the first quarter, 2001 gross profit rate was ~~27.3%~~27.0%. The increase in 2002 over 2001 and 26.9% in 2000. During the second quarter of 2001, we incurred $2 million of one-time expenses included in merchandise costs, bringing our year-to-date one-time costs included in merchandise costs for 2001 to $5 million. This compares to $4 million during the second quarter of 2000 and $19 million for year-to-date 2000. Including these one-time expenses, gross profit rates were 27.5% for the second quarter of 2001 and 27.2% year-to date 2001 compared to 27.0% for the second quarter of 2000 and 26.9% for year-to-date 2000. This increase is primarily the result of ~~synergy savings, reductions in product costs through our corporate-wide merchandising programs, and increases in~~strong corporate brand sales, reductions in advertising expenses and ~~profitability. The economies~~savings from coordinated purchasing programs. Private label sales in Kroger’s Eastern region achieved a market share of ~~scale created by~~25.8% of grocery dollar sales, in the ~~merger have enabled Kroger to reduce costs through coordinated purchasing. Technology and logistics efficiencies have also led to improvements~~first quarter 2002, an increase of 0.2% from the first quarter of 2001. In Kroger’s Western region, private label market share was 20.7% of grocery dollar sales an increase from approximately 16%—18% at the time of the Fred Meyer merger.
We recorded a one-time net credit of $4 million in ~~category management and various other aspects of our operations, resulting in a decreased cost of product. We incurred $7 million of pre-tax one-time~~ operating, general and administrative ~~expenses~~expense in the ~~second~~first quarter of ~~2001~~2002, compared to $4$11 million of expense during the ~~second~~first quarter of ~~2000. Year-to-date these costs were $19 million for 2001 and $70 million for 2000.~~2001. Excluding these one-time items, operating, general and administrative expenses as a percent of sales were ~~18.9%~~18.5% during the ~~second~~first quarter of ~~2001~~2002 and ~~18.8% year-to-date 2001. These rates compare to~~ 18.7% during the ~~second~~first quarter ~~and year-to-date 2000.~~of 2001. Including these one-time items, operating, general and administrative expenses as a percent of sales were ~~19.0%~~18.4% in the ~~second~~first quarter of ~~2001 and 18.9% year-to-date 2001~~2002 compared to ~~18.7%~~18.8% in the ~~second~~first quarter of ~~2000 and 19.0% year-to-date 2000.~~2001. Operating, general and administrative expenses decreased as a percent of sales ~~increased from~~primarily due to our successful cost reduction and productivity initiatives. These results were achieved despite the ~~prior year primarily because~~negative impact of higher ~~utility and~~ health care benefit costs ~~offset by increased productivity.~~ and credit card fees.
Interest expense totaled $189 million for the first quarter of 2002, a decrease of approximately 8.3% from the first quarter of 2001. This decrease resulted from lower interest rates on our floating-rate debt in the first quarter 2002 and an overall reduction of debt versus the first quarter 2001.
The effective tax rate differs from the expected statutory rate primarily due to the effect of certain state taxes and non-deductible goodwill. Total goodwill amortization was $26 million in the second quarter of 2001 and $57 million year-to-date 2001 compared to $23 million in the second quarter of 2000 and $54 million year-to-date 2000. taxes.
Net earnings were ~~$256~~$362 million or ~~$0.31~~$0.45 per diluted share for the ~~second~~first quarter of ~~2001.~~2002. These results represent an increase of approximately 24% over net earnings of $0.25 per diluted share for the second quarter of 2000. Year-to-date net earnings were $559 million or $0.67 per diluted share, which represent an increase of approximately 86%25% over net earnings of $0.36 per diluted share for ~~year-to-date 2000.~~ the first quarter of 2001. As described below in “Other Issues,” Kroger’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 eliminated the amortization of goodwill beginning in fiscal 2002. Goodwill amortization expense totaled $31 million in the first quarter of 2001. In the first quarter 2002, we performed a transitional impairment review of goodwill and recorded a $16 million after-tax impairment loss as a cumulative effect of an accounting change. Adjusting first quarter 2002 results to eliminate the cumulative effect of the accounting change, and first quarter 2001 results to eliminate the amortization of goodwill and its tax effect, net earnings were $0.47 per diluted share in the first quarter 2002, an increase of approximately 18% over net earnings of $0.40 per diluted share for the first quarter, 2001.
Net earnings, excluding merger-related costs, ~~and~~other one-time items, restructuring charges and the cumulative effect of the accounting change, were ~~$263~~$386 million or ~~$0.32~~$0.48 per diluted share in the ~~second~~first quarter of ~~2001.~~2002. These results represent an increase of approximately ~~19%~~17% over net earnings of ~~$224 million, or $0.27~~$0.41 per diluted share excluding ~~merger-related~~merger related costs, ~~the impairment charge, and~~other one-time items and the amortization of goodwill and its tax effect, for the ~~second~~first quarter of 2000. On this same basis, year-to-date earnings before extraordinary loss were $576 million or $0.69 per diluted share, which represent an increase of approximately 19% over earnings of $495 million or $0.58 per diluted share. 13 15 2001.
16
MERGER-RELATED COSTS AND OTHER ONE-TIME ~~EXPENSES Total pre-tax merger-related~~ITEMS
Merger-related costs ~~incurred were $2 million during~~
We are continuing the ~~second quarter~~process of ~~2001, and $2 million during the second quarter of 2000. The year-to-date pre-tax merger costs incurred were $4 million during 2001 and $11 million during 2000.~~implementing our integration plan relating to recent mergers. During the first ~~quarter~~quarters of ~~2000,~~2002 and 2001, we ~~recorded a~~incurred pre-tax ~~impairment charge~~non-cash merger-related costs of ~~approximately $191 million. We identified impairment losses for assets to be disposed~~$2 million resulting from the issuance of ~~assets to be held and used, and certain investments in former suppliers~~restricted stock. Restrictions on the stock awards lapsed based on the achievement of synergy goals. All synergy-based awards were earned provided that ~~have experienced financial difficulty and with whom supply arrangements have ceased.~~ recipients were still employed by Kroger on the stated restriction lapsing date.
One-time items
In addition to ~~pre-tax~~the merger-related costs that are shown separately on the Consolidated ~~Statements~~Statement of Earnings, we ~~also~~ incurred ~~other~~ pre-tax one-time expenses ~~that~~of $3 million and $14 million during the first quarters of 2002 and 2001, respectively. Also in the first quarter 2002, we recorded pre-tax one-time income of $7 million resulting from the revaluation of excess energy purchase contracts. These items are included in merchandise costs and operating, general and administrative expense in 2001 and in operating, general and administrative expense in 2002.
Approximately $3 million of product costs for excess capacity was included as merchandise costs in the first quarter 2001. The remaining $11 million of expenses in the first quarter 2001, and the $3 million of expenses in the first quarter 2002, primarily related to employee severance and system conversion costs and were included as operating, general and administrative expenses. All of the costs in 2001 and $2 million of the costs in 2002 were cash expenditures.
During March through May 2001, we entered into four separate commitments to purchase electricity from one of our utility suppliers in southern California. At the inception of the contracts, forecasted electricity usage indicated that it was probable that all of the electricity would be utilized in the operations of the company. We, therefore, accounted for the contracts in accordance with the normal purchases and normal sales exception under SFAS No. 133, as amended, and no amounts were initially recorded in the financial statements related to these purchase commitments.
During the third quarter 2001, we determined that one of the contracts, and a portion of a second contract, provided for supplies in excess of our expected demand for electricity. This precluded use of the normal purchases and normal sales exception under SFAS No. 133 for those contracts, and required the contracts to be marked to fair value through current-period earnings. We therefore recorded a pre-tax charge of $81 million in the third quarter 2001 to accrue liabilities for the estimated fair value of these contracts through December 2006. The ~~one-time~~remaining portion of the second contract was re-designated as a cash flow hedge of future purchases. The other two purchase commitments continue to qualify for the normal purchases and normal sales exception under SFAS No. 133.
SFAS No. 133 requires the excess contracts to be revalued through current-period earnings each quarter. Due to an increase in the forward market prices for electricity in southern California during the first quarter 2002, we recorded pre-tax income of $7 million to mark the excess contracts to estimated fair value as of May 25, 2002.
Restructuring charges
On December 11, 2001, we outlined a Strategic Growth Plan that will support additional investment in our core business to increase sales and market share. As part of the plan to reduce operating, general and administrative costs, we have eliminated over 1,400 of the approximately 1,500 positions targeted for reduction under the Plan. We also have merged the Nashville division office and distribution center into the Atlanta and Louisville divisions. Restructuring charges related to the Plan totaled $13 million, pre-tax, in the first quarter 2002. The majority of these expenses ofrelated to severance agreements, distribution center consolidation and conversion costs. Approximately $9 million ~~during~~represented cash expenditures.
Cumulative effect of an accounting change
As described below in “Other Issues,” adoption of SFAS No. 142 required Kroger to perform a transitional impairment review of goodwill in 2002. This review has been completed and resulted in a $16 million after-tax impairment loss, recorded as a cumulative effect of an accounting change in the ~~second~~first quarter ~~and $24 million year to date 2001, and $8 million during the second quarter and $89 million year-to-date 2000, were costs related to recent mergers.~~ 2002.
17
The table below details our ~~pre-tax merger-related~~merger related costs and other one-time items:
2nd Quarter Ended Two Quarters Ended ------------------------------- ------------------------------- August 18, August 12, August 18, August 12, 2001 2000 2001 2000 ------------------------------- ------------------------------- (in millions) (in millions) Merger-related costs...................................... $ 2 $ 2 $ 4 $ 11 --------- --------- --------- -------- One-time items related

First Quarter Ended

May 25, 2002

May 26, 2001

(in millions)
Merger related costs      $ 2      $ 2


One-time items related to mergers included in:
Merchandise costs      —        3
Operating, general and administrative      3      11
Other one-time items included in:
Operating, general and administrative—energy contracts      (7 )      —


Total one-time items      (4 )      14
Restructuring charges      13      —
Cumulative effect of an accounting change, net of tax      16      —


Total merger related costs and other one-time items      $ 27      $ 16


Refer to Notes two, three and four to mergers included in: Merchandise costs...................................... 2 4 5 19 Operating, general and administrative.................. 7 4 19 70 --------- --------- --------- -------- Total one-time items...................................... 9 8 24 89 --------- --------- --------- -------- Impairment charge......................................... -- -- -- 191 --------- --------- --------- -------- Total merger-related costs and other one-time items....... $ 11 $ 10 $ 28 $ 291 ========= ========= ========= ========
~~Please refer to footnotes two and three of~~ the financial statements for more information on these costs.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management ~~---------------~~
During the ~~second~~first quarter ~~of 2001,~~2002, we invested ~~approximately $180~~$121 million to repurchase ~~approximately 7~~5.5 million shares of Kroger stock at an average price of ~~$25.30~~$21.89 per share. ~~During the first two quarters~~These amounts include shares acquired by Kroger in connection with awards of ~~2001, we repurchased approximately 19.9 million~~ shares and exercises of ~~our common~~ stock ~~at an average price of $24.19. During the second quarter of 2001, we~~options by participants in Kroger’s stock option and long-term incentive plans. We purchased ~~approximately 1 million shares to complete our $750 million stock repurchase plan. We also purchased approximately 5~~3.8 million shares under ~~the~~our $1 ~~billion authorization~~billlion stock repurchase plan and ~~approximately 1~~we purchased an additional 1.7 million shares under our program to repurchase common stock funded by the proceeds and tax benefits from stock option exercises.
We had several lines of credit with borrowing capacity totaling ~~$3.5 billion, with borrowings of $1.4~~approximately $2.76 billion at ~~August 18, 2001.~~May 25, 2002. Outstanding credit agreement and commercial paper borrowings, and certain outstanding letters of credit, reduce funds available under our lines of credit. At May 25, 2002, these amounts totaled $200 million, $541 million and $121 million, respectively. In addition, we had a ~~fully borrowed $457 million synthetic lease credit facility and a $150~~$75 million money market line with no borrowings at ~~August~~May 25, 2002, and a $202 million synthetic lease credit facility as further described below.
On May 22, 2002, we entered into a new $1,950 million revolving credit facility, comprised of a Five-Year Credit Agreement and a 364-Day Credit Agreement (collectively the “New Credit Agreement”). The Five Year Credit Agreement, a $700 million facility, terminates on May 22, 2007 unless extended or earlier terminated. The 364-Day Credit Agreement, a $1,250 million facility, terminates on May 22, 2002 unless extended, converted into a one-year term loan, or earlier terminated by us. We terminated our previous $1,875 million Five-Year Credit Agreement and $812.5 million 364-Day Credit Agreement (collectively the “Old Credit Agreement”) upon entering into the New Credit Agreement. Borrowings under the New Credit Agreement bear interest as described in the Credit Agreement, which is incorporated herein by reference to Exhibits 99.1 and 99.2 of Kroger’s Current Report on Form 8-K dated May 24, 2002. At May 25, 2002, the Applicable Margin for the 364-Day facility was .625% and for the Five-Year facility was .600%. The Facility Fee for the 364-Day facility was .125% and for the Five-Year facility was .150%. The Credit Agreement contains covenants, which among other things, require the maintenance of certain financial ratios, including fixed charge coverage ratios and leverage ratios.
As a result of the early termination of the $1,875 million Five-Year Credit Agreement in the first quarter 2002, we recorded an after-tax extraordinary loss of $3 million for the write-off of the related deferred financing costs.
We are a party to a financing transaction related to 16 properties constructed for total costs of approximately $202 million. Under the terms of the financing transaction, which was structured as a synthetic lease, a special purpose trust owns the properties and leases the properties to subsidiaries of Kroger. The lease expires in February 2003. We pay a variable lease rate that was approximately 3.3% at May 25, 2002.
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The synthetic lease qualifies as an operating lease and the owner of the special purpose trust has made a substantive residual equity investment. The transaction, therefore, is accounted for off-balance sheet and the related costs are reported as rent expense. As of May 25, 2002, the assets and liabilities of the special purpose trust were comprised primarily of the properties and $187 million of bank debt used to fund the construction of the properties.
In connection with these financing transactions, we have made a residual value guarantee for the leased property equal to 85% of the financing, or $172 million. We believe the market value of the property subject to this financing exceeded the residual value guarantee at May 25, 2002. During the first quarter of 2002, we purchased approximately $192 million of assets related to 18 ~~2001.~~ stores previously financed under this synthetic lease, leaving approximately $202 million outstanding under the synthetic lease at May 25, 2002.
Net total debt ~~was $8.5~~decreased $370 million to $8.3 billion at the end of the ~~second~~first quarter of ~~2001, an increase of $391 million as~~2002 compared to the ~~second~~first quarter of the prior year. Net total debt is defined as long-term debt, including capital leases and current portion thereof, less investments in debt securities and prefunded employee benefits. Net total debt ~~increased $207~~decreased $222 million from year-end ~~2000.~~2001. These ~~increases~~decreases are ~~primarily~~ the result of the ~~increased investment in working capital and stock repurchases. 14~~ 16 use of free cash flow to reduce outstanding debt.
Our bank credit facilities and the indentures underlying our publicly issued debt contain various restrictive covenants. Some of these covenants are based on EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, LIFO, extraordinary losses, and one-time items. The ability to generate EBITDA at levels sufficient to satisfy the requirements of these agreements is a key measure of our financial strength. We do not intend to present EBITDA as an alternative to any generally accepted accounting principle measure of performance. Rather, we believe the presentation of EBITDA is important for understanding our performance compared to our debt covenants. The calculation of EBITDA is based on the definition contained in our bank credit facilities. This may be a different definition than other companies use. We were in compliance with all EBITDA-based bank credit facilities and indenture covenants on ~~August 18, 2001.~~ May 25, 2002.
The following is a summary of the calculation of EBITDA for the first quarter of ~~2001~~2002 and ~~2000.~~
2nd Quarter Ended Two Quarters Ended ---------------------------------- -------------------------------- August 18, August 12, August 18, August 12, 2001 2000 2001 2000 ---------------------------------- -------------------------------- (in millions) (in millions) Earnings before tax expense and extraordinary loss...... $ 419 $ 361 $ 917 $ 527 Interest................................................ 152 155 357 361 Depreciation............................................ 220 211 509 487 Goodwill amortization................................... 26 23 57 54 LIFO.................................................... 8 4 20 16 One-time items included in merchandise costs............ 2 4 5 19 One-time items included in operating, general and administrative expenses.............................. 7 4 19 70 Merger-related costs.................................... 2 2 4 11 Impairment charges...................................... -- -- -- 191 Rounding................................................ 1 (1) -- (1) --------- --------- --------- --------- EBITDA.................................................. $ 837 $ 763 $ 1,888 $ 1,735 ========= ========= ========= =========
2001.

1st Quarter Ended

May 26, 2002

May 25, 2001

(in millions)
Earnings before tax expense, extraordinary loss and the cumulative effect of an accounting change    $ 610    $ 498
Interest    189    206
Depreciation    323    288
Goodwill amortization    —      31
LIFO    12    12
One-time items included in merchandise costs    —      3
One-time items included in operating, general and administrative expenses    (4 )    11
Merger related costs    2    2
Restructuring charges    13    —


EBITDA    $ 1,145    $ 1,051


Cash Flow ~~---------~~
We generated ~~$1.83~~$1.3 billion of cash from operating activities during the first ~~two quarters~~quarter of ~~2001~~2002 compared to ~~$1.95 billion during~~$616 million in the first ~~two quarters~~quarter of ~~2000.~~2001. Cash flow from operating activities ~~decreased~~increased in the first ~~two quarters~~quarter of ~~2001 largely~~2002 primarily due to ~~an increase in~~increased earnings and decreased working ~~capital and an increase in cash tax payments.~~ capital.
Investing activities used ~~$1.20 billion~~$712 million of cash during the first ~~two quarters~~quarter of ~~2001~~2002 compared to ~~$912~~$654 million in ~~2000.~~2001. This increase in use of cash was primarily ~~because of payments~~due to the payment for acquisitions and increased capital spending.
Financing activities used ~~$653~~$560 million of cash ~~during~~in the first ~~two quarters~~quarter of ~~2001~~2002 compared to ~~$1.16 billion during~~a provision of $37 million of cash in the first ~~two quarters~~quarter of ~~2000.~~2001. This ~~reduction~~decrease in ~~the use of~~ cash was ~~primarily because of proceeds received from~~due to a reduction in the issuance of debt, ~~during 2001 offset by an increase in~~the use of free cash flow to pay down outstanding debt balances and fewer treasury stock ~~purchases.~~ purchases during the first quarter of 2002.
19
CAPITAL EXPENDITURES
Capital expenditures ~~including~~excluding acquisitions totaled ~~$540~~$781 million in the ~~second~~first quarter of ~~2001~~2002 compared to ~~$384~~$618 million in the ~~second~~first quarter of ~~2000.~~2001. Including acquisitions, capital expenditures totaled $890 million and $645 million in the first quarter of 2002 and 2001, respectively. Expenditures in 2002 include the purchase of $192 million of assets previously financed under a synthetic lease. During the ~~second~~first quarter of ~~2001~~2002, we opened, acquired, expanded or relocated 3834 food stores. We had 1917 operational closings and completed 2232 within the wall remodels. Square footage increased ~~4.0%. 15~~ 17 3.4% versus the first quarter of 2001.
OTHER ISSUES
Kroger ~~has completed the $750 million stock repurchase program announced in April 2000 and~~ continues to repurchase Kroger stock under the $1 billion repurchase program authorized in March 2001. As of May 25, 2002, we had $574 million remaining under this program. At current prices, we aggressively continue to repurchase common stock under the program funded by the proceeds and tax benefits from stock option exercises.
We indirectly own a 50% interest in the Santee Dairy (“Santee”) and have a product supply arrangement with Santee that requires us to purchase 9 million gallons of fluid milk and other products annually. The product supply agreement expires on July 29, 2007. Upon acquisition of Ralphs/Food 4 Less, Santee became excess capacity and a duplicate facility. The joint venture is managed independently and has a board comprised of an equal number of members from each partner, plus one independent member. When there is a split vote, this member generally votes with the other partner.
Emerging Issues Task Force (EITF) Issue Nos. ~~00-14, "Accounting~~00-22, “Accounting for ~~Certain Sales Incentives;" 00-22, "Accounting for "Points"~~‘Points’ and Certain Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future;"” and ~~00-25, "Vendor Income Statement Characterization of~~01-09, “Accounting for Consideration ~~from~~Given by a Vendor to a ~~Retailer" become~~Customer (Including a Reseller of Vendor’s Products),” became effective for ~~The~~ Kroger ~~Co. beginning in the first quarter of~~on February 3, 2002. These issues address the appropriate accounting for certain vendor contracts and loyalty programs. The ~~Company continues to assess the effect these new standards will have on the financial statements. The Company expects the~~ adoption of ~~these standards will~~this standard did not have a material effect on our financial statements. ~~Statement of Financial Accounting Standards ("SFAS")~~
SFAS No. 141, ~~"Business~~“Business Combinations,~~" and SFAS No. 142, "Goodwill and Other Intangible Assets" were~~” was issued by the Financial Accounting Standards Board (“FASB”) in ~~late~~ June of 2001. ~~SFAS 141 is effective for~~This standard requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. The Statement also addresses the recognition of intangible assets in a business combination. Adoption of SFAS No. 141 did not have a material effect on our financial statements.
SFAS No. 142, “Goodwill and Other Intangible Assets,” was issued by the FASB in June of 2001. The Statement addresses the accounting for intangible assets acquired outside of a business combination. The Statement also addresses the accounting for goodwill and other intangible assets subsequent to initial recognition. SFAS No. 142 provides that goodwill no longer will ~~become effective~~be amortized and instead will be tested for ~~The~~ impairment on an annual basis.
Kroger ~~Co.~~adopted SFAS No. 142 on February 3, 2002. Accordingly, we performed a transitional impairment review of our goodwill, which totaled $3.6 billion as of February 3, 2002. The review was performed at the operating division level. Generally, fair value represented a multiple of earnings before interest, taxes, depreciation, amortization, LIFO charge, extraordinary items and one-time items (“EBITDA”) or discounted projected future cash flows. Impairment was indicated when the carrying value of a division, including goodwill, exceeded its fair value. We ~~are currently analyzing~~determined that the ~~effect~~carrying value of the jewelry store division, which included $26 million of goodwill, exceeded its fair value. Impairment was not indicated for the goodwill associated with the other operating divisions.
The fair value of the jewelry store division was subsequently measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. As a result of this analysis, we determined that the jewelry store division goodwill was entirely impaired. Impairment primarily resulted from the recent operating performance of the division and review of the division’s projected future cash flows on a discounted basis, rather than on an undiscounted basis, as was the standard under SFAS No. 121, prior to adoption of ~~these standards will have on its financial statements. Statement on Financial Accounting Standards ("SFAS")~~SFAS No. 142. Accordingly, we recorded a $16 million charge, net of a $10 million tax benefit, as a cumulative effect of an accounting change in the first quarter, 2001.
SFAS No. 143, ~~"Asset~~“Asset Retirement Obligations,"” was issued by the ~~Financial Accounting Standards Board~~FASB in August of 2001. This standard addresses obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 will become effective for ~~The~~ Kroger ~~Co.~~ on February 2, 2003. ~~The company is~~We currently are analyzing the effect this standard will have on its financial statements. ~~Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by~~
20
SFAS No. ~~137, "Accounting~~144, “Accounting for ~~Derivative Instruments~~the Impairment or Disposal of Long-Lived Assets,” was issued by the FASB in August of 2001. This standard replaces SFAS No. 121 and ~~Hedging Activities - Deferral~~APB No. 30 and amends APB No. 51. SFAS No. 144 became effective for Kroger on February 3, 2002. Adoption of ~~the Effective Date~~this standard did not have a material effect on our financial statements.
SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. ~~133,"~~13, and Technical Corrections,” was issued by the FASB in April 2002. SFAS No. ~~138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," became~~145 becomes effective for Kroger ~~as of~~on February ~~4, 2001. SFAS No. 133, as amended, defines derivatives, requires that derivatives be carried at fair value~~2, 2003. We currently are analyzing the effect this standard will have on the balance sheet, and provides for hedge accounting when certain conditions are met. Initial adoption of this new accounting standard resulted in Kroger recording a liability of $9 million with a corresponding charge recorded as additional paid in capital, net of income tax effects. An accumulated other comprehensive loss caption was not utilized due to the immateriality of the balance. In accordance with SFAS No. 133, derivativeour financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as "cash flow" hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of related tax effects. The ineffective portion of the cash flow hedge, if any, is recognized in current-period earnings. Other comprehensive income is reclassified to current-period earnings when the hedged transaction affects earnings. We assess, both at inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of hedged items. If we determine that a derivative is not highly effective as a hedge or ceases to be highly effective, we discontinue hedge accounting prospectively. As of August 18, 2001, we recorded a year-to-date liability of $15 million related to the fair value of its derivative instruments. These instruments are designated as, and are considered, effective cash flow hedges. Hedge ineffectiveness was not material during the quarter ended August 18, 2001. We recorded a corresponding charge as a part of additional paid in capital, net of income tax effects. 16 18 statements.
OUTLOOK
Information provided by us, including written or oral statements made by our representatives, may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as integration of the operations of acquired or merged companies, expansion and growth of our business, future capital expenditures and our business strategy, contain forward-looking information. Statements elsewhere in this report and below regarding our expectations, hopes, beliefs, intentions, or strategies are also forward looking statements. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. While we believe that the statements are accurate, uncertainties and other factors could cause actual results to differ materially from those statements. In particular: -
•
We expect to reduce net operating working capital as compared to the third quarter of 1999 by a total of $500 million by the end of the third quarter 2004. Our ability to achieve this reduction could be adversely affected by: increases in product costs; our ability to obtain sales growth from new square footage; competitive activity in the markets in which we operate; changes in our product mix; changes in laws and regulations; and other factors. We calculate net operating working capital as detailed in the table below. As of the end of the second quarter of 2001, net operating working capital increased $235 million since the second quarter of 2000. A calculation of net operating working capital, after reclassification of certain balance sheet amounts, based on our definition for the third quarter of 1999, the second quarter of 2000, and the second quarter of 2001 is provided below:
~~Third Second Second Quarter Quarter Quarter~~ 1999 by a total of $500 million by the end of the third quarter 2004. Our ability to achieve this reduction will depend on results of our programs to improve net working capital management. We calculate net operating working capital as detailed in the table below. As of the end of the first quarter 2002, net operating working capital decreased $147 million since the first quarter of 2001. A calculation of net operating working capital based on our definition for the first quarters of 2002, 2001 and 2000 ~~2001 ------------------------------------- (in millions)~~ Cash................................. $ 283 $ 155 $ 137 Receivables.......................... 633 583 649 FIFO inventory....................... 4,632 4,133 4,375 Operating prepaid and other assets... 200 252 256 Accounts payable..................... (3,222) (2,940) (3,118) Operating accrued liabilities........ (1,937) (1,932) (1,851) Prepaid VEBA......................... -- (56) (18) ------- -------- -------- Working capital ..................... $ 589 $ 195 $ 430 ======== ======== ======== is shown below.
- We obtain sales growth from new square footage, as well as from increased productivity from existing locations. We expect 2001 full year square footage to grow 4.0% to 4.5%, excluding major acquisitions. We expect combination stores to increase our sales per customer by including numerous specialty departments, such as pharmacies, natural food products, fuel centers,

First Quarter
2002

First Quarter 2001

First Quarter 2000


(in millions)

Cash    $ 185    $ 160    $ 163
Receivables    641    672    623
FIFO inventory    4,545    4,537    4,240
Operating prepaid and other assets    308    351    358
Accounts payable    (3,266 )    (3,135 )    (3,004 )
Operating accrued liabilities    (1,822 )    (1,813 )    (1,849 )
Prepaid VEBA    (61 )    (95 )    (118 )



Working capital    $ 530    $ 677    $ 413



•
We obtain sales growth from new square footage, as well as from increased productivity from existing locations. We expect full year 2002 square footage to grow 3.5% to 4.5%, excluding major acquisitions. We expect combination stores to increase our sales per customer by including numerous specialty departments, such as pharmacies, natural food products, gasoline pumps, seafood shops, floral shops, and bakeries. We believe the combination store format will allow us to withstand continued competition from other food retailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants.
•
On December 11, 2001, we outlined a Strategic Growth Plan that will support additional investment in core business to grow sales and increase market share. We intend to achieve identical supermarket store sales growth of 2% to 3% above product cost inflation and to reduce operating, general and administrative costs by more than $500 million over the next two years. We expect approximately two-thirds of this reduction to be achieved by the end of fiscal 2002. As of May 25, 2002, we had reduced these costs by approximately $124 million. We have eliminated over 1,400 of the approximately 1,500 positions targeted for reduction under the Plan. We also have merged the Nashville division office and distribution center into the Atlanta and Louisville divisions.
21
   As part of the plan, we have established a long-term, sustainable annual earnings-per-share (“EPS”) growth target of 13%—15%, before one-time items, beginning in fiscal 2004. For fiscal 2002 and 2003, we expect annual EPS growth of 10%—12%, before one-time items.
   We believe the combination store format will allow us to complete effectively with other food retailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants. Our square footage growth may not meet our expectations if real estate projects are not completed as scheduled or if a general economic downturn causes us to delay projects. Our projected increases in sales per customer may not be achieved if customers reduce spending for "non-essential" items in our specialty departments. - Our targeted annual earnings per share growth is 16%-18% throughtotal cost of the fiscal year ending February 1, 2003 and 15% thereafter. Our ability to achieve this growth could be adversely affected by: general economic conditions; competitive activity in the markets in which we operate; increases in product costs; prolonged union work stoppages; interest rate fluctuations; our ability to obtain sales growth from new square footage; and other factors not specifically identified. 17 19 - Capital expenditures reflect our strategy of growth through expansion and acquisition as well as our emphasis on self-development and ownership of real estate, and on logistics and technology improvements. The continued capital spending in technology focusing on improved store operations, logistics, manufacturing procurement, category management, merchandising and buying practices, should reduce merchandising costs as a percent of sales. We expect our capital expenditures for fiscal 2001 to total $2.0 billion, excluding acquisitions. We intend to use the combination of free cash flow from operations and borrowings under credit facilities to finance capital expenditure requirements. If determined preferable, we may fund capital expenditure requirements by mortgaging facilities, entering into sale/leaseback transactions, or by issuing additional debt or equity. - Based on current operating results, we believe that operating cash flow and other sources of liquidity, including borrowings under our commercial paper program and bank credit facilities,Strategic Growth Plan will be ~~adequate~~approximately $75 million to ~~meet anticipated requirements~~$90 million pre-tax, a reduction of $10 million from our original estimate in December 2001. In the first quarter 2002, we recorded restructuring charges of $13 million primarily for ~~working capital, capital expenditures, interest payments~~severance agreements, distribution center consolidation and ~~scheduled principal payments for~~conversion costs. As of May 25, 2002, the ~~foreseeable future. We also believe we have adequate coverage~~cumulative total of our debt covenants to continue responding effectively to competitive conditions. - A decline in sufficient cash flows to support capital expansion plans, share repurchase programs and general operating activities could cause our growth to slow significantly and may cause us to miss our earnings targets, because we obtain some of our sales growth from new square footage. - The grocery retailing industry continues to experience fierce competition from other grocery retailers, supercenters, club or warehouse stores, and drug stores. Our ability to maintain our current success is dependent upon our ability to compete in this industry and continue to reduce operating expenses. The competitive environment may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. While we believe our opportunities for sustained, profitable growth are considerable, unanticipated actions of competitors could impact our share of sales and net income. - Changes in laws and regulations, including changes in accounting standards, taxation requirements, and environmental law may have a material impact on our financial statements. - Changes inrestructuring charges recorded under the general business and economic conditions in our operating regions, including the rate of inflation, population growth, and employment and job growth in the markets in which we operate may affect our ability to hire and train qualified employees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may also effect the shopping habits of our customers, which could affect sales and earnings. - Changes in our product mix may negatively affect certain financial indicators. For example, we have added and will continue to add supermarket fuel centers. Since gasoline is a low profit margin item with high sales dollars, we expect to see our gross profit margins decrease as we sell more gasoline. Although this negatively affects our gross profit margin, gasoline provides a positive affect on EBITDA and net earnings. - Our ability to integrate any companies we acquire or have acquired and achieve operating improvements at those companies will affect our operations. - We retain a portion of the exposure for our workers' compensation and general liability claims. It is possible that these claims may cause significant expenditures that would affect our operating cash flows. - Our capital expenditures could fall outside of the expected range if we are unsuccessful in acquiring suitable sites for new stores, if development costs exceed those budgeted, or if our logistics and technology projects are not completed in the time frame expected or on budget. - Adverse weather conditions could increase the cost our suppliers charge for our products, or may decrease the customer demand for certain products. Additionally, increases in the cost of inputs, such as utility costs or raw material costs, could negatively impact financial ratios and net earnings. - Although we currently operate only in the United States, the prices we are charged for imported goods could be affected by civil unrest in foreign countries where our suppliers do business. If we are unable to pass these increases on to our customers our gross margin and EBITDA will suffer. 18 20 - Interest rate fluctuation and other capital market conditions may cause variability in earnings. Although we use derivative financial instruments to reduce our net exposure to financial risks, we are still exposed to interest rate fluctuations and other capital market conditions. - We cannot foresee the effects of the tragic events of September 11, 2001, or the general economic downtown, upon the Company'sPlan was $50 million.
•
Capital expenditures reflect our strategy of growth through expansion and acquisition as well as our emphasis on self-development and ownership of real estate, and on logistics and technology improvements. The continued capital spending in technology focusing on improved store operations, logistics, manufacturing procurement, category management, merchandising and buying practices, should reduce merchandising costs as a percent of sales. As a result of the stores that we have acquired and the purchase of assets previously financed under a synthetic lease, we now expect our capital expenditures for fiscal 2002 to total $2.4—$2.5 billion. We intend to use the combination of free cash flows from operations, including reductions in working capital, and borrowings under credit facilities to finance capital expenditure requirements. If determined preferable, we may fund capital expenditure requirements by mortgaging facilities, entering into sale/leaseback transactions, or by issuing additional debt or equity.
•
This analysis contains certain forward-looking statements about Kroger’s future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected growth in earnings per share (“EPS”); working capital reduction; a decline in our net total debt-to-EBITDA ratio; our ability to generate free cash flow; and our strategic growth plan, and are indicated by words or phrases such as “comfortable,” “committed,” “expects,” “goal,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. Our ability to achieve annual EPS growth goals will be affected primarily by pricing and promotional activities of existing and new competitors, including non-traditional food retailers, and our response to these actions intended to increase market share. In addition, Kroger’s EPS growth goals could be affected by: increases in product costs; newly opened or consolidated distribution centers; our stock repurchase program; our ability to obtain sales growth from new square footage; competitive activity in the markets in which we operate; changes in our product mix; and changes in laws and regulations. Our ability to reduce our net total debt-to-EBITDA ratio could be adversely affected by: our ability to generate sales growth and free cash flow; interest rate fluctuations and other changes in capital market conditions; Kroger’s stock repurchase activity; unexpected increases in the cost of capital expenditures; acquisitions; and other factors. The results of our strategic growth plan and our ability to generate free cash flow to the extent expected could be adversely affected if any of the factors identified above negatively impact our operations. In addition, the timing of the execution of the plan could adversely impact our EPS and sales results.
•
Based on current operating results, we believe that operating cash flow and other sources of liquidity, including borrowings under our commercial paper program and bank credit facilities, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. We also believe we have adequate coverage of our debt covenants to continue to respond effectively to competitive conditions.
•
A decline in the generation of sufficient cash flows to support capital expansion plans, share repurchase programs and general operating activities could cause our growth to slow significantly and may cause us to miss our earnings targets, because we obtain some of our sales growth from new square footage.
•
The grocery retailing industry continues to experience fierce competition from other grocery retailers, supercenters, club or warehouse stores, and drug stores. Our ability to maintain our current success is dependent upon our ability to compete in this industry and continue to reduce operating expenses. The competitive environment may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. While we believe our opportunities for sustained, profitable growth are considerable, unanticipated actions of competitors could impact our share of sales and net income.
•
Changes in laws and regulations, including changes in accounting standards, taxation requirements, and environmental laws may have a material impact on our financial statements.
22
•
Changes in the general business and economic conditions in our operating regions, including the rate of inflation, population growth, and employment and job growth in the markets in which we operate may affect our ability to hire and train qualified employees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may also effect the shopping habits of our customers, which could affect sales and earnings.
•
Changes in our product mix may negatively affect certain financial indicators. For example, we have added and will continue to add supermarket fuel centers. Since gasoline is a low profit margin item with high sales dollars, we expect to see our gross profit margins decrease as we sell more gasoline. Although this negatively affects our gross profit margin, gasoline provides a positive effect on operating, general and administrative expense as a percent of sales.
•
Our ability to integrate any companies we acquire or have acquired and achieve operating improvements at those companies will affect our operations.
•
We retain a portion of the exposure for our workers’ compensation and general liability claims. It is possible that these claims may cause significant expenditures that would affect our operating cash flows.
•
Our capital expenditures could fall outside of the expected range if we are unsuccessful in acquiring suitable sites for new stores, if development costs exceed those budgeted, or if our logistics and technology projects are not completed in the time frame expected or on budget.
•
Adverse weather conditions could increase the cost our suppliers charge for our products, or may decrease the customer demand for certain products. Additionally, increases in the cost of inputs, such as utility costs or raw material costs, could negatively impact financial ratios and net earnings.
•
Although we presently operate only in the United States, civil unrest in foreign countries in which our suppliers do business may affect the prices we are charged for imported goods. If we are unable to pass these increases on to our customers our gross margin and net earnings will suffer.
•
Interest rate fluctuation and other capital market conditions may cause variability in earnings. Although we use derivative financial instruments to reduce our net exposure to financial risks, we are still exposed to interest rate fluctuations and other capital market conditions.
•
We cannot fully foresee the effects of the general economic downtown on Kroger’s business. We have assumed the economic situation and competitive situations will not change significantly for 2002 and 2003.
Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in or contemplated or implied by forward-looking statements made by us or our ~~representatives or us. 19~~ ~~21 ITEM~~representatives.
23
Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to market risk from the changes in interest rates as a result of borrowing activities. We continue to utilize interest rate swapsQuantitative and caps to limit our exposure to rising interest rates. We use derivatives primarily to fix the rates on variable debt and limit the floating rate debt to a total of $2.3 billion or less. Qualitative Disclosures About Market Risk.
There have been no significant changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk on our Form 10-K filed with the SEC on May ~~2, 2001. 20~~ 22 1, 2002.
24
PART ~~II -~~ II—OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) June 21, 2001 - Annual Meeting (b) The shareholders elected four directors to serve until the annual meeting of shareholders in 2004 or until their successors have been elected
Item 6.    Exhibits and qualified and ratified the selection of PricewaterhouseCoopers LLP, as Company auditors for 2001. The shareholders also adopted a shareholder proposal requesting that the Board of Directors take steps to implement the annual election of all Board members as opposed to election in classes and defeated a shareholder proposal recommending the Company label and identify all products sold under its brand names or private labels that may contain genetically engineered crops, organisms or products. Votes were cast as follows: For Withheld ----------- ----------- To Serve Until 2004 ------------------- John L. Clendenin 602,206,422 134,802,546 David B. Dillon 605,593,361 131,415,607 Bruce Karatz 606,339,537 130,669,431 Thomas H. O'Leary 602,339,635 134,669,333
~~For Against Withheld Broker Non-Votes ---------- ----------- ---------- ----------------~~ PricewaterhouseCoopers LLP 724,044,937 8,788,911 4,175,120 -- For Against Withheld Broker Non-Votes ---------- ----------- ---------- ---------------- Shareholder proposal (declassify Board) 399,384,890 251,811,552 11,002,368 74,810,158 For Against Withheld Broker Non-Votes ---------- ----------- ---------- ---------------- Shareholder proposal (genetically engineered items) 91,492,862 506,219,156 64,486,792 74,810,158
21 ~~23 ITEM 6. EXHIBITS AND REPORTS ON FORM~~Reports on Form 8-K.
(a)  EXHIBIT ~~3.1 -~~ 3.1—Amended Articles of Incorporation of the Company are hereby incorporated by reference to Exhibit 3.1 of the ~~Company's~~Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. The ~~Company's~~Company’s Regulations are incorporated by reference to Exhibit 4.2 of the ~~Company's~~Company’s Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33-57552.
EXHIBIT ~~4.1 -~~ 4.1—Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.
EXHIBIT ~~99.1 -~~ 99.1—Additional ~~Exhibits -~~ Exhibits—Statement of Computation of Ratio of Earnings to Fixed Charges.
EXHIBIT 99.2—Additional Exhibits—Pro Forma Application of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
(b)  The Company disclosed and filed aan announcement of fourth quarter and fiscal year 2001 earnings and additional authorization documentation for its shelf-registration statement in its Current Report on Form 8-K dated March 12, 2002; an underwriting agreement, pricing agreement and the Thirteenth Supplemental Indenture related to the issuance of $500,000,000, 6.75% Senior Notes in its Current Report on Form 8-K dated April 3, 2002, and its new ~~364 -~~ 364—Day Credit Agreement and Five-Year Credit Agreement, both dated as of May ~~23, 2001,~~22, 2002, in its Current Report on Form 8-K dated May 31, 2001; an announcement of first quarter 2001 earnings results in its Current Report on Form 8-K dated June 26, 2001; and an underwriting agreement, pricing agreement, and the Twelfth Supplemental Indenture related to the issuance of $250,000,000 of Debt Securities in the form of Puttable Reset Securities due 2012 in its Current Report on Form 8-K dated August 16, 2001. 22 24, 2002.
25
SIGNATURES ~~----------~~
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ~~THE KROGER CO.~~
THE KROGER CO.
By:
/s/    JOSEPH A. PICHLER
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: October 1, 2001 By: /s/ Joseph A. Pichler ---------------------------------- Joseph A. Pichler Chairman of the Board and Chief Executive Officer July 9, 2002
By:
/s/    M. ELIZABETH VAN OFLEN
M. Elizabeth Van Oflen
Vice President and
Corporate Controller
Dated: October 1, 2001 By: /s/ M. Elizabeth Van Oflen ---------------------------------- M. Elizabeth Van Oflen Vice President and Corporate Controller 25 July 9, 2002
26
Exhibit Index ------------- Exhibit 3.1 - Amended Articles of Incorporation of the Company are hereby incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. The Company's Regulations are incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33-57552. Exhibit 4.1 - Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request. Exhibit 10.1 - 364 - Day Credit Agreement and Five- Year Credit Agreement, both dated as of May 23, 2001, among The Kroger Co., as Borrower; the Initial Lenders named therein; Citibank, N.A. and The Chase Manhattan Bank, as Administrative Agents; and Bank of America, N.A., Bank One, N.A., and The Bank of New York, as Co-Syndication Agents. Incorporated by reference to Exhibit 99.1 and 99.2 of the Company's Current Report on Form 8-K dated May 31, 2001. Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.
Exhibit   3.1 —Amended Articles of Incorporation of the Company are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 1998. The Company’s Regulations are incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33-57552.
Exhibit   4.1 —Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request.
Exhibit 10.1 —364—Day Credit Agreement and Five—Year Credit Agreement, both dated as of May 22, 2002, among The Kroger Co., as Borrower; the Initial Lenders named therein; Citibank, N.A. and JPMorgan Chase Bank, as Administrative Agents; and Bank of America, N.A., Bank One, N.A., The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch and Union Bank of California, as Co-Syndication Agents. Incorporated by reference to Exhibit 99.1 and 99.2 of the Company’s Current Report on Form 8-K dated May 24, 2002.
Exhibit 99.1 —Additional Exhibits—Statement of Computation of Ratio of Earnings to Fixed Charges.
Exhibit 99.2 —Additional Exhibits—Pro Forma Application of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
27

Ohio		31-0345740
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	First Quarter Ended
	May 25, 2002			May 26, 2001
Sales	$	15,667		$	15,102

Merchandise costs, including advertising, warehousing, and transportation		11,438			11,034
Operating, general and administrative		2,888			2,841
Rent		204			202
Depreciation and amortization		323			319
Restructuring charges		13			—
Merger related costs		2			2

Operating profit		799			704
Interest expense		189			206

Earnings before income tax expense, extraordinary loss and cumulative effect of an accounting change		610			498
Income tax expense		229			194

Earnings before extraordinary loss and cumulative effect of an accounting change		381			304
Extraordinary loss, net of income tax benefit		(3	)		—

Earnings before cumulative effect of an accounting change		378			304
Cumulative effect of an accounting change, net of income tax benefit		(16	)		—

Net earnings	$	362		$	304

Earnings per basic common share:
Earnings before extraordinary loss and cumulative effect of an accounting change	$	0.48		$	0.37
Extraordinary loss, net of income tax benefit		0.00			0.00
Cumulative effect of an accounting change, net of income tax benefit		(0.02	)		0.00

Net earnings	$	0.46		$	0.37

Average number of common shares used in basic calculation		793			812
Earnings per diluted common share:
Earnings before extraordinary loss and cumulative effect of an accounting change	$	0.47		$	0.36
Extraordinary loss, net of income tax benefit		0.00			0.00
Cumulative effect of an accounting change, net of income tax benefit		(0.02	)		0.00

Net earnings	$	0.45		$	0.36

Average number of common shares used in diluted calculation		809			833

	May 25, 2002			February 2, 2002
ASSETS
Current assets
Cash	$	185		$	161
Receivables		641			679
Inventories		4,193			4,178
Prepaid and other current assets		324			494

Total current assets		5,343			5,512
Property, plant and equipment, net		10,033			9,657
Goodwill, net		3,572			3,594
Other assets		313			324

Total Assets	$	19,261		$	19,087

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases	$	455		$	436
Accounts payable		3,266			3,005
Salaries and wages		540			584
Other current liabilities		1,430			1,460

Total current liabilities		5,691			5,485
Long-term debt including obligations under capital leases		7,961			8,412
Other long-term liabilities		1,818			1,688

Total Liabilities		15,470			15,585

Commitments and Contingencies (Note 11)
SHAREOWNERS’ EQUITY
Preferred stock, $100 par, 5 shares authorized and unissued		—			—
Common stock, $1 par, 1,000 shares authorized: 904 shares issued in 2002 and 901 shares issued in 2001		904			901
Additional paid-in capital		2,256			2,217
Accumulated other comprehensive loss		(31	)		(33	)
Accumulated earnings		2,509			2,147
Common stock in treasury, at cost, 112 shares in 2002 and 106 shares in 2001		(1,847	)		(1,730	)

Total Shareowners’ Equity		3,791			3,502

Total Liabilities and Shareowners’ Equity	$	19,261		$	19,087

	Facility Closure Costs			Employee Severance			Incentive Awards and Contributions
Balance at February 3, 2001	$	113		$	18		$	35
Additions		—			—			4
Payments		(19	)		(3	)		(9	)

Balance at February 2, 2002		94			15			30
Additions		—			—			2
Payments		(5	)		(5	)		—

Balance at May 25, 2002	$	89		$	10		$	32

Balance at February 2, 2002	$	78
Net payments (settlement of excess purchase commitments)		(5	)
Revaluation (change in liabilities due to increase in forward market prices)		(7	)

Balance at May 25, 2002	$	66

	Severance & Other Costs
Balance at February 2, 2002	$	37
Additions		13
Payments		(25	)

Balance at May 25, 2002	$	25

	First Quarter Ended May 25, 2002					First Quarter Ended May 26, 2001
	Earnings (Numerator)		Shares (Denominator)	Per Share Amount		Earnings (Numerator)		Shares (Denominator)	Per Share Amount
Basic earnings per common share	$	381	793	$	0.48	$	304	812	$	0.37
Dilutive effect of stock options and warrants		—	16				—	21

Diluted earnings per common share	$	381	809	$	0.47	$	304	833	$	0.36

	The Kroger Co.		Guarantor Subsidiaries			Eliminations			Consolidated
Current assets
Cash	$	23	$	162		$	—		$	185
Receivables		305		336			—			641
Net inventories		385		3,808			—			4,193
Prepaid and other current assets		28		296			—			324

Total current assets		741		4,602			—			5,343
Property, plant and equipment, net		1,043		8,990			—			10,033
Goodwill, net		21		3,551			—			3,572
Other assets		657		(344	)		—			313
Investment in and advances to subsidiaries		10,959		—			(10,959	)		—

Total assets	$	13,421	$	16,799		$	(10,959	)	$	19,261

Current liabilities
Current portion of long-term debt including obligations under capital leases	$	438	$	17		$	—		$	455
Accounts payable		234		3,032			—			3,266
Other current liabilities		420		1,550			—			1,970

Total current liabilities		1,092		4,599			—			5,691
Long-term debt including obligations under capital leases		7,614		347			—			7,961
Other long-term liabilities		924		894			—			1,818

Total liabilities		9,630		5,840			—			15,470

Shareowners’ Equity		3,791		10,959			(10,959	)		3,791

Total liabilities and shareowners’ equity	$	13,421	$	16,799		$	(10,959	)	$	19,261

	1st Quarter Ended
	May 26, 2002			May 25, 2001
	(in millions)
Earnings before tax expense, extraordinary loss and the cumulative effect of an accounting change	$	610		$	498
Interest		189			206
Depreciation		323			288
Goodwill amortization		—			31
LIFO		12			12
One-time items included in merchandise costs		—			3
One-time items included in operating, general and administrative expenses		(4	)		11
Merger related costs		2			2
Restructuring charges		13			—

EBITDA	$	1,145		$	1,051