10-Q 1 l90353ae10-q.txt THE KROGER CO. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 18, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- --------------------- Commission file number 1-303 THE KROGER CO. ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-0345740 ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1014 Vine Street, Cincinnati, OH 45202 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (513) 762-4000 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Unchanged ------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ------- ------- There were 803,293,536 shares of Common Stock ($1 par value) outstanding as of September 26, 2001 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. THE KROGER CO. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (in millions, except per share amounts) (unaudited)
2nd Quarter Ended Two Quarters Ended --------------------------- --------------------------- August 18, August 12, August 18, August 12, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Sales $11,485 $11,017 $26,587 $25,346 ------- ------- ------- ------- Merchandise costs, including advertising, warehousing, and transportation .. 8,331 8,051 19,366 18,551 Operating, general and administrative ...................................... 2,177 2,059 5,012 4,808 Rent ....................................................................... 158 155 365 356 Depreciation and amortization .............................................. 246 234 566 541 Asset impairment charges -- -- -- 191 Merger-related costs ....................................................... 2 2 4 11 ------- ------- ------- ------- Operating profit ........................................................ 571 516 1,274 888 Interest expense ........................................................... 152 155 357 361 ------- ------- ------- ------- Earnings before income tax expense and extraordinary loss ............... 419 361 917 527 Income tax expense ......................................................... 163 151 358 217 ------- ------- ------- ------- Earnings before extraordinary loss ...................................... $ 256 $ 210 $ 559 $ 310 Extraordinary loss, net of income tax benefit .............................. -- (2) -- (2) ------- ------- ------- ------- Net Earnings ............................................................ $ 256 $ 208 $ 559 $ 308 ======= ======= ======= ======= Earnings per basic common share: Earnings before extraordinary loss ...................................... $ 0.32 $ 0.25 $ 0.69 $ 0.37 Extraordinary loss ...................................................... 0.00 0.00 0.00 0.00 ------- ------- ------- ------- Net earnings ......................................................... $ 0.32 $ 0.25 $ 0.69 $ 0.37 ======= ======= ======= ======= Average number of common shares used in basic calculation .................. 805 824 809 828 Earnings per diluted common share: Earnings before extraordinary loss ...................................... $ 0.31 $ 0.25 $ 0.67 $ 0.36 Extraordinary loss ...................................................... 0.00 0.00 0.00 0.00 ------- ------- ------- ------- Net earnings ......................................................... $ 0.31 $ 0.25 $ 0.67 $ 0.36 ======= ======= ======= ======= Average number of common shares used in diluted calculation ................ 827 847 830 849
-------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. 1 3 THE KROGER CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (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 ========= =========
-------------------------------------------------------------------------------- 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 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
-------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. 3 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Certain prior year amounts have been reclassified to conform to 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 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" 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 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"). 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 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on May 2, 2001. The unaudited information included in the consolidated financial statements for the second quarter and two quarters ended August 18, 2001 and August 12, 2000 includes the results of operations of the Company for the 12-week and 28-week periods then ended. 2. MERGER-RELATED COSTS The Company is continuing to implement 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, and the second quarter of 2000, the Company incurred pre-tax costs totaling $2 resulting from issuing 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 restrictions on the stock awards lapse to the extent that synergy goals are achieved. 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 ====== ====== ======
3. ONE-TIME ITEMS In addition to the merger-related costs described above, the Company incurred pre-tax one-time expenses of $24 and $89 for year-to-date 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 was included in operating, general and administrative costs and 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 as operating, general, and administrative costs. The one-time items incurred during 2000 included approximately $19 for inventory write-downs included as merchandise costs. The remaining $70 in 2000 was included in operating, general and administrative costs and related to the closing of stores, severance expenses related to headcount reductions, and other miscellaneous costs. Of the $70, $15 represented cash expenditures and $55 represented charges that were accrued during the quarters. During the first quarter of 2000, we recorded a pre-tax impairment charge of $191. We identified impairment losses for assets to be disposed of, assets to be held and used, and certain investments in former suppliers that have experienced financial difficulty and with whom supply arrangements have ceased. 4. 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. EARNINGS PER COMMON SHARE Diluted earnings per common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of earnings and shares used in calculating basic earnings per share to those used in calculating diluted 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. 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 for Certain Sales Incentives;" 00-22, "Accounting for "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 Consideration from a Vendor to a Retailer" become effective for The Kroger Co. beginning in the first quarter of 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 not have a material effect on our financial statements. SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued by the Financial Accounting Standards Board in late June of 2001. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and SFAS 142 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 is currently analyzing the effect this standard will have on its financial statements. 7. GUARANTOR SUBSIDIARIES Certain of the Company's Senior Notes and Senior Subordinated Notes (the "Guaranteed Notes") are jointly and severally, fully and unconditionally guaranteed by certain Kroger subsidiaries (the "Guarantor Subsidiaries"). At August 18, 2001, a total of approximately $6.0 billion of Guaranteed Notes were outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly owned subsidiaries of Kroger. Separate financial statements of Kroger 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' 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 following tables present summarized financial information as of August 18, 2001 and February 3, 2001 and for the quarters ended August 18, 2001 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 ========== ========== ========== ==========
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 2. 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 quarter of 2001 increased 4.2% to $11.5 billion while year-to-date sales increased 4.9% to $26.6 billion. The increase in sales is attributable to an increase in comparable and identical store sales and an increase in the number of stores due to new store openings and acquisitions. Identical food store sales, which include stores that have been in operation and have not been expanded or relocated for four quarters, grew 0.8% from the second quarter of 2000. Comparable food stores sales, which include relocations and expansions, increased 1.6% over the prior year. During the second quarter of 2001, we opened, acquired, relocated, or expanded 38 food stores, remodeled 22 food stores and closed 19 food stores. We operated 2,392 food stores at August 18, 2001 compared to 2,338 food stores at August 12, 2000. As of August 18, 2001, food store square footage totaled 128 million. This represents an increase of 4.0% over August 12, 2000. The gross profit rate during the second quarter, excluding one-time expenses and the effect of LIFO, was 27.6% in 2001 and 27.0% in 2000. On this same basis, our year-to-date gross profit rate was 27.3% in 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 corporate brand sales and profitability. The economies of scale created by the merger have enabled Kroger to reduce costs through coordinated purchasing. Technology and logistics efficiencies have also led to improvements 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 in the second quarter of 2001 compared to $4 million during the second quarter of 2000. Year-to-date these costs were $19 million for 2001 and $70 million for 2000. Excluding these one-time items, operating, general and administrative expenses as a percent of sales were 18.9% during the second quarter of 2001 and 18.8% year-to-date 2001. These rates compare to 18.7% during the second quarter and year-to-date 2000. Including these one-time items, operating, general and administrative expenses as a percent of sales were 19.0% in the second quarter of 2001 and 18.9% year-to-date 2001 compared to 18.7% in the second quarter of 2000 and 19.0% year-to-date 2000. Operating, general and administrative expenses as a percent of sales increased from the prior year primarily because of higher utility and health care benefit costs, offset by increased productivity. 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. Net earnings were $256 million or $0.31 per diluted share for the second quarter of 2001. 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% over net earnings of $0.36 per diluted share for year-to-date 2000. Net earnings, excluding merger-related costs and one-time items, were $263 million or $0.32 per diluted share in the second quarter of 2001. These results represent an increase of approximately 19% over net earnings of $224 million, or $0.27 per diluted share excluding merger-related costs, the impairment charge, and one-time items, for the second 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 MERGER-RELATED COSTS AND OTHER ONE-TIME EXPENSES Total pre-tax merger-related costs incurred were $2 million during the second quarter 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. During the first quarter of 2000, we recorded a pre-tax impairment charge of approximately $191 million. We identified impairment losses for assets to be disposed of, assets to be held and used, and certain investments in former suppliers that have experienced financial difficulty and with whom supply arrangements have ceased. In addition to pre-tax merger-related costs that are shown separately on the Consolidated Statements of Earnings, we also incurred other pre-tax one-time expenses that are included in merchandise costs and operating, general and administrative expenses. The one-time expenses of $9 million during the second 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. The table below details our pre-tax merger-related costs and 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 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 quarter of 2001, we invested approximately $180 million to repurchase approximately 7 million shares of Kroger stock at an average price of $25.30 per share. During the first two quarters of 2001, we repurchased approximately 19.9 million shares of our common stock at an average price of $24.19. During the second quarter of 2001, we purchased approximately 1 million shares to complete our $750 million stock repurchase plan. We also purchased approximately 5 million shares under the $1 billion authorization and approximately 1 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 totaling $3.5 billion, with borrowings of $1.4 billion at August 18, 2001. In addition, we had a fully borrowed $457 million synthetic lease credit facility and a $150 million money market line with no borrowings at August 18, 2001. Net debt was $8.5 billion at the end of the second quarter of 2001, an increase of $391 million as compared to the second quarter of the prior year. Net debt is defined as long-term debt, including capital leases and current portion thereof, less investments in debt securities and prefunded employee benefits. Net debt increased $207 million from year-end 2000. These increases are primarily the result of the increased investment in working capital and stock repurchases. 14 16 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. The following is a summary of the calculation of EBITDA for the first quarter of 2001 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 ========= ========= ========= =========
Cash Flow --------- We generated $1.83 billion of cash from operating activities during the first two quarters of 2001 compared to $1.95 billion during the first two quarters of 2000. Cash flow from operating activities decreased in the first two quarters of 2001 largely due to an increase in working capital and an increase in cash tax payments. Investing activities used $1.20 billion of cash during the first two quarters of 2001 compared to $912 million in 2000. This increase in use of cash was primarily because of payments for acquisitions and increased capital spending. Financing activities used $653 million of cash during the first two quarters of 2001 compared to $1.16 billion during the first two quarters of 2000. This reduction in the use of cash was primarily because of proceeds received from the issuance of debt during 2001 offset by an increase in treasury stock purchases. CAPITAL EXPENDITURES Capital expenditures including acquisitions totaled $540 million in the second quarter of 2001 compared to $384 million in the second quarter of 2000. During the second quarter of 2001 we opened, acquired, expanded, or relocated 38 food stores. We had 19 operational closings and completed 22 within the wall remodels. Square footage increased 4.0%. 15 17 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. Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for Certain Sales Incentives;" 00-22, "Accounting for "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 Consideration from a Vendor to a Retailer" become effective for The Kroger Co. beginning in the first quarter of 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 not have a material effect on our financial statements. Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued by the Financial Accounting Standards Board in late June of 2001. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and SFAS 142 will become effective for The Kroger Co. on February 3, 2002. We are 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 is currently 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 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 Kroger 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 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, 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. 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 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 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 ======== ======== ========
- 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, seafood shops, floral shops, and bakeries. 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% through 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, 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 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 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 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's business. 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 our representatives or us. 19 21 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 swaps 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. 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 PART 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 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 8-K. (a) 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 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. (b) The Company disclosed and filed a new 364 - Day Credit Agreement and Five-Year Credit Agreement, both dated as of May 23, 2001, 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 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. Dated: October 1, 2001 By: /s/ Joseph A. Pichler ---------------------------------- Joseph A. Pichler Chairman of the Board and Chief Executive Officer Dated: October 1, 2001 By: /s/ M. Elizabeth Van Oflen ---------------------------------- M. Elizabeth Van Oflen Vice President and Corporate Controller 25 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.