FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For 39 Weeks Ended: October 28, 1999 Commission File Number: 1-6187
ALBERTSON'S, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 82-0184434
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
- ----------------------------------------------- ----------
(Address) (Zip Code)
Registrant's telephone number, including area code: (208) 395-6200
--------------
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
----- -----
Number of Registrant's $1.00 par value
common shares outstanding at December 1, 1999: 423,628,359
1
<PAGE>
PART I. FINANCIAL INFORMATION
ALBERTSON'S, INC.
CONSOLIDATED EARNINGS
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
------------------------------------ -------------------------------------
October 28, October 29, October 28, October 29,
1999 1998 1999 1998
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Sales $8,982,555 $8,838,215 $27,579,183 $26,504,222
Cost of sales 6,517,213 6,426,580 20,055,827 19,399,807
------------------ ----------------- ------------------ ------------------
Gross profit 2,465,342 2,411,635 7,523,356 7,104,415
Selling, general and
administrative expenses 2,147,861 1,963,910 6,378,350 5,818,568
Merger related and exit costs (20,388) 408,516
Litigation settlement 37,000 37,000
Impairment - store closures 29,423
------------------ ----------------- ------------------ ------------------
Operating profit 300,869 447,725 699,490 1,256,424
Other (expenses) income:
Interest, net (84,175) (83,324) (244,035) (251,704)
Other, net (179) (2,597) 4,634 9,254
------------------ ----------------- ------------------ ------------------
Earnings before
income taxes and extra-
ordinary item 216,515 361,804 460,089 1,013,974
Income taxes 86,606 143,313 296,532 402,442
------------------ ----------------- ------------------ ------------------
Earnings before
extraordinary item 129,909 218,491 163,557 611,532
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7,388 (23,272)
------------------ ----------------- ------------------ ------------------
NET EARNINGS $ 129,909 $ 218,491 $ 140,285 $ 611,532
================== ================= ================== ==================
BASIC EARNINGS PER SHARE:
Earnings before
extraordinary item $0.31 $0.52 $0.39 $1.46
Extraordinary item (0.06)
------------------ ----------------- ------------------ ------------------
Net earnings $0.31 $0.52 $0.33 $1.46
================== ================= ================== ==================
DILUTED EARNINGS PER SHARE:
Earnings before
extraordinary item $0.31 $0.52 $0.39 $1.45
Extraordinary item (0.06)
================== ================= ================== ==================
Net earnings $0.31 $0.52 $0.33 $1.45
================== ================= ================== ==================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 423,595 418,679 421,834 418,517
Diluted 424,382 421,850 423,065 421,071
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
October 28, 1999 January 28, 1999
(unaudited)
------------------------- -----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 219,177 $ 116,139
Accounts and notes receivable 531,289 581,625
Inventories 3,524,131 3,249,179
Prepaid expenses 153,801 106,800
Refundable income taxes 37,060
Assets held for sale 110,748
Deferred income taxes 88,968 132,565
------------------------- --------------------
TOTAL CURRENT ASSETS 4,665,174 4,186,308
OTHER ASSETS 676,671 653,690
GOODWILL (net of accumulated amortization of
$587,784 and $582,729, respectively) 1,595,945 1,746,641
LAND, BUILDINGS AND EQUIPMENT (net of
accumulated depreciation and amortization
of $4,877,385 and $4,775,586, respectively) 8,640,976 8,544,628
------------------------- --------------------
========================= ====================
$15,578,766 $15,131,267
========================= ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,391,970 $ 2,185,330
Salaries and related liabilities 487,072 512,166
Taxes other than income taxes 200,382 168,920
Income taxes 49,944
Self-insurance 158,014 172,709
Unearned income 73,791 101,251
Other current liabilities 226,485 92,577
Merger related accruals 51,874
Current maturities of long-term debt 554,725 49,871
Current capitalized lease obligations 19,160 18,118
------------------------- --------------------
TOTAL CURRENT LIABILITIES 4,163,473 3,350,886
LONG-TERM DEBT 4,781,948 4,905,392
CAPITALIZED LEASE OBLIGATIONS 178,787 202,171
SELF-INSURANCE 308,117 315,180
DEFERRED INCOME TAXES 142,633 207,833
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 493,078 628,155
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value; authorized
- 10,000,000 shares; issued - none
Common stock - $1.00 par value; authorized
- 1,200,000,000 shares; issued 423,641,655
shares and 434,557,800 shares, respectively 423,642 434,557
Capital in excess of par value 141,704 579,403
Treasury stock - 0 and 14,554,669 shares,
respectively (519,051)
Retained earnings 4,945,384 5,026,741
------------------------- --------------------
5,510,730 5,521,650
========================= ====================
$15,578,766 $15,131,267
========================= ====================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-----------------------------------------------
October 28, October 29,
1999 1998
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 140,285 $ 611,532
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 633,869 599,459
Goodwill amortization 44,140 42,379
Merger related noncash charges 282,910
Impairment - store closures 29,423
Net loss (gain) on asset sales 5,705 (16,784)
Net deferred income taxes (21,603) 11,995
Increase in cash surrender value of
Company-owned life insurance (4,634) (8,685)
Changes in operating assets and
liabilities:
Receivables and prepaid expenses 109,747 (20,331)
Inventories (276,602) (129,794)
Accounts payable 206,640 158,580
Other current liabilities 78,238 (61,298)
Self-insurance (21,758) (92,049)
Unearned income (33,971) (7,910)
Other long-term liabilities (126,598) 15,170
-------------------- --------------------
Net cash provided by operating activities 1,016,368 1,131,687
CASH FLOWS FROM INVESTING ACTIVITIES:
Net capital expenditures (1,272,818) (1,058,585)
Proceeds from divestitures 358,506
Increase in other assets (181,429) (88,486)
Business acquisitions, net of cash acquired (262,098)
-------------------- --------------------
Net cash used in investing activities (1,095,741) (1,409,169)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 1,800,000 462,000
Payments on long-term borrowings (947,005) (207,138)
Net commercial paper and bank line activity (498,330) 149,691
Proceeds from stock options exercised 30,396 12,028
Cash dividends (188,334) (196,862)
Tax payments for options exercised (14,316)
-------------------- --------------------
Net cash provided by financing activities 182,411 219,719
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH 103,038 (57,763)
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 116,139 155,877
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 219,177 $ 98,114
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
ALBERTSON'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Business Combination
On June 23, 1999, Albertsons, Inc. ("Albertson's" or the "Company") and American
Stores Company ("ASC") consummated a merger with the issuance of approximately
177 million shares of Albertson's common stock (the "Merger"). The Merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The pooling of
interests method of accounting is intended to present as a single interest, two
or more common stockholders' interests that were previously independent;
accordingly, these consolidated financial statements restate the historical
financial statements as though the companies had always been combined. The
restated financial statements are adjusted to conform the accounting policies
and financial statement presentations.
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments necessary to present fairly, in all material
respects, the results of operations of the Company for the periods presented.
Such adjustments consisted only of normal recurring items except for the merger
related charges discussed under "Merger Related and Exit Costs", the one time
charge for the litigation settlement discussed under "Litigation Settlement" and
the 1998 impairment charge discussed under "Impairment - Store Closures". The
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements for each of the three years in the period ended January 28,
1999, as included in the Company's Form 8-K filed with the Securities and
Exchange Commission on September 22, 1999 ("September 1999 8-K").
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Historical operating results are not necessarily indicative of future results.
Reclassifications and Conformity Adjustments
Certain reclassifications and adjustments have been made to the consolidated
financial statements for conformity purposes.
Reporting Periods
The Company's quarterly reporting periods are generally 13 weeks and
periodically consist of 14 weeks because the fiscal year ends on the Thursday
nearest to January 31 each year (the Saturday nearest to January 31 for ASC).
The consolidated financial information includes the results of operations for a
full 13 week and 39 week period with Albertson's period ending October 28, 1999,
and ASC's period ending October 30, 1999.
5
<PAGE>
Merger Related and Exit Costs
Results of operations for the 39 weeks ended October 28, 1999, include $607
million of merger related and exit costs ($482 million after tax). The following
table presents the pre-tax costs incurred by category of expenditure and merger
related accruals included in the Company's Consolidated Balance Sheet(in
millions):
<TABLE>
<CAPTION>
Exit Merger Extraordinary Period
Costs Charge Loss Costs Total
------------- ------------ ---------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Severance costs $91 $ 8 $7 $ 106
Write-down of assets
to net realizable
value and other 255 4 259
Transaction and
financing costs $ 31 73 104
Integration costs 11 80 91
Stock option charge 47 47
------------- ------------ ---------------------- ------------ ------------
Total costs 346 66 31 164 607
Cash expenditures (70) (9) (31) (159) (269)
Write-down of assets
to net realizable
value (239) (239)
Stock option charge (47) (47)
============= ============ ====================== ============ ============
Merger related accruals
at October 28, 1999 $37 $10 $0 $5 $52
============= ============ ====================== ============ ============
</TABLE>
Employee severance costs consist of obligations to employees who were terminated
or were notified of termination under a plan authorized by senior management.
Approximately 635 employees will be severed as a result of the Merger of which
471 were terminated as of October 28, 1999.
The write-down of assets to net realizable value includes the expected loss on
disposal of stores required to be divested (discussed below) and duplicate and
abandoned facilities, including administrative offices, intangibles and
information technology equipment which were abandoned by the Company or are
being held for sale. The estimated fair value of assets held for sale has been
determined using negotiated sales prices or independent appraisals.
Transaction and financing costs consist primarily of professional fees paid for
investment banking, legal, accounting, printing and regulatory filing fees.
Financing costs also include the extraordinary loss on extinguishment of debt.
Integration costs consist primarily of incremental transition and integration
costs associated with integrating the operations of Albertson's and ASC and are
being expensed as incurred.
As disclosed in the previous filings the Company recorded a charge through the
first two quarters of 1999 of $47 million related to limited stock appreciation
rights (LSARS). The actual change of control price used to measure the value of
these exercised LSARS became determinable at the date the Merger was consumated
and resulted in no further adjustments.
In connection with the Merger, the Company entered into agreements with the
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements required the Company to
divest a total of 117 stores in California, 19 stores in Nevada and 9 stores in
New Mexico. Of the stores required to be divested, 40 were ASC locations
operated primarily under the Lucky name, and 105 were Albertson's stores
operated primarily under the Albertson's name. In addition, the Company divested
four supermarket real estate sites as required by the agreements. The stores
identified for disposition had sales of $2.3 billion in fiscal 1998. The Company
6
<PAGE>
has divested 142 of the required 145 stores as of October 28, 1999.
Litigation Settlement
The Company recorded a $37.0 million pretax ($22.2 million after tax) one time
charge to earnings (litigation settlement) in the third quarter resulting from
an agreement in principle reached to settle eight purported multi-state cases
combined in the United States District Court in Boise, Idaho which raised
various issues including "off-the-clock" work allegations. The proposed
settlement is subject to court approval. Under the proposed settlement
agreement, current and former employees who meet eligibility criteria may
present their claims to a settlement administrator. While the Company cannot
specify the exact number of individuals who are likely to submit claims and the
exact amount of their claims, the one time charge is the Company's current
estimate of the total monetary liability, including attorney fees, for all eight
cases.
Impairment - Store Closures
The Company recorded a charge to earnings in the first quarter of 1998 related
to management's decision to close 16 underperforming stores in 8 states. The
charge included impaired real estate and equipment, as well as the present value
of remaining liabilities under leases, net of expected sublease recoveries. With
the exception of one store, all stores have been closed and management believes
the 1998 charge and remaining reserves are adequate.
Income Taxes
The effective income tax rate for 1999 increased as a result of the effect of
certain merger related and exit costs for which there were not corresponding tax
benefits.
Indebtedness
On March 30, 1999, the Company entered into a revolving credit agreement with a
syndicate of commercial banks whereby the Company may borrow principal amounts
up to $1.5 billion at varying interest rates at any time prior to March 28,
2000. The agreement has a one-year term out option which allows the Company to
convert any loans outstanding on the expiration date of the agreement into
one-year term loans. The agreement contains certain covenants, the most
restrictive of which requires the Company to maintain consolidated tangible net
worth, as defined, of at least $2.1 billion. In addition to the new revolving
credit agreement, the Company has an existing $600 million revolving credit
agreement, whereby the Company may borrow principal amounts at varying interest
rates any time prior to December 17, 2001. The combination of the two revolving
credit agreements allows the Company to borrow principal amounts up to $2.1
billion and serves as backup financing for the Company's commercial paper
borrowings. There were no amounts outstanding under either revolving credit
agreement as of October 28, 1999.
Subsequent to the Merger the Company has consolidated several of the commercial
paper, bank lines and other financing arrangements. The consolidation of debt
included the repayment of outstanding amounts under ASC's revolving credit
facilities and other debt containing change of control provisions and the tender
for, or open market purchases of, certain higher coupon debt. As a result, the
following debt was extinguished (in millions):
<TABLE>
<CAPTION>
Amount
Debt Description Reason for Repayment Extinguished
- --------------------------------------------------- --------------------------------- --------------------------
<S> <C> <C>
Revolving Credit Facility Change of control $ 500.0
Bank borrowing due 2000 Change of control 75.0
10.6% Note due in 2004 Change of control 93.4
9.125% Notes due 2002 Tender offer 170.1
8.0% Debentures due 2026 Open market purchases 78.3
7.9% Debentures due 2017 Open market purchases 4.5
</TABLE>
In July 1999 the Company issued $500 million of floating rate notes. The notes
are due July 2000 and bear interest based on LIBOR commercial paper rates that
7
<PAGE>
reset monthly. As of October 28, 1999, the interest rate was 5.39% on the
outstanding notes. These notes were issued under the Company's commercial paper
program.
In July 1999 the Company issued $1.3 billion of term notes under a shelf
registration statement filed with the Securities and Exchange Commission in
February 1999. The notes are comprised of: $300 million of principal bearing
interest at 6.55% due August 1, 2004; $350 million of principal bearing interest
at 6.95% due August 1, 2009; and $650 million of principal bearing interest at
7.45% due August 1, 2029. Interest is paid semiannually. Proceeds were used
primarily to repay borrowings under the Company's commercial paper program.
Additional securities up to $1.2 billion remain available for issuance under the
Company's 1999 registration statement.
In July 1999 the Company negotiated an amendment to a $200 million term loan
agreement between ASC and a group of commercial banks. The original agreement
contained a change of control provision. The amended agreement has revised
representations, warranties and covenants which substantially mirror the
Company's $1.5 billion revolving credit agreement as well as a guarantee by
Albertson's, Inc. The amended fixed rate loans carry interest based upon a
pricing schedule (which averages 6.45%) dependent upon the Company's long-term
debt rating, and mature July 3, 2004.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows (in thousands):
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
October 28, 1999 October 29, 1998
----------------------- -----------------------
<S> <C> <C>
Cash payments for:
Income taxes $ 377,007 $ 423,848
Interest, net of amounts
capitalized 222,585 225,014
Noncash activities:
Capitalized leases incurred 11,344 18,819
Capitalized leases terminated 13,917 5,509
Tax benefits related to stock
options 7,875 2,173
Liabilities assumed in connection
with asset acquisition 6,976 1,340
Increase in cash surrender value
of Company-owned life insurance 4,634 8,685
Fair market value of stock
exchanged for option price and
tax withholdings 2,632 1,753
Noncash merger charges:
Write-down of assets to net realizable
value 235,313
Stock option charge 47,597
Impairment loss - store closures 29,423
Note payable related to
business acquisition 8,000
</TABLE>
Recent Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS")No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
8
<PAGE>
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact, if any, on the Company's reporting requirements.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Combination
On June 23, 1999, Albertsons, Inc. ("Albertson's" or the "Company") and American
Stores Company ("ASC") consummated a merger with the issuance of approximately
177 million shares of Albertson's common stock (the "Merger"). The Merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The pooling of
interests method of accounting is intended to present as a single interest, two
or more common stockholders' interests that were previously independent;
accordingly, these consolidated financial statements restate the historical
financial statements as though the companies had always been combined. The
restated financial statements are adjusted to conform the accounting policies
and financial statement presentations.
Results of Operations - Third Quarter
Sales for the 13 weeks ended October 28, 1999, increased 1.6%. Sales increased
despite the sale of 142 stores required to be divested. Sales were positively
impacted by the sharing of best practices across the Company and as a result of
new and remodeled stores. Identical store sales increased 1.9% and comparable
store sales (which include replacement stores) increased 2.2%. Management
estimates that there was deflation in the price of products the Company sells of
approximately 0.3% (annualized). During the third quarter the Company opened 20
combination food and drug stores, 13 drug stores and 15 fuel centers. The
Company closed 149 conventional and combination food and drug stores, 139 of
which were required divestitures and one of which was replaced with a new store.
The Company also closed 7 drug stores, 3 of which were replaced with new stores.
Twenty nine stores were remodeled during the third quarter. Construction of a
new distribution center in Tulsa, Oklahoma was completed August 1, 1999, and
shipments to the Company's stores in the Midwest began on August 16, 1999. The
new Lancaster, Pennsylvania distribution center began receiving product on
September 2, 1999, and grocery shipments to stores began on October 18, 1999.
Retail square footage decreased to 93.8 million square feet, a net decrease of
2.3% from October 29, 1998. The required divestitures reduced square footage by
6.0 million square feet or 6.2% from the prior year.
In addition to store development, the Company plans to increase sales through
its investment in programs initiated in recent years which are designed to
provide solutions to customer needs. These programs include the Front End
Manager program; the home meal solutions process called "Quick Fixin' Ideas(R)";
special destination categories; pharmacy and health initiatives; and increased
emphasis on training programs utilizing Computer Guided Training. To provide
additional solutions to customer needs, the Company has added new
gourmet-quality bakery products and organic grocery and produce items. Other
solutions include neighborhood marketing and targeted advertising. In over 400
stores in California, Nevada and New Mexico markets where the Company now
operates under the Albertson's banner the Company has increased service levels,
spruced up stores, and enhanced product promotions, advertising and price
markdowns to promote sales growth. Future growth will be affected by the
required divestiture of 145 stores in connection with the Merger. The Company
has divested 142 of the 145 stores as of October 28, 1999.
10
<PAGE>
For the 13 weeks ended October 28, 1999, the Company reported net income of
$130.0 million, or $0.31 per basic and diluted share as compared to net income
of $218 million or $0.52 per basic and diluted share for the 13 weeks ended
October 29, 1998.
This quarter's earnings were adversely impacted by the litigation settlement and
the costs of integration. The Company is merging two large organizations into a
single rapidly growing food and drug store chain, and also has taken significant
steps to bring the Albertson's brand to new regions and new markets and new
channels of distribution. During the quarter a significant number of stores were
divested and the Company substantially converted over 400 stores to common
systems and the Albertson's banner in California, Nevada and New Mexico. The
conversion was more complicated and costly than expected.
Results of operations for the 13 weeks ended October 28, 1999, include $56
million of merger related and exit costs ($33 million after tax). The following
table presents the pre-tax costs (income) incurred by category of expenditure
(in millions):
<TABLE>
<CAPTION>
Exit Merger Period
Costs Charge Costs Total
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Severance costs $(2) $ 0 $5 $ 3
Write-down of assets
to net realizable
value and other (17) 3 (14)
Integration costs 2 65 67
================ ================ ============== ===============
Total costs $ (19) $ 2 $ 73 $ 56
================ ================ ============== ===============
</TABLE>
Employee severance costs consist of obligations to employees who were terminated
or were notified of termination under a plan authorized by management.
Approximately 635 employees will be severed as a result of the Merger of which
471 were terminated as of October 28, 1999.
The write-down of assets to net realizable value includes the expected loss on
disposal of stores required to be divested (discussed under "Divestitures") and
duplicate and abandoned facilities, including administrative offices,
intangibles and information technology equipment which were abandoned by the
Company or are being held for sale. The estimated fair values of assets held for
sale were determined using negotiated sales prices or independent appraisals.
During the quarter a revision to the estimate, of the amount expected to be
incurred for the sale of assets, reversed approximately $20 million of the
charge taken in the second quarter.
Integration costs consist primarily of incremental transition costs associated
with integrating the operations of Albertson's and ASC and were expensed as
incurred.
The Company expects to incur additional after-tax merger related and exit costs
of approximately $200 million over the next two years which consist primarily of
expected integration costs and costs associated with other consolidation
activities for which plans have not yet been finalized.
11
<PAGE>
Due to the significance of the litigation settlement charge and the merger
related and exit costs and their effect on operating results, the following
table and discussion is presented to aid in the comparison of income statement
components without the effects of one time charges, and merger related and exit
costs (in thousands).
<TABLE>
<CAPTION>
13 Weeks Ended October 28, 1999 13 Weeks Ended
October 29, 1998
------------------------------------------------------------
As Reported Adjustments Adjusted
---------------- --------------- ---------------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $8,982,555 $8,982,555 100.00% $8,838,215 100.00%
Cost of sales 6,517,213 $(17,022) 6,500,191 72.36 6,426,580 72.71
---------------- --------------- ---------------- ---------- -------------- ----------
Gross profit 2,465,342 17,022 2,482,364 27.64 2,411,635 27.29
Selling, general and
administrative expenses 2,147,861 (58,963) 2,088,898 23.26 1,963,910 22.22
Merger related and exit
costs (20,388) 20,388
Litigation settlement 37,000 (37,000)
---------------- --------------- ---------------- ---------- -------------- ----------
Operating profit 300,869 92,597 393,466 4.38 447,725 5.07
Interest expense, net (84,175) (84,175) (0.94) (83,324) (0.94)
Other income, net (179) (179) (2,597) (0.03)
---------------- --------------- ---------------- ---------- -------------- ----------
Earnings before
income taxes 216,515 92,597 309,112 3.44 361,804 4.09
Income taxes 86,606 37,039 123,645 1.38 143,313 1.62
---------------- --------------- ---------------- ---------- -------------- ----------
NET EARNINGS $ 129,909 $ 55,558 $ 185,467 2.06% $ 218,491 2.47%
================ =============== ================ ========== ============== ==========
</TABLE>
Gross profit, as a percent to sales, increased primarily as a result of
continued improvements made in retail stores, including the improved sales mix
of partially prepared, value-added products. Gross profit improvements were also
realized through the continued utilization of Company-owned distribution
facilities and increased buying efficiencies. The Merger has created buying
synergies and margin improvements from the implementation of common best
practices across the Company. The pre-tax LIFO charge reduced gross profit by
$9.0 million (0.10% to sales) in the third quarter of 1999 as compared to $10.2
million (0.10% to sales) in the third quarter of 1998.
Selling, general and administrative expenses excluding merger related and exit
costs, as a percent to sales, increased primarily due to increased salary and
related benefit costs resulting from the Company's initiatives to increase
sales, activities associated with the banner change in California, Nevada and
New Mexico and increased depreciation expense associated with the Company's
expansion program.
The Company recorded a $37.0 million pretax ($22.2 million after tax) one time
charge to earnings (litigation settlement) in the third quarter resulting from
an agreement in principle reached to settle eight purported multi-state cases
combined in the United States District Court in Boise, Idaho which raised
various issues including "off-the-clock" work allegations. The proposed
settlement is subject to court approval. Under the proposed settlement
agreement, current and former employees who meet eligibility criteria may
present their claims to a settlement administrator. While the Company cannot
specify the exact number of individuals who are likely to submit claims and the
exact amount of their claims, the one time charge is the Company's current
estimate of the total monetary liability, including attorney fees, for all eight
cases.
12
<PAGE>
Results of Operations - Year-To-Date
Sales for the 39 weeks ended October 28, 1999, increased 4.1%.
Sales increased despite the sale of 142 stores required to be divested. Sales
are being positively impacted by the sharing of best practices across the
Company and as a result of new and remodeled stores. Identical store sales
increased 1.6% and comparable store sales (which include replacement stores)
increased 2.0%. Management estimates that there was deflation in the price of
products the Company sells of approximately 0.3% (annualized). During the 39
weeks ended October 28, 1999, the Company opened 53 combination food and drug
stores, 41 drug stores and 31 fuel centers. The Company closed 175 conventional
and combination food and drug stores, 142 of which were required divestitures
and 13 of which were replaced with new stores. The Company also closed 20 drug
stores, 8 of which were replaced with new stores. Fifty-seven stores were
remodeled during the 39 weeks. Construction of a new distribution center in
Tulsa, Oklahoma was completed August 1, 1999, and shipments to the Company's
stores in the Midwest began on August 16, 1999. The new Lancaster, Pennsylvania
distribution center began receiving product on September 2, 1999 and began
grocery shipments to stores on October 18, 1999. Retail square footage decreased
to 93.8 million square feet, a net decrease of 2.3% from October 28, 1998. The
required divestitures reduced square footage by 6.0 million square feet or 6.2%
from the prior year.
In addition to store development, the Company plans to increase sales through
its investment in programs initiated in recent years which are designed to
provide solutions to customer needs. These programs include the Front End
Manager program; the home meal solutions process called "Quick Fixin' Ideas(R)";
special destination categories; pharmacy and health initiatives; and increased
emphasis on training programs utilizing Computer Guided Training. To provide
additional solutions to customer needs, the Company has added new
gourmet-quality bakery products and organic grocery and produce items. Other
solutions include neighborhood marketing, and targeted advertising. In the
California, Nevada and New Mexico markets where the Company now operates under
the Albertson's banner, the Company has increased service levels, spruced up
stores, and enhanced product promotions, advertising and price markdowns to
promote sales growth. Future growth will be affected by the required
divestitures of 145 stores in connection with the Merger. The Company has
divested 142 of the 145 stores as of October 28, 1999
For the 39 weeks ended October 28, 1999, the Company reported net income of
$140.3 million, or $0.33 per basic and diluted share as compared to $611 million
or $1.46 per basic and $1.45 per diluted share for the 39 weeks ended October
29, 1998. The decrease from the prior year is primarily attributable to one time
costs, merger related costs and exit costs associated with the Merger as
discussed below.
13
<PAGE>
Results of operations for the 39 weeks ended October 28, 1999, include $607
million of merger related and exit costs ($483 million after tax). The following
table presents the pre-tax costs incurred by category of expenditure
(in millions):
<TABLE>
<CAPTION>
Exit Merger Extraordinary Period
Costs Charge Loss Costs Total
------------- ------------ ---------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Severance costs $91 $ 8 $ 7 $106
Write-down of assets
to net realizable
value and other 255 4 259
Transaction and
financing costs $ 31 73 104
Integration costs 11 80 91
Stock option charge 47 47
------------- ------------ ---------------------- ------------ ------------
============= ============ ====================== ============ ============
Total costs $ 346 $ 66 $ 31 $ 164 $607
============= ============ ====================== ============ ============
</TABLE>
Employee severance costs consist of obligations to employees who were terminated
or were notified of termination under a plan authorized by senior management.
Approximately 635 employees will be severed as a result of the Merger of which
471 were terminated as of October 28, 1999.
The write-down of assets to net realizable value includes the expected loss on
disposal of stores required to be divested (discussed under "Divestitures") and
duplicate and abandoned facilities, including administrative offices,
intangibles and information technology equipment which were abandoned by the
Company or are being held for sale. The estimated fair values of assets held for
sale has been determined using negotiated sales prices or independent
appraisals.
Transaction and financing costs consist primarily of professional fees paid for
investment banking, legal, accounting, printing and regulatory filing fees.
Financing costs also include the extraordinary loss on extinguishment of debt.
Integration costs consist primarily of incremental transition costs associated
with integrating the operations of Albertson's and ASC and were expensed as
incurred.
As a result of the Merger, stock option compensation cost was recognized
pursuant to limited stock appreciation rights discussed under "Merger Related
and Exit Costs" in the Notes to Consolidated Financial Statements.
The Company expects to incur additional after-tax merger related and exit costs
of approximately $200 million over the next two years which consist primarily of
expected integration costs and costs associated with other consolidation
activities for which plans have not yet been finalized.
14
<PAGE>
Due to the significance of the litigation settlement charge, and the merger
related and exit costs and their effect on operating results, the following
table and discussion that follows is presented to aid in the comparison of
income statement components without the effects of one time charges, merger
related and exit costs (in thousands).
<TABLE>
<CAPTION>
39 Weeks Ended October 28, 1999 39 Weeks Ended
October 29, 1998
------------------------------------------------------------
As Reported Adjustments Adjusted
---------------- --------------- ---------------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $27,579,183 $27,579,183 100.00% $26,504,222 100.00%
Cost of sales 20,055,827 $ (20,816) 20,035,011 72.65 19,399,807 73.20
---------------- --------------- ---------------- ---------- -------------- ----------
Gross profit 7,523,356 20,816 7,544,172 27.35 7,104,415 26.80
Selling, general and
administrative expenses 6,378,350 (146,114) 6,232,236 22.60 5,818,568 21.95
Merger related and exit
costs 408,516 (408,516)
Litigation settlement 37,000 (37,000)
Impairment - store
closures 29,423 0.11
---------------- --------------- ---------------- ---------- -------------- ----------
Operating profit 699,490 612,446 1,311,936 4.76 1,256,424 4.74
Interest expense, net (244,035) 850 (243,185) (0.88) (251,704) (0.95)
Other income, net 4,634 4,634 0.02 9,254 0.03
---------------- --------------- ---------------- ---------- -------------- ----------
Earnings before income
taxes and extraordinary
item 460,089 613,296 1,073,385 3.89 1,013,974 3.83
Income taxes 296,532 131,598 428,130 1.55 402,442 1.52
---------------- --------------- ---------------- ---------- -------------- ----------
Earnings before
extraordinary item 163,557 481,698 645,255 2.34 611,532 2.31
Extraordinary loss on
extinguishment of debt,
net of tax benefit of
$7,388 (23,272) 23,272
---------------- --------------- ---------------- ---------- -------------- ----------
NET EARNINGS $ 140,285 $ 504,970 $ 645,255 2.34% $ 611,532 2.31%
================ =============== ================ ========== ============== ==========
</TABLE>
Gross profit, as a percent to sales, increased primarily as a result of
continued improvements made in retail stores, including improved sales mix of
partially prepared, value-added products. Gross profit improvements were also
realized through the continued utilization of Company-owned distribution
facilities and increased buying efficiencies. The merger has created buying
synergies and margin improvements from the implementation of common best
practices across the Company. The pre-tax LIFO charge reduced gross profit by
$27.0 million (0.10% to sales) in the 39 weeks ended October 28, 1999, as
compared to $31.4 million (0.12% to sales) for the 39 weeks ended October 29,
1998.
Selling, general and administrative expenses excluding merger related and exit
costs, as a percent to sales, increased primarily due to increased salary and
related benefit costs resulting from the Company's initiatives to increase
sales, activities associated with the banner charge in California, Nevada and
New Mexico, and increased depreciation expense associated with the Company's
expansion program.
The Company recorded a $29.4 million pre-tax ($18.4 million after tax) charge to
earnings (Impairment - Store Closures) in the first quarter of 1998 related to
management's decision to close 16 underperforming stores in 8 states during the
fiscal year. The charge includes impaired real estate and equipment, as well as
the present value of remaining liabilities under leases, net of expected
sublease recoveries. Substantially all of these stores have been closed.
Other income for the 39 weeks ended October 28, 1999, included noncash income of
$4.6 million for the increase in cash surrender value of Company-owned life
15
<PAGE>
insurance as compared to income of $8.7 million for the 39 weeks ended October
29, 1998.
Liquidity and Capital Resources
The Company's operating results continue to enhance its financial position and
ability to continue its planned expansion program. Cash flows from operations
and available borrowings are sufficient for the future operating needs of the
Company.
Cash provided by operating activities during the 39 weeks ended October 28, 1999
was $1.0 billion as compared to $1.1 billion during the same period of 1998.
During the 39 weeks ended October 28, 1999, the Company invested $1.3 billion
for net capital expenditures. The Company's financing activities during the 39
weeks ended October 28, 1999, included net new borrowings of $355 million and
the payment of dividends of $188 million.
The Company utilizes its commercial paper and bank line programs primarily to
supplement cash requirements for seasonal fluctuations in working capital and to
fund its capital expenditure program. Accordingly, commercial paper and bank
line borrowings will fluctuate between quarterly reporting periods. Following
the Merger the Company has consolidated several of the commercial paper, bank
lines and other financing arrangements. The consolidation of debt included the
repayment of ASC debt containing change of control provisions and the tender
for, or open market purchases of, certain higher coupon debt.
On March 30, 1999, the Company entered into a revolving credit agreement with a
syndicate of commercial banks whereby the Company may borrow principal amounts
up to $1.5 billion at varying interest rates at any time prior to March 28,
2000. The agreement has a one-year term out option which allows the Company to
convert any loans outstanding on the expiration date of the agreement into
one-year term loans. The agreement contains certain covenants, the most
restrictive of which requires the Company to maintain consolidated tangible net
worth, as defined, of at least $2.1 billion. In addition to the new revolving
credit agreement, the Company has an existing $600 million revolving credit
agreement, whereby the Company may borrow principal amounts at varying interest
rates any time prior to December 17, 2001. The combination of the two revolving
credit agreements allows the Company to borrow principal amounts up to $2.1
billion and serves as backup financing for the Company's commercial paper and
borrowings. There were no amounts outstanding under either revolving credit
agreement as of October 28, 1999.
In July 1999 the Company issued $500 million of floating rate notes. The notes
are due July 2000 and bear interest based on LIBOR commercial paper rates that
reset monthly. As of October 28, 1999, the interest rate was 5.39% on the
outstanding notes. These notes were issued under the Company's commercial paper
program.
In July 1999 the Company issued $1.3 billion of term notes under a shelf
registration statement filed with the Securities and Exchange Commission in
February 1999. The notes are comprised of: $300 million of principal bearing
interest at 6.55% due August 1, 2004; $350 million of principal bearing interest
at 6.95% due August 1, 2009; and $650 million of principal bearing interest at
7.45% due August 1, 2029. Interest is paid semiannually. Proceeds were used
primarily to repay borrowings under the Company's commercial paper program.
Additional securities up to $1.2 billion remain available for issuance under the
Company's 1999 registration statement.
16
<PAGE>
Divestitures
In connection with the Merger, the Company entered into agreements with the
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements required the Company to
divest a total of 117 stores in California, 19 stores in Nevada and 9 stores in
New Mexico. Of the stores required to be divested, 40 were ASC locations
operated primarily under the Lucky name, and 105 were Albertson's stores
operated primarily under the Albertson's name. In addition, the Company divested
four supermarket real estate sites as required by the agreements. The stores
identified for disposition had sales of $2.3 billion in fiscal 1998. The Company
has divested 142 of the required 145 stores as of October 28, 1999.
Recent Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS")No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact, if any, on the Company's reporting requirements.
Year 2000 Compliance
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. As the year 2000
approaches, systems using such programs may be unable to accurately process
certain date-based information. To the extent that the Company's software
applications contain source code that is unable to interpret appropriately the
upcoming calendar year 2000 and beyond, some level of modification or
replacement of such applications will be necessary to avoid system failures and
the temporary inability to process transactions or engage in other normal
business activities.
Beginning in 1995 the Company formed project teams to assess the impact of the
Year 2000 issue on the software and hardware utilized in the Company's internal
operations. The project teams are staffed primarily with representatives of the
Company's Information Systems and Technology departments and report on a regular
basis to senior management and the Company's Board of Directors.
The initial phase of the Year 2000 project was assessment and planning. This
phase included an assessment of all computer hardware, software, systems and
processes ("IT Systems") and non-information technology systems such as
telephones, clocks, scales, refrigeration controllers and other equipment
containing embedded microprocessor technology ("Non-IT Systems"). The upgrades,
validation and forward date testing for all systems has been substantially
completed.
In addition to the remediation of the IT systems and Non-IT systems, the Company
has identified relationships with third parties, including vendors, suppliers
and service providers, which the Company believes are critical to its business
operations. The Company has been communicating with these third parties through
questionnaires, letters and interviews in an effort to determine the extent to
which they are addressing their Year 2000 compliance issues. The Company will
continue to communicate with, assess the progress of, and monitor the progress
of these third parties in resolving Year 2000 issues.
17
<PAGE>
The total costs to address the Company's Year 2000 issues are estimated to be
approximately $43 million, of which approximately $28 million has been expensed
and approximately $15 million has been capitalized. These costs include
expenditures accelerated for Year 2000 compliance. As of October 28, 1999, the
Company has spent substantially all of these costs. These costs have been funded
through operating cash flow and represent a small portion of the Company's IT
budget.
The Company is dependent on the proper operation of its internal computer
systems and software for several key aspects of its business operations,
including store operations, merchandise purchasing, inventory management,
pricing, sales, warehousing, transportation, financial reporting and
administrative functions. The Company is also dependent on the proper operation
of the computer systems and software of third parties providing critical goods
and services to the Company, including vendors, utilities, financial
institutions, government entities and others. The Company believes that its
efforts will result in Year 2000 compliance. However, the failure or malfunction
of internal or external systems could impair the Company's ability to operate
its business in the ordinary course and could have a material adverse effect on
its results of operations.
The Company has developed its contingency plans with respect to its most
critical applications. Contingency plans include manual workarounds, increased
inventories and extra staffing.
Environmental
The Company has identified environmental contamination at certain of its stores,
distribution centers, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses) which are primarily
related to underground petroleum storage tanks (USTs) and ground water
contamination. The Company conducts an on-going program for the inspection and
evaluation of new sites proposed to be acquired by the Company and the
remediation/monitoring of contamination at existing and previously owned sites.
Although the ultimate outcome and expense of environmental remediation is
uncertain, the Company believes that the required costs of remediation, UST
upgrades and continuing compliance with environmental laws will not have a
material adverse effect on the financial condition of the Company.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995 From time to time, information provided
by the Company, including written or oral statements made by its
representatives, may contain forward-looking information as defined in the
Private Securities Litigation Reform Act of 1995, including statements with
respect to the Merger and future performance of the combined companies. All
statements, other than statements of historical facts, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such things as expansion and growth of the Company's
business, future capital expenditures and the Company's business strategy,
contain forward-looking information. In reviewing such information it should be
kept in mind that actual results may differ materially from those projected or
suggested in such forward-looking information. This forward-looking information
is based on various factors and was derived utilizing numerous assumptions. Many
of these factors have previously been identified in filings or statements made
by or on behalf of the Company.
18
<PAGE>
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in consumer
spending, competitive factors and other factors affecting the Company's business
in or beyond the Company's control. These factors include changes in the rate of
inflation, changes in state or federal legislation or regulation, adverse
determinations with respect to litigation or other claims (including
environmental matters), labor negotiations, adverse effects of failure to
achieve Year 2000 compliance, the Company's ability to recruit and develop
employees, its ability to develop new stores or complete remodels as rapidly as
planned, its ability to implement new technology successfully, stability of
product costs and the Company's ability to successfully integrate the operations
of ASC.
Other factors and assumptions not identified above could also cause the actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
An agreement in principle has been reached to settle eight purported multi-state
cases combined in the United States District Court in Boise, Idaho which raise
various issues including "off the clock" work allegations. The proposed
settlement is subject to court approval. Under the proposed settlement
agreement, current and former employees who meet eligibility criteria may
present their claims to a settlement administrator. While the Company cannot
specify the exact number of individuals who are likely to submit claims and the
exact amount of their claims, the $37 million pretax ($22 million after tax) one
time charge recorded by the Company in the third quarter is the Company's
current estimate of the total monetary liability, including attorney fees, for
all eight cases.
The Company is also involved in routine litigation incidental to operations. The
Company utilizes various methods of alternative dispute resolution, including
settlement discussions, to manage the costs and uncertainties inherent in the
litigation process. In the opinion of management, the ultimate resolution of
these legal proceedings will not have a material adverse effect on the Company's
financial condition.
Item 2. Changes in Securities
In accordance with the Company's $1.5 billion revolving credit agreement and the
amended $200 million term loan agreement between ASC and a group of commercial
banks, the Company's consolidated tangible net worth, as defined, shall not be
less than $2.1 billion.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Number Description
27 Financial data schedule for the 39 weeks ended October 28, 1999.
b. The following reports on Form 8-K were filed during the quarter ended
October 28, 1999:
Current report on Form 8-K dated September 22, 1999, regarding the June
23, 1999, consummation of the merger between Albertson's, Inc and
American Stores Company.
20
<PAGE>
SIGNATURE
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.
ALBERTSON'S, INC.
---------------------------------
(Registrant)
Date: December 9, 1999 /S/ A. Craig Olson
--------------------- ---------------------------------
A. Craig Olson
Executive Vice President
and Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM ALBERTSON'S
QUARTERLY REPORT TO STOCKHOLDERS FOR THE 39 WEEKS ENDED OCTOBER 28, 1999,AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-03-2000
<PERIOD-START> JAN-29-1999
<PERIOD-END> OCT-28-1999
<CASH> 219,177
<SECURITIES> 0
<RECEIVABLES> 554,869
<ALLOWANCES> 23,580
<INVENTORY> 3,524,131
<CURRENT-ASSETS> 4,655,174
<PP&E> 13,518,361
<DEPRECIATION> 4,877,385
<TOTAL-ASSETS> 15,578,766
<CURRENT-LIABILITIES> 4,163,473
<BONDS> 4,960,735
0
0
<COMMON> 423,642
<OTHER-SE> 5,087,088
<TOTAL-LIABILITY-AND-EQUITY> 15,578,766
<SALES> 27,579,183
<TOTAL-REVENUES> 27,579,183
<CGS> 20,055,827
<TOTAL-COSTS> 20,055,827
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,035
<INCOME-PRETAX> 460,089
<INCOME-TAX> 296,532
<INCOME-CONTINUING> 163,557
<DISCONTINUED> 0
<EXTRAORDINARY> 23,272
<CHANGES> 0
<NET-INCOME> 140,285
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
