SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 16, 1999 Commission file number 1-6187
- ------------------------------ -----------------------------
ALBERTSON'S, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 82-0184434
- ------------------------ ------------
(State of Incorporation) (Employer Identification Number)
250 Parkcenter Boulevard, P.O. Box 20, Boise, Idaho 83726
- --------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 395-6200
--------------
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 2, 1999, Albertson's, Inc., a Delaware corporation
("Albertson's") filed a Current Report on Form 8-K regarding the consummation of
the acquisition by Albertson's of all of the equity interest of American Stores
Company ("ASC") in a transaction accounted for as a pooling of interests and in
which Albertson's stated that it anticipated filing the requisite financial
statements on or before August 27, 1999. This Current Report on Form 8-K
contains the following: 1) Audited financial statements of ASC as of January 30,
1999, January 31, 1998, and February 1, 1997, and for each of the three years
ended January 30, 1999; 2) Audited supplemental consolidated financial
statements as of January 28, 1999, January 29, 1998, and January 30, 1997, and
for each of the three years ended January 28, 1999, which have been restated as
if Albertson's and ASC had been combined for all periods presented; 3) Unaudited
interim supplemental consolidated financial statements as of April 29, 1999, and
for the 13 week periods ended April 29, 1999, and April 30, 1998, which have
been restated as if Albertson's and ASC had been combined for all periods
presented; and, 4) Unaudited pro forma combined financial data as of April 29,
1999, for the year ended January 28, 1999, and for the 13 weeks ended April 29,
1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements.
The consolidated balance sheets of American Stores Company and
subsidiaries as of January 30, 1999, January 31, 1998, and February 1,
1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three fiscal years in the period
ended January 30, 1999, are included herein as Exhibit 99.
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The following supplemental consolidated financial statements of
Albertson's, Inc. and its subsidiaries, including American Stores
Company, prepared under the pooling of interests method of accounting
are filed as part of this report:
Audited Supplemental Consolidated Financial Statements:
Independent Auditors' Report
Supplemental Consolidated Earnings for the years ended January 28, 1999,
January 29, 1998, and January 30, 1997 Supplemental Consolidated Balance
Sheets at January 28, 1999, January 29, 1998, and January 30, 1997
Supplemental Consolidated Cash Flows for the years ended January 28,
1999, January 29, 1998, and January 30, 1997 Supplemental Consolidated
Stockholders' Equity for the years ended January 28, 1999, January 29,
1998, and January 30, 1997 Notes to Supplemental Consolidated Financial
Statements
Unaudited Interim Supplemental Consolidated Financial Statements:
Interim Supplemental Consolidated Earnings for the 13 weeks ended April
29, 1999, and April 30, 1998 Interim Supplemental Consolidated Balance
Sheets at April 29, 1999, and January 28, 1999 Interim Supplemental
Consolidated Cash Flows for the 13 weeks ended April 29, 1999, and April
30, 1998 Notes to Interim Supplemental Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations
(b) Unaudited Pro Forma Combined Financial Data.
The following pro forma combined financial data of Albertson's, Inc. and
its subsidiaries, including American Stores Company, prepared under the
pooling of interests method of accounting are filed as part of this
report:
Pro Forma Combined Balance Sheet as of April 29, 1999
Pro Forma Combined Statement of Earnings for the year ended January 28,
1999 Pro Forma Combined Statement of Earnings for 13 weeks ended April
29, 1999 Notes to Pro Forma Combined Financial Data
(c) Exhibits.
Exhibit No. Description
23 Consent of Deloitte & Touche LLP
23.1 Consent of Ernst & Young LLP
99 Audited financial statements of American Stores
Company as of January 30, 1999, January 31, 1998,
and February 1, 1997, and for each of the three
years ended January 30, 1999
99.1 Supplemental Consolidated Financial Statements
99.2 Unaudited Pro Forma Combined Financial Data
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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: July 16, 1999 /S/ A. Craig Olson
- ---------------------- ----------------------------
A. Craig Olson
Executive Vice President
and Chief Financial Officer
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Index to Exhibits
Filed with the Current Report on Form 8-K
Exhibit No. Description Page No.
23 Consent of Deloitte & Touche LLP 5
23.1 Consent of Ernst & Young LLP 6
99 Audited financial statements of American Stores 7
Company as of January 30, 1999, January 31, 1998,
and February 1, 1997, and for each of the three
years ended January 30, 1999
99.1 Supplemental Consolidated Financial Statements 28
99.2 Unaudited Pro Forma Combined Financial Statements 78
Page 4
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-70967 on Form S-3 and Registration Statement Nos. 2-80776, 33-2139,
33-7901, 33-15062, 33-43635, 33-62799, 333-59803, 333-82157, and 333-82161 on
Form S-8 of Albertson's, Inc. and subsidiaries of our report dated June 23,
1999, with respect to the supplemental consolidated financial statements of
Albertson's, Inc. and subsidiaries included in this Current Report on Form 8-K
to be filed with the Securities and Exchange Commission on July 16, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boise, Idaho
July 16, 1999
Page 5
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
(Form S-3 No. 333-70967 and related Prospectus and Forms S-8 No. 2-80776,
33-2139, 33-7901, 33-15062, 33-43635, 33-62799, 33-59803, 333-82157 and
333-82161) of Albertson's, Inc. of our report dated March 17, 1999, with respect
to the consolidated financial statements of American Stores Company included in
its Annual Report (Form 10-K) for the year ended January 30, 1999, included in
the current report on Form 8-K dated July 16, 1999, of Albertson's, Inc., filed
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
Salt Lake City, Utah
July 13, 1999
Page 6
EXHIBIT 99
AUDITED FINAINCIAL STATEMENTS OF AMERICAN STORES COMPANY
INDEX TO AUDITED FINAINCIAL STATEMENTS OF AMERICAN STORES COMPANY
The following audited financial statements of American Stores Company
have been taken from Item 8 of American Stores Company Form 10-K as filed by
American Stores Company with the Securities and Exchange Commission on April 13,
1999, Commission File No. 1-5392.
Report of Independent Auditors 8
Consolidated Statements of Earnings 9
Consolidated Balance Sheets 10
Consolidated Statements of Cash Flows 11
Consolidated Statements of Shareholders' Equity 12
Notes to Consolidated Financial Statements 13
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Shareholders and Board of Directors
American Stores Company
We have audited the accompanying consolidated balance sheets of American Stores
Company and subsidiaries as of January 30, 1999, January 31, 1998 and February
1, 1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Stores
Company and subsidiaries at January 30, 1999, January 31, 1998 and February 1,
1997, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 17, 1999
Salt Lake City, Utah
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<TABLE>
<CAPTION>
Consolidated Statements of Earnings
(In thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Sales $19,866,725 $19,138,880 $18,678,129
Cost of merchandise sold, including
warehousing and transportation
expenses 14,560,899 14,039,263 13,713,151
------------------ ----------------- ------------------
Gross profit 5,305,826 5,099,617 4,964,978
Operating and administrative expenses 4,437,804 4,317,576 4,220,187
Merger related stock options 195,252
Restructuring and impairment 13,400 77,151
------------------ ----------------- ------------------
Operating profit 672,770 768,641 667,640
Other income (expense):
Interest income 3,337 5,647 8,470
Interest expense (232,652) (216,710) (171,558)
Shareholder related expense (33,913)
------------------ ----------------- ------------------
Total other income (expense) (229,315) (244,976) (163,088)
------------------ ----------------- ------------------
Earnings before income taxes 443,455 523,665 504,552
Federal and state income taxes (209,711) (243,045) (217,331)
------------------ ----------------- ------------------
Net earnings $ 233,744 $ 280,620 $ 287,221
================== ================= ==================
Basic earnings per share $.85 $1.02 $.98
Diluted earnings per share $.84 $1.01 $.98
Average number of common shares
outstanding used for basic earnings
per share 274,790 276,409 291,776
Dilutive common stock options 2,772 1,360 875
------------------ ----------------- ------------------
Average number of common shares
Outstanding used for dilutive
earnings per share 277,562 277,769 292,651
================== ================= ==================
Outstanding employee stock options
having no dilutive effect 4,350
See notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Balance Sheets
Year-End
------------------ ------------------------- -----------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 35,493 $ 47,794 $ 37,467
Receivables 427,911 399,319 318,878
Inventories 1,726,015 1,714,229 1,725,542
Prepaid expenses 67,929 71,855 66,510
Deferred income tax benefits 83,055 28,583 18,099
------------------ ------------------ ------------------
Total Current Assets 2,340,403 2,261,780 2,166,496
Property, Plant and Equipment and
Property Under Capital Leases,at cost
Land 927,021 856,967 734,726
Buildings 2,452,509 2,325,388 1,980,660
Fixtures and equipment 3,000,732 2,877,019 2,616,786
Leasehold improvements 927,441 831,364 781,454
------------------ ------------------ ------------------
7,307,703 6,890,738 6,113,626
Less accumulated depreciation and
amortization (2,683,628) (2,552,723) (2,361,255)
------------------ ------------------ ------------------
Net Property, Plant and Equipment 4,624,075 4,338,015 3,752,371
Goodwill, net of accumulated amortization 1,589,614 1,611,812 1,665,242
Other Assets 331,207 324,408 297,296
================== ================== ==================
Total Assets $8,885,299 $8,536,015 $7,881,405
================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,147,510 $1,186,845 $ 851,285
Accrued payroll and benefits 333,917 301,656 325,806
Current portion of self-insurance reserves 99,643 108,263 121,144
Income taxes payable 15,392 11,293 21,290
Other current liabilities 338,842 412,342 416,153
Current maturities of long-term debt
and obligations under capital leases 49,651 100,935 66,003
------------------ ------------------ ------------------
Total Current Liabilities 1,984,955 2,121,334 1,801,681
Self-insurance Reserves, less current
portion 266,661 390,661 403,981
Deferred Income Taxes 361,566 349,041 348,846
Other Liabilities 149,892 163,927 178,326
Long-term Debt and Obligations Under
Capital Leases, less current
maturities 3,423,029 3,201,970 2,613,144
Shareholders' Equity
Common stock of $1.00 par value,
authorized 700,000 shares; issued
299,778 shares 299,778 299,778 299,778
Additional paid-in capital 463,246 269,205 212,672
Retained earnings 2,455,223 2,320,322 2,136,744
Less cost of treasury stock; 23,103
shares in 1998, 26,172 shares in
1997 and 7,949 shares in 1996 (519,051) (580,223) (113,767)
------------------ ------------------ ------------------
Total Shareholders' Equity 2,699,196 2,309,082 2,535,427
================== ================== ==================
Total Liabilities and Shareholders' Equity $8,885,299 $8,536,015 $7,881,405
================== ================== ==================
See notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $233,744 $280,620 $287,221
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 487,304 468,869 440,445
Merger related stock option charge 195,252
Net (gain) loss on asset sales (15,818) (772) 265
Self-insurance reserve decrease (132,620) (26,201) (62,367)
Other 5,865 (78,004) 120,070
(Increase) decrease in current assets:
Receivables (28,592) (80,441) 810
Inventories (11,786) 11,313 (152,920)
Prepaid expenses (50,546) (15,829) 5,006
(Decrease) increase in current liabilities:
Accounts payable (39,335) 335,560 (145,069)
Other current liabilities (52,256) 16,137 66,759
Accrued payroll and benefits 32,261 (24,150) (6,037)
Income taxes payable 4,099 (9,997) 3,998
------------------ ---------------- -----------------
Total adjustments 393,828 596,485 270,960
------------------ ---------------- -----------------
Net cash provided by operating activities 627,572 877,105 558,181
------------------ ---------------- -----------------
Cash Flows from Investing Activities:
Expended for property, plant and equipment (830,376) (974,724) (943,080)
Proceeds from sale of assets 115,450 39,447 47,670
Increases in other assets (56,813) (43,638) (60,416)
------------------ ---------------- -----------------
Net cash used in investing activities (771,739) (978,915) (955,826)
------------------ ---------------- -----------------
Cash Flows from Financing Activities:
Proceeds from long-term borrowing 145,000 500,000 350,000
Payment of long-term borrowing (50,000) (160,000) (100,000)
Net addition to debt and obligations under
capital leases 75,748 279,101 188,979
Proceeds from exercise of stock options, other 59,961 44,164 24,860
Repurchase of common stock (37,798)
Repurchase of common stock from major
Shareholder (550,000)
Issuance of common stock for over-allotments 95,914
Cash dividends (98,843) (97,042) (93,351)
------------------ ---------------- -----------------
Net cash provided by financing activities 131,866 112,137 332,690
------------------ ---------------- -----------------
Net (decrease) increase in cash and cash
Equivalents (12,301) 10,327 (64,955)
Cash and Cash Equivalents:
Beginning of Year 47,794 37,467 102,422
------------------ ---------------- -----------------
End of Year $ 35,493 $ 47,794 $ 37,467
================== ================ =================
See notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Additional
(In thousands, Common Paid-In Retained Treasury
except per share data) Stock Capital Earnings Stock Total
- ---------------------------------------------- ------------- ----------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of 1996 $299,778 $195,229 $1,942,874 $(83,385) $2,354,496
============= ================= ================== ================ =================
Net earnings - 1996 287,221 287,221
Issuance of 1,127 shares of
stock for stock options,
awards and Employee Stock
Purchase Plan (ESPP) 7,891 7,497 15,388
Dividends ($.32 per share) (93,351) (93,351)
Stock Purchase Incentive Plans 8,856 8,856
Purchase of 13 shares for
treasury, including ESPP
buybacks (103) (78) (181)
Stock Repurchase Program 2,180
Shares (37,798) (37,798)
Other 799 (3) 796
============= ================= ================== ================ =================
Balances at year-end 1996 $299,778 $212,672 $2,136,744 $(113,767) $2,535,427
============= ================= ================== ================ =================
Net earnings - 1997 280,620 280,620
Issuance of 1,652 shares of
stock for stock options,
awards and Employee Stock
Purchase Plan (ESPP) 5,983 24,704 30,687
Shares related to directors'
Stock compensation plan - 193
Shares 3,931 86 4,017
Dividends ($.35 per share) (97,042) (97,042)
Stock Purchase Incentive Plans 10,425 10,425
Purchase of 59 shares for
treasury, including ESPP
buybacks (967) (967)
Stock Repurchase from major
shareholder - 24,444 shares (550,000) (550,000)
Stock issuance for over-
allotments - 4,622 shares 36,194 59,721 95,915
------------- ----------------- ------------------ ---------------- -----------------
Balances at year-end 1997 $299,778 $269,205 $2,320,322 $(580,223) $2,309,082
============= ================= ================== ================ =================
Net earnings - 1998 233,744 233,744
Issuance of 3,158 shares of
stock for stock options and (11,367) 62,816 51,449
awards
Merger related stock options 195,252 195,252
Dividends ($.36 per share) (98,843) (98,843)
Stock Purchase Incentive Plans 1,358 1,358
Purchase of 101 shares for
treasury, including ESPP
buybacks (1,824) (1,824)
Shares related to directors'
stock compensation plan - 20
shares 3,174 180 3,354
Other 5,624 5,624
------------- ----------------- ------------------ ---------------- -----------------
Balances at year-end 1998 $299,778 $463,246 $2,455,223 $(519,051) $2,699,196
============= ================= ================== ================ =================
See notes to consolidated financial statements
</TABLE>
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Notes to Consolidated Financial Statements
Nature of Operations
American Stores Company is one of the nation's leading food and drug retailers,
operating 1,580 stores in 26 states. The Company operates in a single industry
segment and its principal formats include supermarkets, stand-alone drug stores
and combination food/drug stores. Principal markets, where products are sold
primarily to retail customers, include California, Illinois, New Jersey,
Pennsylvania, Nevada, Indiana, Massachusetts and Arizona.
Significant Accounting Policies
Fiscal Year. The fiscal year of the Company ends on the Saturday nearest to
January 31. All references herein to "1998", "1997" and "1996" represent the
52-week fiscal years ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively.
Basis of Consolidation. The consolidated financial statements include the
accounts of American Stores Company and all subsidiaries. Accordingly, all
references herein to "American Stores Company" include the consolidated results
of its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair value.
Depreciation and Amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements and leased properties under capital leases are amortized over the
estimated useful life of the property or over the term of the lease, whichever
is shorter. The depreciable lives are primarily 20 to 25 years for buildings, 3
to 10 years for fixtures and equipment and 20 to 25 years for leasehold
improvements and property under capital lease, depending on the life of the
lease. Depreciation expense related to property, plant and equipment amounted to
$407.5 million, $390.4 million and $359.9 million in fiscal 1998, 1997 and 1996,
respectively. Amortization expense related to property under capital leases
amounted to $7.6 million, $8.5 million and $9.2 million in fiscal 1998, 1997 and
1996, respectively.
Goodwill. Goodwill, principally from the acquisition of Lucky Stores, Inc. in
1988, represents the excess of cost over fair value of net assets acquired and
is being amortized over 40 years using the straight-line method. Accumulated
amortization amounted to $579.1 million, $524.6 million and $471.2 million in
1998, 1997 and 1996, respectively.
Costs of Opening and Closing Stores. The costs of opening new stores are charged
against earnings as incurred. When operations are discontinued and a store is
closed, the remaining investment, net of salvage value, is charged against
earnings and, for leased stores, a provision is made for the remaining lease
liability, net of expected sublease income.
Derivative Financial Instruments. The Company enters into interest rate swaps
and similar agreements to modify the interest rate characteristics of its
outstanding debt or on anticipated public debt financing of the Company and
holds them strictly for purposes other than trading. The objective of these
derivative transactions is to reduce the Company's exposure to changes in
interest rates, and each transaction is evaluated periodically by the Company
for changes in market value and counterparty credit exposure.
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The agreements are usually in notional amounts less than the total amount of the
anticipated debt issue and are generally in effect for a period estimated to
expire concurrent with the anticipated debt issue. They involve the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which the payments are based. The difference to be paid or received as
interest rates change is recognized quarterly in the case of the LIBOR basket
swap. The fair value of any treasury rate locks is being amortized over the term
of debt issued as an addition to interest expense. In the event of the early
extinguishment of an obligation, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment of the
obligation.
Income Taxes. The Company provides for deferred income taxes or credits as
temporary differences arise in recording income and expenses between financial
reporting and tax reporting. Amortization of goodwill is not deductible for
purposes of calculating income tax provisions.
Environmental Remediation Costs. Costs incurred to investigate and remediate
contaminated sites are accrued when identified and estimable. The related costs
are expensed unless the remediation extends the economic useful life of the
assets employed at the site.
Insurance Programs. The Company is self-insured for property loss, workers'
compensation, general liability and automotive liability, for claims occurring
through the 1997 fiscal year end, subject to specific retention levels. Claims
for workers' compensation, general liability and automotive liability are
insured for fiscal 1998. The Company is required in certain cases to obtain
letters of credit to support its self-insured status. At year-end 1998, the
Company's self-insured liabilities were supported by approximately $150.0
million of undrawn letters of credit. The Company is also self-insured for
health care claims for eligible active and retired associates. Self-insured
liabilities, with the exception of postretirement health care benefits, are not
discounted.
The basis for the amount of the Company's accrual for self insurance claims is
determined by an independent actuary who arrives at the ultimate costs of claims
that have occurred by analyzing amounts already paid to claimants, open case
reserves and an estimate of incurred but not reported losses, including both
claims that are unreported as of the valuation date and the future growth in
claim value that will occur as more information about each claim becomes known.
Impairment. Impairment is recognized on long-lived assets when indicators of
impairment are present and the undiscounted cash flows are less than the related
assets' carrying value.
Stock-based Compensation. The Company continues to account for stock-based
compensation using the intrinsic value method and provides pro forma footnote
disclosure of the impact of the fair value method.
Employees
The largest collective bargaining agreement, which covers approximately 17% of
the Company's labor force, expires in October 2002.
Advertising Expense
The Company includes advertising expenses in cost of goods sold when the
advertisement occurs. Total gross advertising expense amounted to $337.6
million, $336.0 million and $325.7 million in 1998, 1997 and 1996, respectively.
Capitalized advertising costs were $1.7 million, $2.5 million and $4.0 million
in 1998, 1997 and 1996, respectively.
Reclassification
The 1997 and 1996 financial statements have been reclassified to conform to the
current year presentation.
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New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". The statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has
determined that this statement will not have a material impact on the financial
results of the Company.
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) among the Company, Albertson's, Inc. (Albertson's) and Abacus
Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub), pursuant
to which Merger Sub would be merged with and into the Company with the Company
surviving the merger as a wholly-owned subsidiary of Albertson's. Each share of
the Company's Common Stock would be converted into the right to receive 0.63
shares of Albertson's Common Stock, with cash paid in lieu of any fractional
shares. The transaction is intended to qualify as a pooling of interests for
accounting purposes and as a tax-free reorganization for U.S. federal income tax
purposes. On November 12, 1998, the stockholders of the Company and Albertson's
approved the Merger Agreement. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary closing
conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
Inventories
Approximately 94% of inventories are accounted for using the LIFO (last-in,
first-out) method for inventory valuation. If the FIFO (first-in, first-out) and
average cost methods had been used, inventories would have been $334.3 million,
$327.0 million and $324.5 million higher at year-end 1998, 1997 and 1996,
respectively. The LIFO charge to earnings was $7.4 million in 1998, $2.4 million
in 1997 and $11.4 million in 1996. Under this method, the cost of merchandise
sold that is reported in the financial statements approximates current costs and
thus reduces the distortion in reported earnings due to inflation or deflation.
Debt
The Company has a $1.0 billion universal shelf registration statement of which
$500 million has been designated for the Company's Series B Medium Term Note
Program. On March 19, 1998, the Company issued $45 million of 6.5% notes due
March 20, 2008, under the outstanding Series B Medium Term Note Program. On
March 30, 1998, the Company issued an additional $100 million of 7.1% notes due
March 20, 2028, under the same program. Proceeds were used to refinance
short-term debt and for general corporate purposes. At year-end 1998, the
Company had $855 million available under the universal shelf registration
statement.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.4%.
Page 15
<PAGE>
The Company has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, the Company entered into a $300 million revolving credit agreement with
five financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. The agreement terminates on
the earlier of i) effective date of consummation of the Merger, ii) the date
which is 30 days after the date the Merger Agreement is terminated, or iii) July
1, 1999. At year-end 1998, the Company had $325 million of debt outstanding
under the $1.5 billion credit facility, $993 million outstanding under the
commercial paper program, and $226 million outstanding under uncommitted bank
lines, leaving unused committed borrowing capacity of $256 million.
The Company capitalized interest costs associated with construction projects of
$6.2 million, $16.2 million and $10.6 million in 1998, 1997 and 1996,
respectively. The Company made cash payments for interest (net of amounts
capitalized) of $235.7 million, $204.3 million and $160.8 million in 1998, 1997
and 1996, respectively.
The aggregate amounts of debt maturing in each of the next five fiscal years are
listed below:
<TABLE>
<CAPTION>
(In thousands of dollars)
- ---------------------------------------------------------------------------------------- --------------------
<S> <C>
1999 $ 42,880
2000 164,747
2001 35,426
2002 1,832,723
2003 117,856
Thereafter 1,227,208
Total debt 3,420,840
Capital lease obligations 51,840
Total debt and obligations under capital leases $3,472,680
The Company's various loans secured by real estate are collateralized by
properties with a net book value of $225.6 million at year-end 1998.
</TABLE>
Page 16
<PAGE>
<TABLE>
<CAPTION>
A summary of debt is as follows:
(In thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Public Debt (unsecured):
7.5% Debentures due 2037, put option 2009 $ 200,000 $ 200,000
8.0% Debentures due 2026 350,000 350,000 $ 350,000
7.9% Debentures due 2017 100,000 100,000
7.4% Notes due 2005 200,000 200,000 200,000
Medium Term Notes--fixed interest rates
due 1999 through 2028--average interest
rate 7.3% in 1998 and 7.9% in 1997 and
1996 295,000 200,000 250,000
9-1/8% Notes due 2002 249,461 249,320 249,191
Bank Borrowings (unsecured):
Revolving credit facilities--variable
interest rates, effectively due 2002--
average interest rates 5.8% in 1998,
5.9% in 1997 and 5.7% in 1996 325,000 512,000 957,000
Lines of credit and commercial paper--
variable interest rates, effectively
due 2002 -- average Interest rates 5.7%
in 1998, 5.9% in 1997 and 5.6% in 1996 1,218,966 945,899 183,000
Notes due 2004--average interest rate
6.3% 200,000 200,000
Other borrowings--due 2000--average
interest rates 6.6% in 1998, 1997 and
1996 75,000 75,000 75,000
Other Unsecured Debt:
9.8% due in 1999 160,000
10.6% due in 2004 93,337 108,893 108,893
Other--due through 2001 50,343 31,505 2,988
Debt Secured by Real Estate:
Fixed interest rates--due through 2014--
average interest rate 13.4% in 1998,
13.4% in 1997 and 13.3% in 1996 63,733 69,548 77,365
----------------- ----------------- -----------------
Outstanding debt 3,420,840 3,242,165 2,613,437
Capital lease obligations 51,840 60,740 65,710
----------------- ----------------- -----------------
Total debt and obligations under capital
leases 3,472,680 3,302,905 2,679,147
Less current maturities:
Debt 42,880 92,407 56,703
Capital lease obligations 6,771 8,528 9,300
----------------- ----------------- -----------------
Long-term debt and obligations under
capital leases 3,423,029 3,201,970 2,613,144
Long-term capital lease obligations 45,069 52,212 56,410
----------------- ----------------- -----------------
Long-term debt $3,377,960 $3,149,758 $2,556,734
================= ================= =================
</TABLE>
During 1997 the Company entered into a $300 million five-year LIBOR basket swap.
The agreement diversifies the indices used to determine the interest rate on a
portion of the Company's variable rate debt by providing for payments based on
foreign LIBOR indices which are reset every three months and also provides for a
maximum interest rate of 8.0%. The Company recognized no income or expense in
1998 related to this swap. As of year-end 1998, the estimated fair value of the
agreement based on market quotes was a loss of $5.3 million.
Page 17
<PAGE>
On December 15, 1997, a $100 million treasury rate lock agreement was entered
into for the purpose of hedging the interest rate on a portion of the debt the
Company issued in 1998 under a universal shelf registration statement. In March
1998 the treasury lock was terminated in connection with the issuance of $100
million of notes under the registration statement. The Company realized a net
loss of $1.0 million, which is being amortized over the term of the debt as an
addition to interest expense.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its swap agreement. Such counterparties are highly-rated
financial institutions and the Company anticipates they will be able to satisfy
their obligations under the contract.
The carrying amounts of the Company's bank borrowings with variable interest
rates approximate fair value. The fair value of the Company's borrowings with
fixed interest rates is estimated using current market quotes, or discounted
cash flow analyses, or on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The fair value of outstanding debt as
of year-end 1998 was $3.7 billion compared to the carrying value of $3.4
billion.
Leases
The Company leases retail stores, offices and warehouse and distribution
facilities. Initial lease terms average approximately 20 years, plus renewal
options, and may provide for contingent rent based on sales volume in excess of
specified levels.
The summary below shows the aggregate future minimum rent commitments at
year-end 1998 for both capital and operating leases. Operating leases are shown
net of an aggregate $115.1 million of minimum rent income receivable under
non-cancelable subleases. Operating leases also exclude the amortization of
acquisition-related fair value adjustments.
<TABLE>
<CAPTION>
Operating Capital
(In thousands of dollars) Leases Leases
- --------------------------------------------------------------- ------------------------ -------------------------
<S> <C> <C>
1999 $ 181,980 $ 12,430
2000 169,962 10,604
2001 158,306 9,177
2002 146,916 8,246
2003 138,193 7,564
Thereafter 1,254,516 44,355
-------------------------
========================
Total minimum rent commitments $2,049,873 92,376
========================
Less executory costs (such as taxes,
insurance and maintenance) included
in capital leases 512
-------------------------
Net minimum lease payments 91,864
Less amount representing interest 40,024
=========================
Obligations under capital leases,
including $6,771 due within one year $51,840
=========================
</TABLE>
There were no additions to obligations under capital leases in 1998. Rent
expense, excluding the amortization of acquisition-related fair value
adjustments of $13.5 million in 1998, $13.9 million in 1997 and $14.2 million in
1996, was as follows:
<TABLE>
<CAPTION>
Minimum Sublease Contingent Total
(In thousands of dollars) Rent Rent Net Rent Rent
- ------------------------------------------ --------------- -------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1998 $215,880 $20,296 $195,584 $21,342 $216,926
1997 $206,749 $17,591 $189,158 $22,729 $211,887
1996 $189,105 $15,663 $173,442 $24,305 $197,747
</TABLE>
Page 18
<PAGE>
Income Taxes
Federal and state income taxes charged to earnings are summarized below:
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997 1996
- ----------------------------------------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal $228,621 $214,005 $206,313
State 24,852 23,572 25,731
Deferred:
Federal (38,821) 4,847 (12,948)
State (4,941) 621 (1,765)
================== ================== =================
Federal and state income taxes $209,711 $243,045 $217,331
================== ================== =================
</TABLE>
Cash payments of income taxes were $247.6 million, $263.3 million and $226.8
million in 1998, 1997 and 1996, respectively.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
(Percent of earnings before income taxes) 1998 1997 1996
- ---------------------------------------------------------------- --------------- -------------- --------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax rate, net of federal 4.9 4.9 4.8
income tax effect
Goodwill amortization 4.7 4.0 4.2
Merger related stock option charge 3.3
Expenses for repurchase of major
shareholders' common stock 2.3
Tax credits (0.3) (0.1) (0.1)
Other (0.3) 0.3 (0.8)
=============== ============== ==============
Effective income tax rate 47.3% 46.4% 43.1%
=============== ============== ==============
</TABLE>
Deferred tax benefits and liabilities as of year-end 1998 related to the
following temporary differences:
<TABLE>
<CAPTION>
(In thousands of dollars) Benefits Liabilities Total
- -------------------------------------------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C>
Basis in fixed assets $ 33,808 $(267,107) $(233,299)
Self-insurance reserves 122,887 122,887
Purchase accounting valuation 16,299 (253,483) (237,184)
Compensation and benefits 127,698 (30,250) 97,448
Other, net 97,221 (125,584) (28,363)
===================== =================== ===================
Deferred tax benefits and liabilities $397,913 $(676,424) $(278,511)
===================== =================== ===================
No valuation allowances have been considered necessary in the calculation of
deferred tax benefits.
</TABLE>
Page 19
<PAGE>
Stock Compensation Plans
Variable Accounting Treatment for Option Plans
Stock options and certain shares of restricted stock granted under the Company's
stock option and stock award plans automatically vest upon a change of control,
which is defined in plans adopted prior to June 1997 (Pre-1997 Plans) as
stockholder approval of the Merger or, for options granted under the Company's
1997 Stock Option and Stock Award Plan and the 1997 Stock Plan for Non-Employee
Directors (1997 Plans), upon the later of stockholder approval or regulatory
approval of the Merger. All options outstanding on the consummation of the
merger will be converted into options to acquire shares of Albertson's Common
Stock. In addition, option holders have the right (limited stock appreciation
right or LSAR), during an exercise period of up to 60 days after the occurrence
of a change of control (but prior to consummation of the Merger), to elect to
surrender all or part of their options in exchange for shares of Albertson's
Common Stock having a value equal to the excess of the change of control price
over the exercise price (which shares will be deliverable upon the Merger). The
change of control price is defined as the higher of (i) the highest reported
sales price during the 60-day period ending prior to the respective dates of the
"change of control", or (ii) the price paid to stockholders in the Merger,
subject to adjustment in both cases if the exercise period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998 by the Company's
stockholders accelerated the vesting of 10.2 million stock options granted under
Pre-1997 Plans (approximately 60% of the outstanding stock options) and
permitted the holders of these options to exercise LSARs. The exercisability of
10.2 million LSARs resulted in the Company recognizing a $195.3 million merger
related stock option charge during the fourth fiscal quarter of 1998. This
charge was recorded based on the difference between the average option exercise
price of $19.15 and the average market price at measurement dates of $38.29. Of
the 10.2 million options, 6.3 million were exercised using the LSAR feature, 1.7
million were exercised without using the LSAR, and 2.2 million shares reverted
back to fixed price options due to the expiration of the LSAR on January 10,
1999.
The actual change of control price used to measure the value of the 6.3 million
LSARs will not be determinable until the date the Merger is consummated or the
Merger Agreement is terminated. Additional charges or income would be recognized
in each quarter until the Merger is consummated if the change of control price
is higher or lower than the amounts assumed for purposes of the foregoing
estimates. If the Merger is consummated, the foregoing charges will be non-cash.
LSARs relating to the approximately 6.5 million remaining stock options issued
under the 1997 Plans will become exercisable upon regulatory approval of the
Merger, which would result in recognition of an additional charge estimated at
$100 million based upon an average exercise price of $23.72 and assuming an
estimated change of control price of $39.19. The actual change of control price
used to measure the value of the LSARs will not be determinable until the date
the Merger is consummated or the Merger Agreement is terminated. If the Merger
is consummated, the foregoing charges will be non-cash.
Fixed Stock Option Plans
The Company's Stock Option and Stock Award Plans (Plans) provide for the grant
of options to purchase shares of common stock and the issuance of restricted
stock awards, subject to certain antidilution adjustments. At year-end 1998,
there were 7.1 million shares reserved for future grants or awards under the
Company's Plans.
Page 20
<PAGE>
A summary of the Company's stock option activity and related information for
1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Price Exercise Price
Price
(Options in thousands) Options Options Options
- ------------------------------------------ --------------- ------------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning 18,268 $20.67 6,030 $14.36 3,840 $11.37
of year
Granted 214 $24.82 13,210 $23.14 2,712 $17.91
Exercised
Cash (2,374) $15.91 (436) $11.34 (269) $ 8.70
LSARs (6,337) $20.03
Forfeited / Expired (1,128) $20.19 (536) $18.21 (253) $13.00
=============== ============= ============
Outstanding at end of year 8,643 $22.61 18,268 $20.67 6,030 $14.36
=============== ============= ============
Exercisable at end of year 2,833 $20.36 1,056 $15.13 424 $ 8.70
Reserved for future grants 7,071 6,368 3,596
</TABLE>
Exercise prices for outstanding options as of year-end 1998 ranged from $8.72 to
$24.88 and the weighted-average remaining contractual life of those options is
6.8 years.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (ESPP), which began January 1, 1996
enables eligible employees of the Company to subscribe for shares of common
stock on quarterly offering dates at a purchase price which is the lesser of 85%
of the fair market value of the shares on the first day or the last day of the
quarterly offering period. For financial reporting purposes, the discount of 15%
is treated as equivalent to the cost of issuing stock. During 1998 employees
contributed $15.2 million to the ESPP program and 0.8 million shares were
issued. Since the ESPP's inception, employees have contributed $45.9 million and
2.6 million shares have been issued. Purchases of stock through ESPP were
suspended following the third quarter 1998 purchases pursuant to the Merger
Agreement with Albertson's.
Long Term Incentive Plans
During 1997 the Company modified the Long Term Incentive Plan for 1996-1998 to
provide participants with the option to receive shares of restricted stock in
lieu of cash as originally provided. The number of shares issued to participants
electing to receive shares of stock was based on the projected value of the Plan
pay-out. The 184,701 shares issued under the 1996-1998 Plan will vest on April
1, 1999.
Performance Incentive Program
The 1998 Performance Incentive Program provides certain of the Company's key
executives an incentive award of shares of two-year restricted stock if certain
Company performance objectives are attained for the 1998 fiscal year. The
Company exceeded its annual performance goal for 1998 and awards under this
program amount to approximately 209,000 shares which will be issued in March
1999.
Key Executive Equity Program
In 1997 the Company established the Key Executive Equity Program (KEEP), a
stock-based management incentive program. A total of approximately 13.4 million
stock options were granted to 169 of the Company's officers in connection with
the KEEP with an exercise price of $22.50 to $24.88 per share. The KEEP involves
the grant of market-priced stock options that would ordinarily begin to vest on
the fifth anniversary of the grant date but which will vest on an accelerated
basis with respect to one-half of the grant if minimum stock ownership
requirements are satisfied, and with respect to the other half of the grant if
the ownership requirements are met and the Company achieves annual performance
goals. The KEEP options will vest and the minimum stock ownership requirements
will expire upon regulatory approval of the merger.
Page 21
<PAGE>
To assist the KEEP participants in meeting the stock ownership requirement, the
Company issued full recourse interest bearing stock purchase loans to 18
participants to acquire additional shares of the Company's stock. The stock
purchased by the participants was purchased on the open market. The purchase
loans have a maturity date of April 1, 2002 and accrue interest at 8.5%, reset
annually at the then current prime rate. Outstanding loan balances at year-end
1998 totaled $1.9 million.
Stock Plan for Non-Employee Directors
During 1997 the shareholders approved the 1997 Stock Plan for Non-Employee
Directors (Directors' Plan), which provides for: 1) the grant of 2,000 shares
annually of the Company's Common Stock (Retainer Stock), 2) the grant on an
annual basis of stock options to acquire 1,200 shares of common stock to each
participant who satisfies the Minimum Stock Ownership Requirement, and 3) the
one time issuance of common stock (173,000 shares in total) to compensate such
directors for their respective interests in the Non-Employee Directors'
Retirement Plan (Retirement Stock), which was terminated concurrently with the
adoption of the Directors' Plan.
Retirement Stock (and dividends thereon which are reinvested in stock) will be
delivered to a participant on the earlier of: 1) death of Participant, 2) change
of control or, 3) the later of the date the Participant attains age 65 or the
date the Participant ceases to serve as a Director. Compensation expense related
to the Retirement Stock and Retainer Stock decreased pre-tax earnings by $3.4
million in 1998 and $4.0 million in 1997. The options vest upon regulatory
approval of the Merger.
Fair Value Disclosures
The Company's pro forma compensation expense under the fair value method,
utilizing the Black-Scholes option valuation model, for fixed stock options
granted and for the ESPP in 1998, 1997 and 1996, after income taxes, was $15.1
million for 1998, $12.9 million for 1997 and $4.8 million for 1996. Pro forma
net income would have been $351.3 million in 1998, $267.7 million in 1997 and
$282.5 million in 1996. Diluted earnings per share would have been $1.26 for
1998, $.97 for 1997 and $.97 for 1996.
The 1998 pro forma net income of $351.3 million resulted from reported net
income of $233.7 million, less the 1998 pro forma compensation expense after
income taxes of $15.1 million, and the elimination of the merger related stock
option charge of $132.7 million ($195.3 million pretax less $62.6 million tax
impact).
The fair value of options estimated at the date of grant assumes an average
expected volatility of 21.2% and dividend yield of 1.8%. Other assumptions for
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ---------------------- ------------------------
Options ESPP Options ESPP Options ESPP
- ---------------------------------------------------- ------------ ---------- ------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average risk-free interest rate 4.7% 5.1% 6.6% 5.0% 6.1% 5.1%
Average life of options (years) 6.5 .25 7.0 .25 4.0 .25
Average vesting date (years) 3.9 2.0 5.0 2.0 3.0 2.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options.
Because the fair value method of accounting for stock-based compensation has not
been applied to options granted prior to January 1, 1995, the preceding pro
forma compensation cost may not be representative of expected costs in future
years.
Page 22
<PAGE>
Stock Purchase Incentive Plans
In 1992 the Company's shareholders approved both the American Stores Company Key
Executive Stock Purchase Incentive Plan and the American Stores Company Board of
Directors Stock Purchase Incentive Plan (Plans). The Company awarded to certain
directors and key executive officers the right to purchase a specified number of
shares of the Company's stock and extended to such directors and officers full
recourse interest bearing, 8-year loans to acquire the stock.
During fiscal 1997 and 1998 the performance cycle for participants in the Plans
ended and each received a deferred award, which was applied toward repayment of
their loans. The balance of the loans, together with accrued and unpaid interest
thereon, is payable in three equal installments on the sixth, seventh and eighth
anniversaries of the purchase date. The aggregate principal of these loans
outstanding is recorded as Other Assets in the balance sheet and as of January
30, 1999, the aggregate outstanding balance (including accrued and unpaid
interest) was $1.9 million.
Repurchase of Common Stock
In June 1996 the Company authorized a stock repurchase program of up to four
million shares of common stock (not including the repurchase of shares from the
Selling Stockholders). During 1996 0.1 million shares were repurchased. There
were no repurchases of common stock under the repurchase program during 1998 and
1997. On August 2, 1998, the Company terminated the stock repurchase program.
Postretirement Health Care Benefits
The Company provides certain health care benefits to eligible retirees of
certain defined employee groups under two unfunded plans, a defined dollar and a
full coverage plan.
<TABLE>
<CAPTION>
Change in Benefit Obligation
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- --------------
<S> <C> <C> <C>
Benefit obligation at beginning of year $54,029 $52,883 $51,671
Service cost (with interest) 670 917 671
Interest cost 3,471 3,816 3,896
Plan amendments 496
Actuarial (gain)/loss (6,880) 431 632
Benefits paid (4,069) (4,018) (3,987)
================ ================= ==============
Benefit obligation at end of year $47,717 $54,029 $52,883
================ ================= ==============
Change in Plan Assets
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Fair value of plan assets at
beginning of year $ 0 $ 0 $ 0
Employer contribution 4,069 4,018 3,987
Benefits paid (4,069) (4,018) (3,987)
================ ================= ================
Fair value of plan assets at
end of year $ 0 $ 0 $ 0
================ ================= ================
Funded status $(47,717) $(54,029) $(52,883)
Unrecognized net actuarial (gain) (18,098) (12,058) (12,969)
Unrecognized prior service cost 446
================ ================= ================
Accrued postretirement benefit
obligation (APBO) $(65,369) $(66,087) $(65,852)
================ ================= ================
Discount rate as of end of year 7.0% 7.5% 7.5%
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease to 6% for 2000 and remain at that level thereafter. For the defined
dollar plan, no future increases in the Company's subsidy level was assumed.
Page 23
<PAGE>
<TABLE>
<CAPTION>
Components of Net Periodic Benefit Cost
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Service cost (with interest) $ 670 $ 917 $ 671
Interest cost 3,471 3,816 3,896
Amortization of prior service cost 50
Recognized net actuarial (gain) (840) (480) (789)
---------------- ----------------- ----------------
Net periodic benefit cost $3,351 $4,253 $3,778
================ ================= ================
</TABLE>
A prior service cost is caused by plan changes. The Company amended the plan to
reduce the first eligibility age for retirement from age 57 (with 10 years of
full-time service or 20 years of part-time service) to age 54 (with 10 years of
full-time service or 20 years of part-time service). The cumulative effect of
this plan change results in an APBO increase of $496,000.
The Company has multiple nonpension postretirement benefit plans. With the
exception of the plans for grandfathered retirees, the health care plans are
contributory, with participants' contributions adjusted annually. The accounting
for the health care plans anticipates that the Company will not increase its
contribution for health care benefits for non-grandfathered retirees in future
years.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-Percentage-Point
(In thousands of dollars) Increase Decrease
Effect on total of service and interest
cost components $139 $(123)
Effect on postretirement benefit obligation $1,992 $(1,763)
Since the subsidy level for the defined dollar plan is fixed, a trend increase
or decrease has no impact on that portion of the obligation.
Retirement Plans
The Company sponsors and contributes to a defined contribution retirement plan,
American Stores Retirement Estates (ASRE). This plan was authorized by the Board
of Directors for the purpose of providing retirement benefits for associates of
American Stores Company and its subsidiaries. The plan covers associates meeting
age and service eligibility requirements, except those represented by a labor
union, unless the collective bargaining agreement provides for participation.
Contributions to ASRE are made at the discretion of the Board of Directors.
The Company also contributes to multi-employer defined benefit retirement plans
in accordance with the provisions of the various labor contracts that govern the
plans. The multi-employer plan contributions are generally based on the number
of hours worked. Information about these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
Page 24
<PAGE>
<TABLE>
<CAPTION>
Retirement plans expense was as follows:
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------- --------------------- ---------------- --------------------
<S> <C> <C> <C>
Company sponsored plans $ 92,966 $ 93,342 $ 88,106
Multi-employer plans 76,202 71,938 95,822
===================== ================ ====================
Retirement plans expense $169,168 $165,280 $183,928
===================== ================ ====================
</TABLE>
Restructuring and Impairment
In 1996 the Company recorded special charges aggregating approximately $100.0
million before taxes, or $.21 per diluted share, related primarily to its
re-engineering initiatives. The special charges are included in cost of
merchandise sold ($10.0 million), operating and administrative expense ($12.9
million) and restructuring and impairment ($77.1 million). The components of the
charge include: warehouse consolidation costs, administrative office
consolidation costs, asset impairment costs, closed store costs and other
miscellaneous charges. The remaining reserve as of the 1998 fiscal year end of
$11.2 million relates primarily to the remaining lease commitments for the
administrative office consolidation costs.
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and ground water contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). 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. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition or results of operations of
the Company. Charges against earnings for environmental remediation were not
material in 1998, 1997 or 1996.
Legal Proceedings
On September 13, 1996, a class action lawsuit captioned McCampbell et al. v.
Ralphs Grocery Company, et al. was filed in the San Diego Superior Court of the
State of California against the Company and two other grocery chains operating
in southern California. The complaint alleges, among other things, that the
Company and others conspired to fix the retail price of eggs in southern
California. The Company believes it has meritorious defenses to plaintiffs
claims and plans to vigorously defend the lawsuit.
The Company is also involved in various other claims, administrative proceedings
and other legal proceedings which arise from time to time in connection with the
conduct of the Company's business. In the opinion of management, such
proceedings will not have a material adverse effect on the Company's financial
condition or results of operations.
Employment Contracts
During 1994 and 1995 the Company entered into Employment Agreements (Agreements)
with 17 of the Company's key executive officers. The Agreements, as amended,
expire on October 31, 2001 and are automatically renewed for subsequent one-year
terms, unless they are individually terminated by the Company at least two years
prior to the end of the term. Each Agreement contains usual and customary terms
of employment agreements and provides the officers with a special long-range
payout. The executives are entitled to receive an annual payment for a period of
20 years beginning at age 57 or upon termination of employment, whichever occurs
later. The payout is calculated as a percentage of the executive's average
target compensation objective during the last two years of his or her employment
under the Agreement. The payout ranges from 9% to 40% based on years of service
with the Company. The payout will be forfeited if the executive enters into
competition with the Company.
Page 25
<PAGE>
The Company also entered into an employment agreement with the Company's
Chairman and Chief Executive Officer in 1994 which, as amended, expires on
October 31, 2002, and is automatically renewed for subsequent two-year terms
unless terminated by the Company at least three years prior to the end of the
term. The agreement provides for an annual payout that vests over an eight-year
period which, if fully vested, would equal approximately $710,000 adjusted for
inflation. Payments will be made over the life of the executive and his spouse.
The payout will be forfeited if the executive enters into competition with the
Company. In the event the Merger closes, the foregoing agreement will be
superseded by a Termination and Consulting agreement (the Consulting Agreement)
between the executive, the Company and Albertson's, Inc. The Consulting
Agreement provides, among other things, for a lump sum payment of the present
value of the payout, which is currently estimated at $11.0 million based upon an
assumed discount rate of 7.75%, and which will have vested in full upon
consummation of the Merger.
Page 26
<PAGE>
Quarterly Results (unaudited)
In the opinion of management, all adjustments necessary for a fair presentation
have been included:
<TABLE>
<CAPTION>
(In thousands of dollars, First Second Third Fourth Fiscal
except per share data) Quarter Quarter Quarter Quarter Year
(4)
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1998 (1)
Sales $4,872,686 $4,950,016 $4,847,756 $5,196,267 $19,866,725
Gross profit 1,266,542 1,318,970 1,299,751 1,420,563 5,305,826
Operating profit 174,515 212,492 197,723 88,040 672,770
Net earnings 65,861 88,160 80,745 (1,022) 233,744
Basic earnings per share $.24 $.32 $.29 $.00 $.85
Diluted earnings per share .24 .32 .29 .00 .84
1997 (2)
Sales $4,747,644 $4,763,174 $4,647,465 $4,980,597 $19,138,880
Gross profit 1,250,805 1,286,449 1,234,699 1,327,664 5,099,617
Operating profit 167,531 212,420 161,468 227,222 768,641
Net earnings 34,225 89,957 60,275 96,163 280,620
Basic earnings per share $.12 $.33 $.22 $.35 $1.02
Diluted earnings per share .12 .33 .22 .35 1.01
1996 (3)
Sales $4,580,028 $4,625,066 $4,563,362 $4,909,673 $18,678,129
Gross profit 1,195,176 1,226,328 1,216,966 1,326,508 4,964,978
Operating profit 149,376 185,195 173,985 159,084 667,640
Net earnings 64,240 83,129 75,757 64,095 287,221
Basic earnings per share $.22 $.28 $.26 $.22 $.98
Diluted earnings per share .22 .28 .26 .22 .98
</TABLE>
(1) Fourth quarter 1998 "Operating profit" included a merger related stock
option charge of $195.3 million ($.47 per share after tax) related to the
exercisibility of 10.2 million limited stock appreciation rights due to
the approval by the Company's stockholders of the Merger Agreement.
(2) First quarter 1997 "Other" included charges of $33.9 million related to
the sale of stock by a major shareholder and operating profit included
charges of $13.4 million related to the sale of a division of the
Company's communications subsidiary (total of $.14 per share).
(3) Fourth quarter 1996 included special charges totaling $100.0 million
pre-tax ($.21 per share, after tax) in operating profit, including $10.0
million in gross profit.
(4) Operating profit, before special charges and merger related stock option
charge, in the fourth quarter has exceeded the prior three quarters in
each of the three years presented due to the seasonality of the food and
drug retail business and LIFO inventory adjustments. The holiday and the
cold and flu season in the fourth quarter benefits the food and drug
retail business.
Page 27
EXHIBIT 99.1
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following supplemental consolidated financial statements give
retroactive effect to the acquisition by Albertson's, Inc. of all of the equity
interests of American Stores Company on June 23, 1999. This transaction has been
accounted for as a pooling of interests as described in the Notes to the
Supplemental Consolidated Financial Statements.
Audited Supplemental Consolidated Financial Statements:
Independent Auditors' Report 29
Supplemental Consolidated Earnings for the years ended January 28, 30
1999, January 29, 1998, and January 30, 1997
Supplemental Consolidated Balance Sheets at January 28, 1999, 31
January 29, 1998, and January 30, 1997
Supplemental Consolidated Cash Flows for the years ended January 32
28, 1999, January 29, 1998, and January 30, 1997
Supplemental Consolidated Stockholders' Equity for the years 33
ended January 28, 1999, January 29, 1998, and January 30, 1997
Notes to Supplemental Consolidated Financial Statements for the 34
years ended January 28, 1999, January 29, 1998, and
January 30, 1997
Unaudited Interim Supplemental Consolidated Financial Statements:
Interim Supplemental Consolidated Earnings for the 13 weeks ended 61
April 29, 1999, and April 30, 1998
Interim Supplemental Consolidated Balance Sheets at April 29, 1999, 62
and January 28, 1999
Interim Supplemental Consolidated Cash Flows for the 13 weeks ended 63
April 29, 1999, and April 30, 1998
Notes to Interim Supplemental Consolidated Financial Statements 64
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Business Combinations 68
Results of Operations - Annual Periods 68
Results of Operations - Quarterly Periods 69
Liquidity and Capital Resources 70
Divestitures and Merger Related Costs 71
Recent Accounting Standards 73
Quantitative and Qualitative Disclosures about Market Risk 74
Year 2000 Compliance 74
Environmental 76
Cautionary Statement for Purposes of "Safe Harbor Provisions"
of the Private Securities Litigation Reform Act of 1995 76
Page 28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Albertson's, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Albertson's, Inc. and subsidiaries (formed as a result of the consolidation of
Albertson's, Inc. and American Stores Company) as of January 28, 1999, January
29, 1998, and January 30, 1997, and the related supplemental consolidated
earnings, stockholders' equity, and cash flows for each of the three years in
the period ended January 28, 1999. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The supplemental consolidated financial statements give retroactive
effect to the merger of Albertson's, Inc. and American Stores Company on June
23, 1999, which has been accounted for as a pooling of interests as described in
the Basis of Presentation Note to the supplemental consolidated financial
statements. Generally accepted accounting principles proscribe giving effect to
a consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These supplemental financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued. We did not audit the
financial statements of American Stores Company which statements reflect total
assets constituting approximately $8.9, $8.5 and $7.9 billion for 1998, 1997 and
1996, respectively, of the related supplemental consolidated financial
statements totals, and which reflect net income constituting approximately $234,
$281, and $287 million of the related supplemental consolidated financial
statement totals for the years ended January 28, 1999, January 29, 1998, and
January 30, 1997, respectively. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for American Stores Company for 1998, 1997 and 1996, is
based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Albertson's,
Inc. and subsidiaries at January 28, 1999, January 29, 1998, and January 30,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 28, 1999, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
/s/ Deloitte & Touche, LLP
Deloitte & Touche LLP
Boise, Idaho
June 23, 1999
Page 29
<PAGE>
Supplemental Consolidated Earnings
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
January 28, January 29, January 30,
(In thousands except per share data) 1999 1998 1997
- ---------------------------------------------------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
Sales $ 35,871,840 $ 33,828,391 $ 32,454,807
Cost of sales 26,156,013 24,820,767 23,901,570
- ---------------------------------------------------------------- -------------------- -------------------- -------------------
Gross profit 9,715,827 9,007,624 8,553,237
Selling, general and administrative
Expenses 7,846,062 7,330,230 6,958,051
Merger related stock option charge 195,252
Impairment and restructuring 24,407 13,400 77,151
- ---------------------------------------------------------------- -------------------- -------------------- -------------------
Operating profit 1,650,106 1,663,994 1,518,035
Other (expenses) income:
Interest, net (336,389) (293,626) (227,657)
Shareholder related expense (33,913)
Other, net 24,583 14,113 9,021
- ---------------------------------------------------------------- -------------------- -------------------- -------------------
Earnings before income taxes 1,338,300 1,350,568 1,299,399
Income taxes 537,403 553,134 518,399
- ----------------------------------------------------------------
-------------------- -------------------- -------------------
Net Earnings $ 800,897 $ 797,434 $ 781,000
-------------------- -------------------- -------------------
Earnings Per Share:
Basic $1.91 $1.89 $1.79
Diluted $1.90 $1.88 $1.79
Weighted average common shares outstanding:
Basic 418,755 421,873 435,529
Diluted 421,672 423,491 437,100
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
Page 30
<PAGE>
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 28, January 29, January 30,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 116,139 $ 155,877 $ 128,332
Accounts and notes receivable 581,625 520,342 417,242
Inventories 3,249,179 3,042,807 2,946,609
Prepaid expenses 106,800 116,281 109,333
Deferred income taxes 132,565 66,330 52,903
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
Total Current Assets 4,186,308 3,901,637 3,654,419
Land, Buildings and Equipment, net 8,547,291 7,701,515 6,786,457
Goodwill, net 1,737,936 1,611,812 1,665,242
Other Assets 659,732 551,641 501,920
- -------------------------------------------------------------------
-------------------- -------------------- -------------------
Total Assets $15,131,267 $13,766,605 $12,608,038
-------------------- -------------------- -------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,186,505 $ 2,148,757 $ 1,771,380
Salaries and related liabilities 512,165 467,127 478,180
Taxes other than income taxes 168,920 180,166 152,180
Income taxes 49,634 33,050 21,399
Self-insurance 172,709 178,245 185,143
Unearned income 101,301 78,450 48,520
Current portion of capitalized lease
obligations 18,118 18,136 17,238
Current maturities of long-term debt 49,871 178,918 57,678
Other 91,663 98,104 110,756
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
Total Current Liabilities 3,350,886 3,380,953 2,842,474
Long-Term Debt 4,905,392 4,139,408 3,478,438
Capitalized Lease Obligations 202,171 193,169 186,460
Self-Insurance 380,893 504,888 511,572
Deferred Income Taxes 257,833 257,561 239,722
Other Long-Term Liabilities and Deferred
Credits 512,442 550,088 554,927
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - $1.00 par value; authorized - 10,000,000 shares; designated
- 3,000,000 shares of Series A Junior Participating; issued - none
Common stock- $1.00 par value; authorized -1,200,000,000 shares; issued -
434,557,800 shares 434,596,070 shares, and 439,550,542
shares, respectively 434,557 434,596 439,550
Capital in excess of par 579,403 384,394 323,682
Retained earnings 5,026,741 4,501,771 4,144,980
Treasury stock - 14,554,669 shares,
16,488,336 shares, and 5,007,989
shares, respectively (519,051) (580,223) (113,767)(
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
Total Stockholders' Equity 5,521,650 4,740,538 4,794,445
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
Total Liabilities and Stockholders' Equity $15,131,267 $13,766,605 $12,608,038
-------------------- -------------------- -------------------
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
Page 31
<PAGE>
Supplemental Consolidated Cash Flows
<TABLE>
<CAPTION>
52 weeks 52 Weeks 52 Weeks
January 28, January 29, January 30,
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 800,897 $ 797,434 $ 781,000
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 862,699 797,664 734,786
Merger related stock option charge 195,252
Net (gain) loss on asset sales (14,405) 5,598 597
Net deferred income taxes (71,730) 4,169 19,155
Increase in cash surrender value of
Company-owned life insurance (22,670) (14,113) (9,021)
Changes in operating assets and
liabilities, net of business
acquisitions:
Receivables and prepaid expenses (78,917) (104,966) (14,674)
Inventories (156,504) (96,198) (323,741)
Accounts payable 8,918 377,377 (108,912)
Other current liabilities 53,845 36,652 76,418
Self-insurance (134,427) (13,582) (73,601)
Unearned income (12,295) 42,105 (10,735)
Other long-term liabilities (2,518) (16,718) 62,270
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Net cash provided by operating
activities 1,428,145 1,815,422 1,133,542
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Cash Flows From Investing Activities:
Capital expenditures (1,607,849) (1,642,166) (1,603,096)
Proceeds from disposals of land,
buildings and equipment 161,669 70,175 78,433
Business acquisitions, net of cash
acquired (259,672)
Increase in other assets (96,701) (128,307) (20,633)
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Net cash used in investing
activities (1,802,553) (1,700,298) (1,545,296)
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 462,000 733,444 552,000
Payments on long-term borrowings (212,619) (178,622) (198,611)
Net commercial paper activity and bank
borrowings 129,934 209,592 318,989
Proceeds from bank line borrowings 170,695
Proceeds from stock options exercised 66,429 50,336 28,571
Cash dividends paid (263,427) (253,303) (239,411)
Treasury stock purchases and
retirements (18,342) (744,941) (92,987)
Issuance of common stock 95,915
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Net cash provided by (used in)
financing activities 334,670 (87,579) 368,551
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Net (decrease) increase in cash and cash
equivalents (39,738) 27,545 (43,203)
Cash and Cash Equivalents at Beginning
of Year 155,877 128,332 171,535
- ---------------------------------------------------------------- -------------------- -------------------- ---------------------
Cash and Cash Equivalents at End of Year $ 116,139 $ 155,877 $ 128,332
-------------------- -------------------- ---------------------
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
Page 32
<PAGE>
Supplemental Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Capital In
$1.00 Par Value Excess of Par Retained Treasury Stock
(Dollars in thousands) Value Earnings Total
------------------------------------------ ----------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at February 1, 1996,
as previously reported $ 251,919 $ 3,269 $1,697,335 $1,952,523
Adjustment for pooling of
interests 188,860 306,147 1,954,874 $ (83,385) 2,366,496
------------------------------------------ ----------------- --------------- --------------- --------------- ---------------
Balance at February 1, 1996, as restated 440,779 309,416 3,652,209 (83,385) 4,319,019
Net earnings 781,000 781,000
Issuance of 710,217 shares of
stock for stock options,
awards and Employee Stock
Purchase Plan (ESPP) 7,891 7,497 15,388
Exercise of stock options 351 2,977 3,328
Tax benefits related to stock
options 4,109 (3) 4,106
Stock purchase incentive plan 8,856 8,856
Treasury stock purchases and
retirements (1,580) (9,567) (43,964) (37,876) (92,987)
Dividends (244,265) (244,265)
------------------------------------------ ----------------- --------------- --------------- --------------- ---------------
Balance at January 30, 1997 439,550 323,682 4,144,980 (113,767) 4,794,445
Net earnings 797,434 797,434
Issuance of 1,041,010 shares
of stock for Stock options,
awards and Employee Stock
Purchase Plan (ESPP) 5,983 24,704 30,687
Exercise of stock options 414 3,186 3,600
Tax benefits related to stock
options 3,974 3,974
Stock purchase incentive plan 10,425 10,425
Treasury stock purchases and
retirements (5,368) (2,981) (185,625) (550,967) (744,941)
Shares related to directors'
stock Compensation plan -
121,590 shares 3,931 86 4,017
Stock issuance - 2,912,094 shares 36,194 59,721 95,915
Dividends (255,018) (255,018)
------------------------------------------ ----------------- --------------- --------------- --------------- ---------------
Balance at January 29, 1998 434,596 384,394 4,501,771 (580,223) 4,740,538
Net earnings 800,897 800,897
Issuance of 1,989,505 shares
of stock for Stock options,
awards and Employee Stock
Purchase Plan (ESPP) (11,367) 62,816 51,449
Merger related stock option
charge 195,252 195,252
Exercise of stock options 310 2,537 2,847
Tax benefits related to stock
options 10,174 10,174
Treasury stock purchases and
retirements (349) (6,119) (10,050) (1,824) (18,342)
Stock purchase incentive plan 1,358 1,358
Shares related to directors'
stock compensation plan -
12,633 shares 3,174 180 3,354
Dividends (265,877) (265,877)
------------------------------------------ ----------------- --------------- --------------- --------------- ---------------
Balance at January 28, 1999 $ 434,557 $579,403 $5,026,741 $(519,051) $5,521,650
----------------- --------------- --------------- --------------- ---------------
See Notes to Supplemental Consolidated Financial Statements
</TABLE>
Page 33
<PAGE>
Notes to Supplemental Consolidated Financial Statements
(Dollars in thousands except per share amounts)
Basis of Presentation
On August 2, 1998, Albertson's Inc. ("Albertson's" or the "Company")
and American Stores Company ("ASC") entered into a definitive merger
agreement ("Merger Agreement") whereby Albertson's would acquire ASC by
exchanging 0.63 share of Albertson's common stock for each outstanding
share of ASC common stock, with cash being paid in lieu of fractional
shares (the "Merger") and ASC would be merged into a wholly-owned
subsidiary of Albertson's. In addition, outstanding rights to receive ASC
common stock under ASC stock option plans would be converted into rights
to receive equivalent Albertson's common stock. ASC operates retail food
and drugs stores throughout the United States.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. 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 supplemental 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. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling
of interests method in financial statements that do not include the date
of consummation. These supplemental financial statements do not extend
through the date of consummation; however, they will become the historical
financial statements of the Company when the Company issues its financial
statements for the second fiscal quarter of 1999.
The Company
The Company is incorporated under the laws of the State of Delaware
and is the successor to a business founded by J. A. Albertson in 1939.
Based on sales, the Company is one of the largest retail food-drug chains
in the United States.
As of January 28, 1999, the Company operated 2,563 stores in 38
Western, Midwestern, Eastern and Southern states. Retail operations are
supported by 21 Company distribution operations, strategically located in
the Company's operating markets.
Summary of Significant Accounting Policies
Fiscal Year End The Company's fiscal year is generally 52 weeks and
periodically consists of 53 weeks because the fiscal year ends on the
Thursday nearest to January 31 each year (the Saturday nearest to January
31 for ASC). Unless the context otherwise indicates, reference to a fiscal
year of the Company refers to the calendar year in which such fiscal year
commences.
Consolidation The consolidated financial statements include the
results of operations, account balances and cash flows of the Company and
its subsidiaries. All material intercompany balances have been eliminated.
Page 34
<PAGE>
Cash and Cash Equivalents The Company considers all highly liquid
investments with a maturity of three months or less at the time of
purchase to be cash equivalents. Investments, which consist of
government-backed money market funds and repurchase agreements backed by
government securities, are recorded at cost which approximates market
value.
Inventories The Company values inventories at the lower of cost or
market. Cost of substantially all inventories is determined on a last-in,
first-out (LIFO) basis.
Capitalization, Depreciation and Amortization Land, buildings and
equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful life of the asset.
Estimated useful lives are generally as follows: buildings and
improvements--10 to 35 years; fixtures and equipment--3 to 10 years;
leasehold improvements--10 to 25 years; and capitalized leases--20 to 30
years. Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate the carrying value of the
assets may not be recoverable.
The costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements are
amortized on the straight-line method over the shorter of the life of the
applicable lease or the useful life of the asset. Capital leases are
recorded at the lower of the fair market value of the asset or the present
value of future minimum lease payments. These leases are amortized on the
straight-line method over their primary term.
Beneficial lease rights and lease liabilities are recorded on
purchased leases based on differences between contractual rents under the
respective lease agreements and prevailing market rents at the date of the
acquisition of the lease. Beneficial lease rights are amortized over the
lease term using the straight-line method. Lease liabilities are amortized
over the lease term using the interest method.
Upon disposal of fixed assets, the appropriate property accounts are
reduced by the related costs and accumulated depreciation and
amortization. The resulting gains and losses are reflected in consolidated
earnings.
Goodwill Goodwill resulting from business acquisitions represents the
excess of cost over fair value of net assets acquired and is being
amortized over 40 years using the straight-line method. Goodwill is
principally from the acquisition of Lucky Stores, Inc. in 1988.
Accumulated amortization amounted to $581 million, $525 million and $471
million in 1998, 1997 and 1996, respectively. Periodically, the Company
re-evaluates goodwill and other intangibles based on undiscounted
operating cash flows whenever significant events or changes occur which
might impair recovery of recorded asset costs.
Self-Insurance The Company is primarily self-insured for property
loss, workers' compensation and general liability costs. For ASC,
beginning in fiscal 1998, insurance was purchased for claims for workers
compensation, general liability and automotive liability. Self-insurance
liabilities are based on claims filed and estimates for claims incurred
but not reported. These liabilities are not discounted.
Unearned Income Unearned income consists primarily of buying and
promotional allowances received from vendors in connection with the
Company's buying and merchandising activities. These funds are recognized
as revenue when earned by purchasing specified amounts of product,
promoting certain products or passage of time.
Store Opening and Closing Costs Noncapital expenditures incurred in
opening new stores or remodeling existing stores are expensed in the year
in which they are incurred. When a store is closed, the remaining
investment in land, buildings and equipment, net of expected recovery
value, is expensed. For properties under operating lease agreements, the
present value cost of any remaining liability under the lease, net of
expected sublease recovery, is also expensed.
Page 35
<PAGE>
Advertising Advertising costs incurred to produce media advertising
for major new campaigns are expensed in the year in which the advertising
first takes place. Other advertising costs are expensed when incurred.
Cooperative advertising income from vendors is recorded in the period in
which the related expense is incurred. Gross advertising expenses of
$518.3 million, $496.6 million and $472.1 million, excluding cooperative
advertising income from vendors, were included with cost of sales in the
Company's Supplemental Consolidated Earnings for 1998, 1997 and 1996,
respectively.
Stock Options Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost of stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the option exercise price and is charged to operations over the
vesting period. Income tax benefits attributable to stock options
exercised are credited to capital in excess of par value.
Company-owned Life Insurance The Company has purchased life insurance
policies to cover its obligations under certain deferred compensation
plans for officers and directors. Cash surrender values of these policies
are adjusted for fluctuations in the market value of underlying
investments. The cash surrender value is adjusted each reporting period
and any gain or loss is included with other income (expense) in the
Company's Supplemental Consolidated Earnings Statement.
Income Taxes The Company provides for deferred income taxes resulting
from temporary differences in reporting certain income and expense items
for income tax and financial accounting purposes. The major temporary
differences and their net effect are shown in the "Income Taxes" note.
Amortization of goodwill is generally not deductible for purposes of
calculating income tax provisions.
Earnings Per Share Basic EPS is computed by dividing consolidated net
earnings by the weighted average number of common shares outstanding.
Diluted EPS is computed by dividing consolidated net earnings by the sum
of the weighted average number of common shares outstanding and the
weighted average number of potential common shares outstanding. Potential
common shares consist solely of outstanding options under the Company's
stock option plans. There were no outstanding options excluded from the
computation of potential common shares (option price exceeded the average
market price during the period) in 1998. Outstanding options excluded in
1997 and 1996 amounted to 4,260,500 shares and 24,000 shares,
respectively. For purposes of the EPS calculation, all shares and
potential common shares of ASC were converted at the 0.63 to 1 exchange
ratio. In connection with the Merger, certain options of ASC were
exchanged for shares of Albertson's based on the fair value of the
options, including contractual rights.
Reclassifications and Conformity Adjustments Certain reclassifications
and adjustments have been made to the historical financial statements of
Albertson's and ASC for conformity purposes.
Use of Estimates 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.
Page 36
<PAGE>
Restructuring, Impairment and Store Closures
In 1998 the Company recorded a charge to earnings of $24.4 million
before taxes 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. As of January 28, 1999, 13 of
these stores had been closed and the remaining stores are expected to be
closed in 1999.
In 1997, the Company recorded special charges aggregating
approximately $13.4 million before taxes related to the sale of a division
of the Company's communications subsidiary.
In 1996 the Company recorded special charges aggregating approximately
$100.0 million before taxes related primarily to its re-engineering
initiatives. The special charges are included in cost of sales ($10.0
million), selling, general and administrative expense ($12.9 million) and
impairment and restructuring ($77.1 million). The components of the charge
include: warehouse consolidation costs, administrative office
consolidation costs, asset impairment costs, closed store costs and other
miscellaneous charges.
The remaining reserve as of the 1998 fiscal year end of $14.9 million,
relates primarily to the remaining lease commitments for the ASC
administrative office consolidation costs.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Cash payments for income taxes $ 588,893 $ 547,361 $ 515,390
Cash payments for interest, net of amounts
capitalized 331,210 270,227 220,084
Noncash investing and financing activities:
Tax benefits related to stock options 10,174 3,974 4,109
Fair market value of stock exchanged for
option price 1,460 2,021 768
Fair market value of stock exchanged for tax
withholdings 1,796 1,606 202
Capitalized lease obligations incurred 24,857 26,885 12,005
Capitalized lease obligations terminated 5,509 1,632 3,240
Liabilities assumed in connection with asset
acquisitions 1,840 150 692
Acquisition note 8,000
</TABLE>
Business Acquisitions
During 1998, the Company acquired 64 stores in three separate stock
purchase acquisitions and 15 stores in an asset acquisition transaction.
In connection with one of the stock purchase acquisitions, the Company
agreed with the Federal Trade Commission to divest nine of the acquired
stores and six previously owned stores. These four acquisition
transactions had a combined purchase price of $302 million.
Page 37
<PAGE>
The above acquisitions were accounted for using the purchase method of
accounting. The results of operations of the acquired businesses have been
included in the supplemental consolidated financial statements from their
date of acquisition. Pro forma results of operations have not been
presented due to the immaterial effects of these acquisitions on the
Company's consolidated operations. For these acquisitions, the excess of
the purchase price over the fair market value of net assets acquired, of
$151 million, was allocated to goodwill which is being amortized over 40
years. The Company has not finalized its purchase price allocation
relative to all of the acquisitions; however, the final purchase price
allocations should not differ significantly from the preliminary purchase
price allocations recorded as of January 28, 1999.
The Company also acquired individual or small groups of stores in
isolated transactions.
Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
-------------------------------------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Trade and other accounts receivable $ 598,106 $ 532,791 $ 428,813
Current portion of notes receivable 2,688 2,367 2,178
Allowance for doubtful accounts (19,169) (14,816) (13,749)
-------------------------------------------------------------- ------------------- ------------------- ------------------
$ 581,625 $ 520,342 $ 417,242
------------------- ------------------- ------------------
</TABLE>
Inventories
Approximately 95% of the Company's inventories are valued using the
last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method
had been used, inventories would have been $584.6 million, $569.0 million
and $557.3 million higher at the end of 1998, 1997 and 1996, respectively.
Net earnings (basic and diluted earnings per share) would have been higher
by $9.8 million ($0.02) in 1998, $7.2 million ($0.02) in 1997 and $16.2
million ($0.04) in 1996. The replacement cost of inventories valued at
LIFO approximates FIFO cost.
Land, Buildings and Equipment
Land, buildings and equipment consist of the following:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
-------------------------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Land $ 1,877,967 $ 1,652,213 $ 1,434,934
Buildings 4,747,711 4,212,899 3,603,728
Fixtures and equipment 5,044,127 4,640,263 4,212,916
Leasehold improvements 1,304,040 1,172,121 1,078,032
Capitalized leases 350,025 371,076 363,829
-------------------------------------------------------------- ------------------- ------------------ ------------------
13,323,870 12,048,572 10,693,439
Accumulated depreciation and
Amortization (4,776,579) (4,347,057) (3,906,982)
-------------------------------------------------------------- ------------------- ------------------ ------------------
$ 8,547,291 $ 7,701,515 $ 6,786,457
------------------- ------------------ ------------------
</TABLE>
Page 38
<PAGE>
Indebtedness
Long-term debt consists of the following (borrowings are unsecured unless
indicated):
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
Albertson's, Inc.
Commercial paper $ 326,425 $ 283,304 $ 328,996
Bank Line 173,834
Medium-term notes issued in
1998,average interest rate of
6.46%, due 2013 through 2028 317,000
Medium-term notes issued in 1997,
average interest rates of 6.81%
and 6.81%, respectively, due 2007
through 2027 200,000 200,000
7.75% debentures due June 2026 200,000 200,000 200,000
6.375% notes due June 2000 200,000 200,000 200,000
Medium-term notes issued in 1993,
average interest rates of 6.14%,
5.92% and 5.92% 89,650 175,075 175,075
Industrial revenue bonds, average
interest rates of 6.0%, 5.96% and 5.96% 13,515 14,230 14,860
Secured mortgage note and other
Notes payable 13,999 3,552 3,748
American Stores Company, Inc.
7.5% Debentures due 2037 200,000 200,000
8.0% Debentures due 2026 350,000 350,000 350,000
7.9% Debentures due 2017 100,000 100,000
7.4% Notes due 2005 200,000 200,000 200,000
Medium Term Notes--fixed interest
rates due 1999 through 2028--
average interest rates 7.3%, 7.9%
and 7.9%, respectively 295,000 200,000 250,000
9-1/8% Notes due 2002 249,461 249,320 249,191
Revolving credit facilities--
variable interest rates,
effectively due 2002 average
interest rates 5.8%, 5.9% and
5.7%, respectively 325,000 512,000 957,000
Lines of credit and commercial
paper-- variable interest rates,
effectively due 2002--average
interest rates 5.7%5.9% and 5.6%,
respectively 1,218,966 945,899 183,000
Notes due 2004--average interest
rate 6.3% 200,000 200,000
Other bank borrowings--due 2000--
average interest rates 6.6%, 6.6%
and 6.6%, respectively 75,000 75,000 75,000
9.8% note 160,000
10.6% note, due in 2004 93,337 108,893 108,893
Other--due through 2001 50,343 31,505 2,988
Debt Secured by Real Estate--
fixed interest rates--due through 2014 average
interest rates 13.4%, 13.4%
and 13.3%, respectively 63,733 69,548 77,365
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
4,955,263 4,318,326 3,536,116
Current maturities (49,871) (178,918) (57,678)
- ------------------------------------------------------------------- -------------------- -------------------- -------------------
$ 4,905,392 $ 4,139,408 $ 3,478,438
-------------------- -------------------- -------------------
</TABLE>
Page 39
<PAGE>
Albertson's Debt
The Company has in place a $600 million commercial paper program. Interest
rates on the outstanding commercial paper borrowings as of January 28, 1999,
ranged from 4.82% to 4.93% with an effective weighted average rate of 4.86%. As
of January 28, 1999, Albertson's had outstanding borrowings under bank lines of
credit of approximately $174 million. Interest on these borrowings ranged from
5.38% to 5.41% with an effective weighted average rate of 5.40%. Albertson's has
established the necessary credit facilities, through its revolving credit
agreement, to refinance the commercial paper and bank line borrowings on a
long-term basis. These borrowings have been classified as noncurrent because it
is the Company's intent to refinance these obligations on a long-term basis.
During 1998 the Company issued a total of $317 million in medium-term
notes under a $500 million shelf registration statement filed with the
Securities and Exchange Commission (SEC) in December 1997. Medium-term notes of
$84 million issued in February 1998 mature at various dates between February
2013 and February 2028, with interest paid semiannually at rates ranging from
6.34% to 6.57%. Medium-term notes of $77 million issued in April 1998 mature in
April 2028, with interest paid semiannually at rates ranging from 6.10% to
6.53%. Medium-term notes of $156 million issued in June 1998 mature in June
2028, with interest paid semiannually at a rate of 6.63%.
In July 1997 the Company issued $200 million of medium-term notes under a
shelf registration statement filed with the SEC in May 1996. The notes mature at
various dates between July 2007 and July 2027. Interest is paid semiannually at
rates ranging from 6.56% to 7.15%.
In June 1996 the Company issued $200 million of 7.75% debentures under a
shelf registration statement filed with the SEC in May 1996. Interest is paid
semiannually.
In June 1995 the Company issued $200 million of 6.375% notes under a shelf
registration statement filed with the SEC in 1992. Interest is paid
semiannually.
The medium-term notes issued in 1993 mature in March 2000. Interest is
paid semiannually at rates ranging from 6.03% to 6.28%.
The industrial revenue bonds are payable in varying annual installments
through 2011, with interest paid semiannually at rates ranging from 4.60% to
6.95%.
The Company has pledged real estate with a cost of $10.8 million as
collateral for a mortgage note which is payable semiannually, including interest
at a rate of 16.5%. The note matures from 1999 to 2013.
Medium-term notes of $30 million due July 2027 contain a put option which
would require the Company to repay the notes in July 2007 if the holder of the
note so elects by giving the Company a 60-day notice. Medium-term notes of $50
million due April 2028 contain a put option which would require the Company to
repay the notes in April 2008 if the holder of the note so elects by giving the
Company a 60-day notice.
The Company has in place a revolving credit agreement with several banks,
whereby it may borrow principal amounts up to $600 million at varying interest
rates any time prior to December 17, 2001. The agreement contains certain
covenants, the most restrictive of which requires the Company to maintain
consolidated tangible net worth, as defined, of at least $750 million.
In addition to amounts available under the revolving credit agreement, the
Company had lines of credit from banks at prevailing interest rates for $635
million at January 28, 1999, (of which approximately $174 million was
outstanding). The cash balances maintained at these banks are not legally
restricted. There were no amounts outstanding under the Company's lines of
credit as of January 29, 1998, or January 30, 1997.
Page 40
<PAGE>
On March 30, 1999, the Company entered into a revolving credit agreement
with a syndicate of banks, whereby it may borrow principal amounts up to $1.5
billion at varying interest rates any time prior to March 28, 2000, (expiration
date). At the expiration of the credit agreement and upon due notice, the
Company may extend the term for an additional 364-day period if lenders holding
at least 75% of commitments agree. The agreement also contains an option which
would allow the Company, upon due notice, to convert any outstanding amounts at
the expiration date to 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.
The Company filed a shelf registration statement with the SEC, which
became effective in February 1999, to authorize the issuance of up to $2.5
billion in debt securities. The remaining authorization of $183 million under
the 1997 shelf registration statement was rolled into the 1999 shelf
registration statement. The Company intends to use the net proceeds of any
securities sold pursuant to the 1999 shelf registration statement for retirement
of debt and general corporate purposes.
ASC Debt
The $200 million 7.5% debentures due 2037 contain a put option which will
require the Company to repay the note in 2009 if the holder of the notes so
elects by giving the Company a 60-day notice.
ASC has a $1.0 billion universal shelf registration statement of which
$500 million has been designated for ASC's Series B Medium Term Note Program. On
March 19, 1998, ASC issued $45 million of 6.5% notes due March 20, 2008, under
the outstanding Series B Medium Term Note Program. On March 30, 1998, ASC issued
an additional $100 million of 7.1% notes due March 20, 2028, under the same
program. Proceeds were used to refinance short-term debt and for general
corporate purposes. At year-end 1998, ASC had $855 million available under the
universal shelf registration statement.
ASC has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, ASC entered into a $300 million revolving credit agreement with five
financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. Both revolving credit
facilities terminated on the date of consummation of the Merger. At year-end
1998, ASC had $325 million of debt outstanding under the $1.5 billion credit
facility, $993 million outstanding under the commercial paper program, and $226
million outstanding under uncommitted bank lines, leaving unused committed
borrowing capacity of $256 million.
During 1997 ASC entered into a $300 million five-year LIBOR basket swap.
The agreement diversifies the indices used to determine the interest rate on a
portion of ASC's variable rate debt by providing for payments based on foreign
LIBOR indices which are reset every three months and also provides for a maximum
interest rate of 8.0%. The Company recognized no income or expense in 1998
related to this swap. As of year-end 1998, the estimated fair value of the
agreement based on market quotes was a loss of $5.3 million.
On December 15, 1997, a $100 million treasury rate lock agreement was
entered into for the purpose of hedging the interest rate on a portion of the
debt ASC issued in 1998 under a universal shelf registration statement. In March
1998 the treasury lock agreement was terminated in connection with the issuance
of $100 million of notes under a registration statement. The Company realized a
net loss of $1.0 million, which is being amortized over the term of the debt as
an addition to interest expense.
Page 41
<PAGE>
Interest
Net interest expense was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------- -------------------- ------------------ -------------------
<S> <C> <C> <C>
Debt $ 318,207 $ 288,072 $ 216,412
Capitalized leases 23,386 22,286 20,945
Capitalized interest (15,342) (24,931) (16,945)
- -------------------------------------------------------------- -------------------- ------------------ -------------------
Interest expense 326,251 285,427 220,412
Net bank service charges 10,138 8,199 7,245
- -------------------------------------------------------------- -------------------- ------------------ -------------------
$ 336,389 $ 293,626 $ 227,657
-------------------- ------------------ -------------------
</TABLE>
The scheduled aggregate maturities of long-term debt outstanding at January 28,
1999, are summarized as follows: $49.9 million in 1999, $460.0 million in 2000,
$537.1 million in 2001, $1,834.4 million in 2002, $119.8 million in 2003 and
$1,954.1 million thereafter.
Capital Stock
On December 2, 1996, the Board of Directors adopted a stockholder rights
plan, which was amended on August 2, 1998, and March 16, 1999, under which all
stockholders receive one right for each share of common stock held. Each right
will entitle the holder to purchase, under certain circumstances, one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, of the Company (the "preferred stock") at a price of
$160. Subject to certain exceptions, the rights will become exercisable for
shares of preferred stock 10 business days (or such later date as may be
determined by the Board of Directors) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the outstanding shares of common stock.
Under the plan, subject to certain exceptions, if any person or group as
defined by the plan, becomes the beneficial owner of 15% or more of the
outstanding common stock or takes certain other actions, each right will then
entitle its holder as defined by the plan, other than such person or group, upon
payment of the $160 exercise price, to purchase common stock (or, in certain
circumstances, cash, property or other securities of the Company) with a value
equal to twice the exercise price. The rights may be redeemed by the Board of
Directors at a price of $0.001 per right under certain circumstances. The
rights, which do not vote and are not entitled to dividends, will expire at the
close of business on March 21, 2007, unless earlier redeemed or extended by the
Board of Directors of the Company. In connection with the Merger, no person or
group became the beneficial owner of 15% or more of the common stock.
On March 18, 1998, ASC's Preferred Share Purchase Rights issued pursuant
to a rights agreement dated March 18, 1988, expired in accordance with their
terms without renewal or extension.
Since 1987, the Board of Directors of Albertson's has continuously adopted
or renewed programs under which the Company is authorized, but not required, to
purchase and retire shares of its common stock. The program adopted by the Board
of Directors on March 2, 1998, authorized the Company to purchase and retire up
to 5 million shares through March 31, 1999. On August 2, 1998, the Board of
Directors rescinded the remaining authorization in connection with the Merger.
The Company has purchased and retired an equivalent of 22.3 million shares of
its common stock for $500 million under these programs, at an average price of
$22.40 per share.
Page 42
<PAGE>
On April 8, 1997, ASC (i) repurchased 15.4 million equivalent common
shares from its former chairman, certain of his family members and charitable
trusts (the Selling Stockholders) for an aggregate price of $550 million and
(ii) sold 2.9 million equivalent common shares for net proceeds of $95.9 million
pursuant to the exercise of an over-allotment option by the underwriters in
connection with a public offering of shares by the Selling Stockholders.
In June 1996 ASC authorized a stock repurchase program (not including the
repurchase of shares from the Selling Stockholders). During 1996, 0.1 million
equivalent shares of common stock were repurchased. There were no repurchases of
common stock under the ASC repurchase program during 1998 and 1997. On August 2,
1998, ASC terminated its stock repurchase program.
Income Taxes
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- -------------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Deferred tax assets (no valuation allowances considered necessary):
Basis in fixed assets $ 75,948 $ 78,313 $ 78,803
Self-insurance reserves 199,282 234,311 276,049
Compensation and benefits 203,939 100,033 100,237
Income unearned for financial
reporting purposes 30,742 29,136 30,741
Other, net 126,560 120,986 115,913
- -------------------------------------------------------------- ------------------- ------------------- -------------------
Total deferred tax assets 636,471 562,779 601,743
- -------------------------------------------------------------- ------------------- ------------------- -------------------
Deferred tax liabilities:
Basis in fixed assets and
capitalized leases (603,570) (575,128) (602,353)
Inventory valuation (101,340) (102,852) (96,759)
Compensation and benefits (31,928) (32,063) (46,163)
Other, net (24,901) (43,967) (43,287)
- -------------------------------------------------------------- ------------------- ------------------- -------------------
Total deferred tax liabilities (761,739) (754,010) (788,562)
- -------------------------------------------------------------- ------------------- ------------------- -------------------
Net deferred tax liability $ (125,268) $ (191,231) $ (186,819)
------------------- ------------------- -------------------
</TABLE>
As a result of an acquisition that occurred during 1998, the Company has
succeeded to federal and state net operating loss carryforwards of $21.6 million
and $13.9 million, respectively, that will expire in various years through 2010.
Based on management's assessment, it is more likely than not that all of the
deferred tax assets associated with the net operating loss carryforwards will be
realized; therefore, no valuation allowance is considered necessary.
Page 43
<PAGE>
Income tax expense on continuing operations consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Current
Federal $ 536,678 $ 487,729 $ 435,146
State 72,455 61,236 64,098
- -------------------------------------------------------------- ------------------- ------------------- -------------------
609,133 548,965 499,244
- -------------------------------------------------------------- ------------------- ------------------- -------------------
Deferred:
Federal (63,047) 3,705 16,060
State (8,683) 464 3,095
- -------------------------------------------------------------- ------------------- ------------------- -------------------
(71,730) 4,169 19,155
- --------------------------------------------------------------
------------------- ------------------- -------------------
$ 537,403 $ 553,134 $ 518,399
------------------- ------------------- -------------------
</TABLE>
The reconciliations between the federal statutory tax rate and the
Company's effective tax rates are as follows:
<TABLE>
<CAPTION>
1998 Percent 1997 Percent 1996 Percent
- ------------------------------------------- ---------------- ------------ ---------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Taxes computed at
statutory rate $ 468,406 35.0 $ 472,699 35.0 $ 454,789 35.0
State income taxes net of
federal income tax
benefit 50,804 3.8 49,925 3.7 52,385 4.0
Expenses for repurchase of
major shareholder's
common stock 11,959 0.9
Goodwill amortization 23,450 1.8 21,169 1.5 21,246 1.6
Merger related stock
option charge 14,500 1.1
Tax credits (1,370) (0.1) (665) (408)
Other (18,387) (1.4) (1,953) (0.1) (9,613) (0.7)
- ------------------------------------------- ---------------- ------------ ---------------- ------------ --------------- ------------
$ 537,403 40.2 $ 553,134 41.0 $ 518,399 39.9
---------------- ------------ ---------------- ------------ --------------- ------------
</TABLE>
Stock Options and Stock Awards
The Company's stock option plans (Plans) provide for the grant of options
to purchase shares of common stock. At January 28, 1999, Albertson's had two
stock option plans in effect under which grants could be made with respect to
10,400,000 shares of the Company's common stock. Under these plans, approved by
the stockholders in 1995, options may be granted to officers and key employees,
and to directors, respectively, to purchase the Company's common stock. During
1998 the stockholders approved Albertson's, Inc., Amended and Restated 1995
Stock-Based Incentive Plan. The amendment increased the number of shares
available for issuance from 10 million to 30 million shares effective at the
consummation of the Merger. ASC also had stock option and stock awards plans
that provide for the grant of options to purchase shares of ASC common stock and
the issuance of ASC restricted stock awards. Generally, options are granted with
an exercise price at not less than 100% of the closing market price on the date
of the grant. The Company's options generally become exercisable in installments
of 20% per year on each of the fifth through ninth anniversaries of the grant
date (the first through fifth anniversaries for future grants) and have a
maximum term of 10 years. In connection with the Merger, all outstanding
Albertson's and ASC options became exercisable in accordance with the change of
control provisions included in the stock option plans and all outstanding ASC
options were converted into a right to acquire an equivalent number of Company
shares. No further options will be granted under the ASC plans. Additionally,
all restrictions lapsed with respect to all outstanding stock awards under the
ASC stock award plans.
Page 44
<PAGE>
Variable Accounting Treatment for Option Plans
Stock options and certain shares of restricted stock granted under ASC's
stock option and stock award plans automatically vest upon a change of control,
which is defined in plans adopted prior to June 1997 (Pre-1997 ASC Plans) as
stockholder approval of the Merger or, for options granted under the Company's
1997 Stock Option and Stock Award Plan and the 1997 Stock Plan for Non-Employee
Directors (1997 Plans), upon the later of stockholder approval or regulatory
approval of the Merger. In addition to the conversion of ASC options into rights
to acquire shares of Company Common Stock, option holders had the right (limited
stock appreciation right or LSAR), during an exercise period of up to 60 days
after the occurrence of a change of control (but prior to consummation of the
Merger), to elect to surrender all or part of their options in exchange for
shares of Albertson's Common Stock having a value equal to the excess of the
change of control price over the exercise price (which shares were deliverable
upon the Merger). The change of control price is defined as the higher of (i)
the highest reported sales price during the 60-day period ending prior to the
respective dates of the "change of control", or (ii) the price paid to
stockholders in the Merger, subject to adjustment in both cases if the exercise
period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998, by ASC's
stockholders accelerated the vesting of 6.4 million equivalent stock options
granted under Pre-1997 ASC Plans (approximately 60% of ASC's outstanding stock
options) and permitted the holders of these options to exercise LSARs. The
exercisability of 6.4 million LSARs resulted in ASC recognizing a $195.3 million
merger related stock option charge during the fourth fiscal quarter of 1998.
This charge was recorded based on the difference between the average equivalent
option exercise price of $30.40 and the average market price at measurement
dates of $60.78. Of the 6.4 million equivalent options, 4.0 million were
exercised using the LSAR feature, 1.0 million were exercised without using the
LSAR, and 1.4 million equivalent shares reverted back to fixed price options due
to the expiration of the LSAR on January 10, 1999.
The actual change of control price used to measure the value of the 4.0
million exercised LSARs was not determinable until the date of Merger
consummation. Additional non cash charges or income were recognized in each
period subsequent to November 12, 1998, through the Merger consummation based on
fluctuations in the change of control price.
LSARs relating to the approximately 4.1 million equivalent stock options
issued under the 1997 ASC Plans became exercisable upon regulatory approval of
the Merger in the second quarter of fiscal 1999, with compensation recognized in
that quarter.
Key Executive Equity Program
In 1997, ASC established the Key Executive Equity Program (KEEP), a
stock-based management incentive program. A total of approximately 8.4 million
equivalent stock options were granted to 169 ASC officers in connection with the
KEEP with an equivalent exercise price of $35.71 to $39.48 per share. The KEEP
involves the grant of market-priced stock options that would ordinarily have
vested on the fifth anniversary of the grant date but which vest on an
accelerated basis with respect to one-half of the grant if minimum stock
ownership requirements are satisfied, and with respect to the other half of the
grant if the ownership requirements are met and the Company achieves annual
performance goals. For participants satisfying the minimum stock ownership
requirements, all unvested shares became vested under the aforementioned change
of control provisions at the date of the Merger.
Page 45
<PAGE>
To assist the KEEP participants in meeting the stock ownership
requirement, ASC issued full recourse interest bearing stock purchase loans to
18 participants to acquire additional shares of ASC stock. The stock purchased
by the participants was purchased on the open market. The purchase loans have a
maturity date of April 1, 2002, and accrue interest at 8.5%, reset annually at
the then current prime rate. Outstanding loan balances at January 28, 1999,
totaled $1.9 million.
A summary of shares reserved for outstanding options as of the fiscal
year end, changes during the year and related weighted average exercise price is
presented below (shares in thousands, all ASC amounts included based upon the
conversion ratio of 0.63 to 1):
<TABLE>
<CAPTION>
January 28, 1999 January 29, 1998 January 30, 1997
Shares Price Shares Price Shares Price
- --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 16,527 $ 32.74 7,856 $ 24.08 6,243 $ 20.17
Granted
ABS 24 45.94 1,524 45.48 790 35.14
ASC equivalent 135 39.40 8,322 36.73 1,709 28.43
Exercised
Cash (l,866) 23.52 (782) 15.46 (545) 11.81
LSARs (3,992) 31.79
Forfeited (839) 32.11 (393) 28.09 (341) 19.42
- --------------------------------------------- -------------- ------------- -------------- -------------- ------------- ------------
Outstanding at end of year 9,989 $ 35.01 16,527 $ 32.74 7,856 $ 24.08
-------------- ------------- -------------- -------------- ------------- ------------
</TABLE>
As of January 28, 1999, there were 7,123,000 shares of Company common stock
reserved for the granting of additional options. The following table
summarizes options outstanding and options exercisable as of January 28,
1999, and the related weighted average remaining contractual life (years)
and weighted average exercise price (shares in thousands):
<TABLE>
<CAPTION>
Albertson's options Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------------
Shares Remaining Shares
Option Price per Share Outstanding Life Price Exercisable Price
- ------------------------------------- ------------------ ---------------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 8.69 to $ 13.56 84 0.9 $ 13.28 52 $ 13.54
16.56 to 24.31 702 3.0 19.09 233 18.40
25.13 to 35.00 2,247 6.6 31.54 99 27.96
39.75 to 45.94 1,511 8.1 45.61 67 43.91
- -------------------------------------
------------------ ---------------- ---------------- --------------------- -----------------
$ 8.69 to $ 45.94 4,544 6.5 $ 33.96 451 $ 23.73
------------------ ---------------- ---------------- --------------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
ASC equivalent options Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------------------
Shares Remaining Shares
Option Price per Share Outstanding Life Price Exercisable Price
- ------------------------------------- ------------------ ---------------- ---------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 13.84 to $ 19.89 290 2.8 $ 18.79 290 $ 18.79
28.43 to 28.43 342 5.5 28.43 343 28.43
35.71 to 39.48 4,813 7.1 37.44 1,152 36.87
- -------------------------------------
------------------ ---------------- ---------------- --------------------- -----------------
$ 13.84 to $ 39.48 5,445 6.8 $ 35.89 1,785 $32.32
------------------ ---------------- ---------------- --------------------- -----------------
</TABLE>
Page 46
<PAGE>
The weighted average fair value at date of grant for Albertson's options
granted during 1998, 1997 and 1996 was $17.14, $15.26 and $10.74 per option,
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Expected life (years) 8.0 6.5 7.0
Risk-free interest rate 5.74% 5.92% 6.24%
Volatility 26.70 26.53 22.06
Dividend yield 1.48 1.41 1.70
</TABLE>
The weighted average fair value at date of grant for options granted by ASC
during 1998, 1997 and 1996 was $11.86, $11.58 and $6.43 per equivalent option,
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Expected life (years) 6.5 7.0 4.0
Risk-free interest rate 4.70% 6.60% 6.10%
Volatility 21.20 21.20 21.00
Dividend yield 1.80 1.80 1.90
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost was recognized at the date of
grant for the stock options issued in the prior three years. Had compensation
cost been determined based on the fair value at the grant date consistent with
the provisions of this statement, the Company's pro forma net earnings and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net earnings:
As reported $ 800,897 $ 797,434 $ 781,000
Pro forma 914,335 782,302 775,058
Basic earnings per share:
As reported 1.91 1.89 1.79
Pro forma 2.16 1.85 1.78
Diluted earnings per share:
As reported 1.90 1.88 1.79
Pro forma 2.14 1.85 1.77
</TABLE>
The 1998 pro forma net income of $914.3 million resulted from reported
net income of $800.9 million, less the 1998 pro forma after-tax compensation
expense of $19.3 million and the elimination of the merger related stock option
charge of $195.3 million, less the related tax effects of $62.6 million. The pro
forma effect on net earnings is not representative of the pro forma effect on
net earnings in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995.
Long Term Incentive Plans
During 1997 ASC modified the ASC Long Term Incentive Plan (LTIP) for
1996-1998 to provide participants with the option to receive shares of
restricted stock in lieu of cash as originally provided. The number of shares
issued to participants electing to receive shares of stock was based on the
projected value of the LTIP pay-out. The 116,362 equivalent shares issued under
the 1996-1998 LTIP vested on April 1, 1999.
Page 47
<PAGE>
Performance Incentive Program
The 1998 Performance Incentive Program provided certain of the ASC key
executives an incentive award of shares of two-year restricted stock if
certain ASC performance objectives were attained for the 1998 fiscal year. ASC
exceeded its annual performance goal for 1998 and awards under this program
amounted to approximately 132,000 equivalent shares. The shares, which would
have fully vested at April 1, 2001, vested in connection with the Merger.
Stock Plan for Non-Employee Directors
During 1997 ASC shareholders approved the 1997 Stock Plan for
Non-Employee Directors (Directors' Plan), which provided for: i) the grant of
1,260 equivalent shares annually of common stock, ii) the grant on an annual
basis of stock options to acquire 756 equivalent shares of common stock to
each participant who satisfies the Minimum Stock Ownership Requirement, and
iii) the one time issuance of common stock (108,990 equivalent shares in
total) to compensate such directors for their respective interests in the ASC
Non-Employee Directors' Retirement Plan (Retirement Stock), which was
terminated concurrently with the adoption of the ASC Directors' Plan. Change
of control provisions caused Retirement Stock restrictions to lapse and the
options to vest in connection with the Merger.
Employee Stock Purchase Plan
The ASC Employee Stock Purchase Plan (ESPP), which began January 1, 1996,
enabled eligible employees of the Company to subscribe for shares of common
stock on quarterly offering dates at a purchase price which was the lesser of
85% of the fair market value of the shares on the first day or the last day
of the quarterly offering period. For financial reporting purposes, the
discount of 15% is treated as equivalent to the cost of issuing stock. During
1998 employees contributed $15.2 million to the ESPP program and 0.5 million
equivalent shares were issued. Since the ESPP's inception, employees have
contributed $45.9 million and 1.7 million equivalent shares have been issued.
Purchases of stock through ESPP were suspended following the third quarter
1998 purchases due to the pending Merger.
Employee Benefit Plans
Substantially all employees working over 20 hours per week are covered
by retirement plans. Union employees participate in multi-employer retirement
plans under collective bargaining agreements. The Company sponsors two funded
defined benefit plans, a defined contribution plan and supplemental
retirement plans for certain executive groups.
The Albertson's Salaried Employees Pension Plan and Albertson's
Employees Corporate Pension Plan, which are funded, qualified, defined
benefit, noncontributory plans for eligible Albertson's employees who are 21
years of age with one or more years of service and (with certain exceptions)
are not covered by collective bargaining agreements. Benefits paid to
retirees are based upon age at retirement, years of credited service and
average compensation. The Company's funding policy for these plans is to
contribute the larger of the amount required to fully fund the Plan's current
liability or the amount necessary to meet the funding requirements as defined
by the Internal Revenue Code.
The Company also sponsors an unfunded Executive Pension Makeup Plan.
This plan is nonqualified and provides certain key employees defined pension
benefits which supplement those provided by the Company's other retirement
plans.
Page 48
<PAGE>
Net periodic cost for defined benefit plans is determined using
assumptions as of the beginning of each year. The projected benefit
obligation and related funded status is determined using assumptions as of
the end of each year. Assumptions used at the end of each year for the
Company-sponsored defined benefit pension plans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Weighted-average discount rate 6.25% 6.60% 7.50%
Annual salary increases 4.50-4.95 4.50-5.00 4.50-5.00
Expected long-term rate of
return on assets 9.50 9.50 9.50
</TABLE>
Net periodic benefit cost for Company-sponsored defined benefit pension
plans was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------- -------------------------- ------------------------------- ------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $ 41,627 $ 26,776 $ 24,138
Interest cost on projected
benefit obligations 30,164 23,174 20,095
Expected return on assets (42,263) (34,118) (30,600)
Amortization of transition
asset (6) (6) (6)
Amortization of prior
service cost 944 944 944
Recognized net actuarial
loss (gain) 2,605 (145) 39
------------------------------------------- -------------------------- ------------------------------- ------------------------
$ 33,071 $ 16,625 $ 14,610
-------------------------- ------------------------------- ------------------------
</TABLE>
Page 49
<PAGE>
The following table sets forth the funded status of the
Company-sponsored defined benefit pension plans:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- --------------------------------------------------------------- --------------------- -------------------- -------------------
<S> <C> <C> <C>
Change in projected benefit obligation:
Beginning of year benefit obligation $ 411,983 $ 293,842 $ 269,645
Service cost 41,627 26,776 24,138
Interest cost 30,164 23,174 20,095
Actuarial loss (gain) 72,195 75,565 (12,716)
Benefits paid (9,419) (7,374) (7,320)
- --------------------------------------------------------------- --------------------- -------------------- -------------------
End of year benefit obligation 546,550 411,983 293,842
- --------------------------------------------------------------- --------------------- -------------------- -------------------
Change in plan assets:
Plan assets at fair value at
beginning of year 414,532 354,806 321,758
Actual return on plan assets 96,200 56,700 36,295
Employer contributions 47,570 10,400 4,073
Benefit payments (9,419) (7,374) (7,320)
- --------------------------------------------------------------- --------------------- -------------------- -------------------
Plan assets at fair value at end of
year 548,883 414,532 354,806
- --------------------------------------------------------------- --------------------- -------------------- -------------------
Funded status 2,333 2,549 60,964
Unrecognized net loss (gain) 45,560 29,922 (23,205)
Unrecognized prior service cost 3,539 4,483 5,427
Unrecognized net transition liability 548 542 536
Additional minimum liability (3,747) (2,612) (1,080)
- ---------------------------------------------------------------
--------------------- -------------------- -------------------
Net prepaid pension cost $ 48,233 $ 34,884 $ 42,642
--------------------- -------------------- -------------------
Prepaid pension cost included with other
assets $ 63,822 $ 47,559 $ 52,497
Accrued pension cost included with other
long-term liabilities (15,589) (12,675) (9,855)
- ---------------------------------------------------------------
--------------------- -------------------- -------------------
Net prepaid pension cost $ 48,233 $ 34,884 $ 42,642
--------------------- -------------------- -------------------
</TABLE>
The following table summarizes the Company-sponsored defined benefit
pension plans which have projected benefit obligations in excess of plan assets
and the accumulated benefit obligation of the unfunded makeup plan in which the
accumulated benefit obligation exceeded plan assets:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- --------------------------------------------------------------- --------------------- -------------------- -------------------
<S> <C> <C> <C>
Projected benefit obligation in excess of plan assets:
Projected benefit obligation $ 18,950 $ 240,869 $ 11,761
Fair value of plan assets 217,743
Accumulated benefit obligation in excess of plan assets:
Accumulated benefit obligation 15,589 12,675 9,855
</TABLE>
Assets of the two funded Company defined benefit pension plans are
invested in directed trusts. Assets in the directed trusts are invested in
common stocks (including $68.0 million, $52.4 million and $38.4 million of the
Company's common stock at January 28, 1999, January 29, 1998, and January 30,
1997, respectively), U.S. Government obligations, corporate bonds, international
equity funds, real estate and money market funds.
Page 50
<PAGE>
The Company sponsors two tax-deferred savings plans which are salary
deferral plans pursuant to Section 401(k) of the Internal Revenue Code. The
plans cover employees meeting age and service eligibility requirements, except
those represented by a labor union, unless the collective bargaining agreement
provides for participation. All contributions to the Company sponsored 401(k)
plan for Albertson's employees are determined and made by the employees and the
Company incurs no material costs in connection with this plan. The Company also
sponsors and contributes to a defined contribution retirement plan, American
Stores Retirement Estates (ASRE). This plan was authorized by the ASC Board of
Directors for the purpose of providing retirement benefits for employees of ASC
and its subsidiaries. Contributions to ASRE are made at the discretion of the
Board of Directors.
The Company also contributes to various plans under industrywide
collective bargaining agreements, primarily for defined benefit pension plans.
Total contributions to these plans were $99.7 million for 1998, $94.4 million
for 1997 and $120.7 million for 1996.
Retirement plans expense was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------ -------------------- ----------------- ----------------
<S> <C> <C> <C>
Defined benefit pension plans $33,071 $16,625 $14,610
ASRE defined contribution plan 92,966 93,342 88,106
Multi-employer plans 99,702 94,438 120,722
- ------------------------------------------------------------------
-------------------- ----------------- ----------------
$ 225,739 $ 204,405 $ 223,438
-------------------- ----------------- ----------------
</TABLE>
Most retired employees of the Company are eligible to remain in its health
and life insurance plans. Retirees who elect to remain in the
Albertson's-sponsored plans are charged a premium which is equal to the
difference between the estimated costs of the benefits for the retiree group and
a fixed contribution amount made by the Company. ASC provides certain health
care benefits to eligible retirees of certain defined employee groups under two
unfunded plans, a defined dollar and a full coverage plan. The net periodic
postretirement benefit cost was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------ -------------------- ----------------- ----------------
<S> <C> <C> <C>
Service cost $ 2,568 $ 2,400 $ 1,975
Interest cost 4,761 4,954 4,885
Amortization of prior service cost 50
Amortization of unrecognized gain (813) (480) (767)
- ------------------------------------------------------------------
-------------------- ----------------- ----------------
$ 6,566 $ 6,874 $ 6,093
-------------------- ----------------- ----------------
</TABLE>
Page 51
<PAGE>
The following table sets forth the funded status of the Company-sponsored
postretirement health and life insurance benefit plans:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- ----------------------------------------------------------- --------------------- -------------------- -------------------
<S> <C> <C> <C>
Change in accumulated benefit obligation:
Beginning of year benefit
obligation $ 71,576 $ 67,036 $ 64,157
Service cost 2,568 2,400 1,975
Interest cost 4,761 4,954 4,885
Plan participants' contributions 1,692 1,396 1,237
Plan amendments 496
Actuarial gain (6,143) 1,152 204
Benefits paid (5,901) (5,362) (5,422)
- ----------------------------------------------------------- --------------------- -------------------- -------------------
End of year benefit obligation 69,049 71,576 67,036
- ----------------------------------------------------------- --------------------- -------------------- -------------------
Plan assets activity:
Employer (excess) contributions 4,209 3,966 4,185
Plan participants' contributions 1,692 1,396 1,237
Benefit payments (5,901) (5,362) (5,422)
- ----------------------------------------------------------- --------------------- -------------------- -------------------
Funded status (69,049) (71,576) (67,036)
Unrecognized net gain (15,615) (10,285) (11,917)
Unrecognized prior service cost 446
- ----------------------------------------------------------- --------------------- -------------------- -------------------
Accrued postretirement benefit
obligations included with other
long-term liabilities $ (84,218) $ (81,861) $ (78,953)
- -----------------------------------------------------------
--------------------- -------------------- -------------------
Discount rates as of end of year 6.25-7.0% 6.6-7.5% 7.5%
--------------------- -------------------- -------------------
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the ASC plans for 1999. For
the ASC full coverage plan, the rate was assumed to decrease to 6% for 2000 and
remain at that level thereafter. For the ASC defined dollar plan, no future
increases in the subsidy level was assumed. Annual rates of increases in health
care costs are not applicable in the calculation of the Albertson's benefit
obligation because Albertson's contribution is a fixed amount per participant.
A prior service cost is caused by plan changes. ASC amended the plan to
reduce the first eligibility age for retirement from age 57 (with 10 years of
full-time service or 20 years of part-time service) to age 54 (with 10 years of
full-time service or 20 years of part-time service). The cumulative effect of
this plan change results in an increase in the accumulated benefit obligation of
$496.
ASC has multiple nonpension postretirement benefit plans. With the
exception of the plans for grandfathered retirees, the health care plans are
contributory, with participants' contributions adjusted annually. The accounting
for the health care plans anticipates that the Company will not increase its
contribution for health care benefits for non-grandfathered retirees in future
years.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects on the ASC plans:
One-Percentage-Point
<TABLE>
<CAPTION>
Increase Decrease
- ---------------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Effect on total of service and interest cost components $ 139 $ (123)
Interest cost 1,992 (1,763)
- ---------------------------------------------------------------------------------------- ----------------- -----------------
</TABLE>
Page 52
<PAGE>
Since the subsidy levels for the Albertson's and the ASC defined dollar
plans are fixed, a trend increase or decrease has no impact on that portion of
the obligation.
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" requires employers to recognize an
obligation for benefits provided to former or inactive employees after
employment but before retirement. The Company is self-insured for certain of its
employees' short-term and long-term disability plans which are the primary
benefits paid to inactive employees prior to retirement. Following is a summary
of the obligation for postemployment benefits included in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- ------------------------------------------------------------ --------------------- -------------------- ------------------
<S> <C> <C> <C>
Included with salaries and related
liabilities $ 7,014 $ 6,661 $ 4,620
Included with other long-term
liabilities 41,546 33,567 30,927
- ------------------------------------------------------------
--------------------- -------------------- ------------------
$ 48,560 $ 40,228 $ 35,547
--------------------- -------------------- ------------------
</TABLE>
The Company also contributes to various plans under industrywide
collective bargaining agreements which provide for health care benefits to both
active employees and retirees. Total contributions to these plans were $270.1
million for 1998, $288.1 million for 1997 and $331.0 million for 1996.
Employment Contracts
During 1994 and 1995 ASC entered into Key Executive Agreements with 17 of
ASC's key executive officers . The agreements, as amended, expire on October 31,
2001, and are automatically renewed for subsequent one-year terms, unless they
are individually terminated by the Company at least two years prior to the end
of the term. Each agreement contains terms of employment and provides the
officers with a special long-range payout. The executives are entitled to
receive an annual payment for a period of 20 years beginning at age 57 or upon
termination of employment, whichever occurs later. The payout is calculated as a
percentage of the executive's average target compensation objective during the
last two years of his or her employment under the Agreement. The payout ranges
from 9% to 40% based on years of service with the Company. Under change of
control provisions activated by the Merger, the executives became fully vested
in the benefit and in a severance benefit equal to three times annual
compensation, as defined, plus a gross up payment for excise taxes if the
employee is terminated or constructively terminated, as defined, without cause.
The payout will be forfeited if the executive enters into competition with the
Company. ASC also entered into employment agreements with additional senior
officers that have change of control provisions activated by the Merger that
provide for a severance benefit of two times to three times compensation, as
defined, plus a gross up payment for excise taxes if the employee is terminated
or constructively terminated without cause. As of January 28, 1999, the Company
has a total of 42 employment agreements outstanding.
Page 53
<PAGE>
ASC also entered into an employment agreement with a key executive officer
in 1994 which, as amended, expires on October 31, 2002, and is automatically
renewed for subsequent two-year terms unless terminated by the Company at least
three years prior to the end of the term. The agreement provides for a payout
that vests over an eight-year period which, if fully vested, would equal $710
per annum adjusted for inflation. Payments will be made over the life of the
executive and his spouse. The payout will be forfeited if the executive enters
into competition with the Company. At the date of Merger, the foregoing
agreement was superseded by a Termination and Consulting Agreement (the
Consulting Agreement) between the executive, ASC and the Company. The Consulting
Agreement provides, among other things, for a lump sum payment of the present
value of the payout, which at January 28, 1999, was estimated at $11.0 million
based upon an assumed discount rate of 7.75%.
Leases
The Company leases a portion of its real estate. The typical lease period
is 20 to 30 years and most leases contain renewal options. Exercise of such
options is dependent on the level of business conducted at the location. In
addition, the Company leases certain equipment. Some leases contain contingent
rental provisions based on sales volume at retail stores or miles traveled for
trucks.
Capitalized leases are calculated using interest rates appropriate at the
inception of each lease. Following is an analysis of the Company's capitalized
leases:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- ----------------------------------------------------------- ---------------------- ------------------- ---------------------
<S> <C> <C> <C>
Real estate and equipment $ 350,025 $ 371,076 $ 363,829
Accumulated amortization (170,106) (194,004) (193,587)
- -----------------------------------------------------------
---------------------- ------------------- ---------------------
$ 179,919 $ 177,072 $ 170,242
---------------------- ------------------- ---------------------
</TABLE>
Future minimum lease payments for noncancelable operating leases which
exclude the amortization of acquisition-related fair value adjustments, related
subleases and capital leases at January 28, 1999, are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Subleases Leases
- ---------------------------------------------------------------- --------------------- -------------------- ----------------
<S> <C> <C> <C>
1999 $ 291,832 $ (32,495) $ 42,250
2000 277,236 (30,000) 40,288
2001 261,277 (25,452) 38,225
2002 243,444 (20,872) 29,498
2003 228,675 (15,026) 27,482
Remainder 1,966,037 (64,249) 287,096
- ---------------------------------------------------------------- ----------------
--------------------- --------------------
Total minimum obligations (receivables) $ 3,268,501 $(188,094) 464,839
--------------------- --------------------
Interest (244,550)
- ---------------------------------------------------------------- --------------------- -------------------- ----------------
Present value of net minimum obligations 220,289
Current portion (18,118)
- ---------------------------------------------------------------- --------------------- --------------------
----------------
Long-term obligations at January 28, 1999 $ 202,171
----------------
</TABLE>
The Company is contingently liable as a guarantor of certain leases that
were assigned to third parties in connection with various store closures and
dispositions. The Company believes the likelihood of a significant loss from
these agreements is remote because of the wide dispersion among third parties
and remedies available to the Company should the primary party fail to perform
under the agreements.
Page 54
<PAGE>
Rent expense under operating leases, excluding the amortization of
acquisition-related fair value adjustments of $13.5 million in 1998, $13.9
million in 1997 and $14.2 million in 1996, was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------- ---------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Minimum rent $ 308,974 $ 288,151 $ 266,319
Contingent rent 24,947 26,198 28,460
- ---------------------------------------------- ---------------------------- -------------------------- ---------------------------
333,921 314,349 294,779
Sublease rent (59,510) (48,711) (39,161)
- ----------------------------------------------
---------------------------- -------------------------- ---------------------------
$ 274,411 $ 265,638 $ 255,618
---------------------------- -------------------------- ---------------------------
</TABLE>
Financial Instruments
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash equivalents,
receivables and interest rate swaps. The Company limits the amount of credit
exposure to each individual financial institution and places its temporary cash
into investments of high credit quality. Concentrations of credit risk with
respect to receivables are limited due to their dispersion across various
companies and geographies. The counterparties to the interest rate swaps are
highly-rated financial institutions.
The estimated fair values of cash and cash equivalents, accounts
receivable, accounts payable, short-term debt and commercial paper borrowings
approximate their carrying amounts. Substantially all of the fair values were
estimated using quoted market prices. The estimated fair values and carrying
amounts of outstanding debt (excluding commercial paper) were as follows (in
millions):
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1999
- -------------------------------------- ------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Fair value $ 3,955.7 $ 3,507.4 $ 3,306.3
Carrying amount 3,628.4 3,231.5 3,206.0
</TABLE>
Environmental
The Company has identified environmental contamination sites related
primarily to underground petroleum storage tanks and ground water contamination
at various store, warehouse, office and manufacturing facilities (related to
current operations as well as previously disposed of businesses). 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. Undiscounted reserves have
been established for each environmental contamination site unless an unfavorable
outcome is remote. Although the ultimate outcome and expense of environmental
remediation is uncertain, the Company believes that required remediation and
continuing compliance with environmental laws, in excess of current reserves,
will not have a material adverse effect on the financial condition of the
Company. Charges against earnings for environmental remediation were not
material in 1998, 1997 or 1996.
Page 55
<PAGE>
Legal Proceedings
Three civil lawsuits filed in September 1996 as purported statewide
class actions in Washington, California and Florida and two civil lawsuits filed
in April 1997 in federal court in Boise, Idaho, as purported multi-state class
actions (including the remaining states in which the Company operated at the
time) have been brought against the Company raising various issues that include:
(i) allegations that the Company has a widespread practice of permitting its
employees to work "off-the-clock" without being paid for their work and (ii)
allegations that the Company's bonus and workers' compensation plans are
unlawful. Four of these suits are being sponsored and financed by the United
Food and Commercial Workers (UFCW) International Union. The five suits have been
consolidated in Boise, Idaho. In addition, three other similar suits have been
filed as purported class actions in Colorado, New Mexico and Nevada which, in
effect, duplicate the coverage of the UFCW-sponsored suits. These three cases
have been transferred to the federal court in Boise, Idaho.
The Company is committed to full compliance with all applicable laws.
Consistent with this commitment, the Company has firm and long-standing policies
in place prohibiting off-the-clock work and has structured its bonus and
workers' compensation plans to comply with applicable law. The Company believes
that the UFCW-sponsored suits are part of a broader and continuing effort by the
UFCW and some of its locals to pressure the Company to unionize employees who
have not expressed a desire to be represented by a union. The Company intends to
vigorously defend against all of these lawsuits, and, at this stage of the
litigation, the Company believes that it has strong defenses against them.
On September 13, 1996, a class action lawsuit captioned McCampbell et
al. v. Ralphs Grocery Company, et al. was filed in the San Diego Superior Court
of the State of California against ASC and two other grocery chains operating in
southern California. The complaint alleges, among other things, that ASC and
others conspired to fix the retail price of eggs in southern California. The
Company believes it has meritorious defenses to plaintiffs claims, disputes the
accuracy of plaintiffs' damages study, and plans to vigorously defend the
lawsuit.
Although these lawsuits are subject to the uncertainties inherent in
the litigation process, based on the information presently available to the
Company, management does not expect the ultimate resolution of these actions to
have a material adverse effect on the Company's financial condition.
The Company is also involved in routine litigation incidental to
operations. 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.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. The Company has analyzed the reporting
requirements of the new standard and has determined that its operations are
within one reportable segment.
Page 56
<PAGE>
Merger, Divestitures and Related Costs
The following table compares amounts previously reported by Albertson's
and ASC prior to the Merger transaction and the combined amounts for fiscal
1998, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
Albertson's ASC Combined
---------------------------- -------------------- ----------------------- ---------------------------
<S> <C> <C> <C>
1998:
Net Revenues $ 16,005.1 $ 19,866.7 $ 35,871.8
Net Earnings 567.2 233.7 800.9
1997:
Net Revenues 14,689.5 19,138.9 33,828.4
Net Earnings 516.8 280.6 797.4
1996:
Net Revenues 13,776.7 18,678.1 32,454.8
Net Earnings 493.8 287.2 781.0
</TABLE>
In connection with the Merger, the Company entered into agreements with
the Attorney Generals 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 require 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 are ASC locations operated
primarily under the Lucky name, and 105 are Albertson's stores operated
primarily under the Albertson's name. In addition, the Company will divest 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 costs of integrating the two companies has and will result in
significant non-recurring charges and incremental expenses. These costs will
have a material effect on 1999 results of operations of the Company and may have
a significant effect on results of operations for the year 2000. The actual
timing of the costs is, in part, dependent upon the actual timing of certain
integration actions. Non-recurring charges and expenses of implementing
integration actions are estimated to total $700 million after income tax
benefits. The cash portion of these charges is estimated at approximately $300
million. When offset by the cash received from the sale of the stores required
to be divested and the net proceeds from the sale of assets that will not be
used in the combined company, the net positive cash flow is approximately $300
million. Merger related costs include the charges for administrative office
consolidation, employee severance under employment contracts and the limited
stock appreciation rights discussed under the Stock Options and Stock Awards
Note.
Page 57
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 is effective for the Company's 2001 fiscal year. The Company has
not yet completed its evaluation of this standard or its impact on the Company's
reporting requirements.
Page 58
<PAGE>
Quarterly Financial Data
<TABLE>
<CAPTION>
(Dollars in thousands
except per share data -
Unaudited) First Second Third Fourth Year
- ------------------------------ ---------------------- ------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
1998
Sales $8,720,939 $8,945,068 $8,838,215 $9,367,618 $35,871,840
Gross Profit 2,297,737 2,395,043 2,411,636 2,611,411 9,715,827
Net earnings 176,462 216,578 218,491 189,366 800,897
Earnings per share:
Basic 0.42 0.52 0.52 0.45 1.91
Diluted 0.42 0.52 0.52 0.45 1.90
- ------------------------------ ---------------------- ------------------ ---------------- ----------------- -------------------
1997
Sales $8,355,185 $8,443,683 $8,259,497 $8,770,026 $33,828,391
Gross profit 2,186,056 2,224,955 2,215,325 2,381,288 9,007,624
Net Earnings 143,491 199,397 183,680 270,866 797,434
Earnings per share:
Basic 0.33 0.47 0.44 0.65 1.89
Diluted 0.33 0.47 0.44 0.65 1.88
- ------------------------------ ---------------------- ------------------ ---------------- ----------------- -------------------
</TABLE>
Fourth quarter 1998 operating results included a pre-tax merger related stock
option charge of $195.3 million ($0.28 per share, after tax) related to the
exercisibility of 6.4 million equivalent limited stock appreciation rights due
to the approval by ASC's stockholders of the Merger Agreement.
A $24.4 million (pre-tax) charge was recorded in fiscal 1998 related to
management's decision to close 16 underperforming stores ($0.03 per share, after
tax). An initial pre-tax charge of $29.4 million was recorded in the first
quarter and a pre-tax adjustment of $5.0 million of income was recorded in the
fourth quarter.
First quarter 1997 operating results included pre-tax charges of $33.9 million
related to the sale of stock by a major shareholder and pre-tax charges of $13.4
million related to the sale of a division of ASC's communications subsidiary
(total of $0.07 per share, after tax).
Net earnings, excluding special charges and the merger related stock option
charge, in the fourth quarter has exceeded the prior three quarters in each of
the years presented due to the seasonality of the food and drug retail business
and LIFO inventory adjustments.
Page 59
<PAGE>
Five Year Summary of Financial Data
<TABLE>
<CAPTION>
(Dollars in thousands
except per share data
- unaudited) 1998 1997 1996 1995 1994
- --------------------------- ------------------ ------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Sales $35,871,840 $33,828,391 $32,454,807 $30,893,928 $30,249,747
Net earnings 800,897 797,434 781,000 781,770 745,549
Earnings per share:
Basic 1.91 1.89 1.79 1.78 1.72
Diluted 1.90 1.88 1.79 1.78 1.68
Total assets 15,131,267 13,766,605 12,608,038 11,498,875 10,653,295
Long-Term Debt and
Capitalized Lease
Obligations 5,107,563 4,332,577 3,664,898 2,837,274 2,576,425
Cash Dividends Declared
Per Share:
Albertson's, Inc. 0.68 0.64 0.60 0.52 0.44
American Stores
Company Equivalent 0.57 0.56 0.51 0.44 0.38
- ------------------------------------ --------- ------------------- -------------------- ------------------- -------------------
</TABLE>
All fiscal years consist of 52 weeks except for 1995 which consists of 53 weeks
of ASC operations and 52 weeks of Albertson's operations.
1998 operating results included a pre-tax merger related stock option charge of
$195.3 million ($0.28 per share, after tax) related to the exercisibility of 6.4
million equivalent limited stock appreciation rights due to the approval by
ASC's stockholders of the Merger Agreement and a $24.4 million (pre-tax) charge
related to management's decision to close 16 underperforming stores ($0.03 per
share, after tax).
1997 operating results included pre-tax charges of $33.9 million related to the
sale of stock by a major shareholder and pre-tax charges of $13.4 million
related to the sale of a division of ASC's communications subsidiary (total of
$0.07 per share, after tax).
1996 operating results included pre-tax charges of $100.0 million ($0.14 per
share, after tax) primarily related to re-engineering activities.
Page 60
<PAGE>
Unaudited Interim Supplemental Consolidated Financial Statements
Interim Supplemental Consolidated Earnings
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
April 29, April 30,
(In thousands except per share data) 1999 1998
- ----------------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Sales $ 9,215,287 $ 8,720,939
Cost of sales 6,712,683 6,423,202
- ----------------------------------------------------------------------- ---------------------- ----------------------
Gross profit 2,502,604 2,297,737
Selling, general and administrative expenses 2,058,148 1,902,608
Merger related stock option income 28,864
Impairment and restructuring costs 29,423
- ----------------------------------------------------------------------- ---------------------- ----------------------
Operating profit 473,320 365,706
Other (expenses) income:
Interest, net (82,031) (82,672)
Other, net 4,300 9,275
- ----------------------------------------------------------------------- ---------------------- ----------------------
Earnings before income taxes 395,589 292,309
Income taxes 157,098 115,847
- ----------------------------------------------------------------------- ---------------------- ----------------------
Net Earnings $ 238,491 $ 176,462
---------------------- ----------------------
Earnings Per Share:
Basic $ 0.57 $ 0.42
Diluted 0.56 0.42
Weighted average common shares outstanding:
Basic 420,293 418,353
Diluted 423,315 420,508
See Notes to Interim Supplemental Consolidated Financial Statements
</TABLE>
Page 61
<PAGE>
Interim Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 29,
1999 January 28,
(Dollars in thousands) (Unaudited) 1999
- -------------------------------------------------------------------------- ------------------------ -------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 116,123 $ 116,139
Accounts and notes receivable 548,570 581,625
Inventories 3,189,143 3,249,179
Prepaid expenses 163,159 106,800
Deferred income taxes 108,495 132,565
- -------------------------------------------------------------------------- ------------------------ -------------------------
Total Current Assets 4,125,490 4,186,308
Land, Buildings and Equipment, net 8,709,913 8,547,291
Goodwill, net 1,725,171 1,737,936
Other Assets 620,359 659,732
- --------------------------------------------------------------------------
------------------------ -------------------------
Total Assets $15,180,933 $15,131,267
------------------------ -------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,106,857 $ 2,186,505
Salaries and related liabilities 447,649 512,165
Taxes other than income taxes 152,934 168,920
Income taxes 160,037 49,634
Self-insurance 152,562 172,709
Unearned income 96,024 101,301
Current portion of capitalized lease
obligations 18,001 18,118
Current maturities of long-term debt 141,938 49,871
Other 114,242 91,663
- -------------------------------------------------------------------------- ------------------------ -------------------------
Total Current Liabilities 3,390,244 3,350,886
Long-Term Debt 4,828,270 4,905,392
Capitalized Lease Obligations 198,845 202,171
Self Insurance 380,193 380,893
Deferred Income Taxes 216,367 257,833
Other Long-Term Liabilities and Deferred
Credits 496,506 512,442
Stockholders' Equity:
Preferred stock - $1.00 par value;
authorized - 10,000,000 shares; designated - 3,000,000 shares of Series
A Junior Participating; issued - none
Common stock- $1.00 par value; authorized - 1,200,000,000 shares; issued -
434,703,837 shares and 434,557,800
shares, respectively 434,703 434,557
Capital in excess of par 550,811 579,403
Retained earnings 5,196,048 5,026,741
Treasury stock - 14,331,621 shares and
14,554,669 shares, respectively (511,054) (519,051)
- -------------------------------------------------------------------------- ------------------------ -------------------------
Total Stockholders' Equity 5,670,508 5,521,650
- -------------------------------------------------------------------------- ------------------------ -------------------------
Total Liabilities and Stockholders'
Equity $15,180,933 $15,131,267
------------------------ -------------------------
See Notes to Interim Supplemental Consolidated Financial Statements
</TABLE>
Page 62
<PAGE>
Interim Supplemental Consolidated Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
April 29, April 30,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 238,491 $ 176,462
provided by operating activities:
Depreciation and amortization 226,993 210,691
Merger related stock option income (28,864)
Net (gain) loss on asset sales (230) 321
Net deferred income taxes (17,396) (17,580)
Increase in cash surrender value of
Company-owned life insurance (4,300) (9,275)
Changes in operating assets and liabilities,
net of business acquisitions:
Receivables and prepaid expenses 22,685 (27,088)
Inventories 60,036 111,473
Accounts payable (79,648) (127,118)
Other current liabilities 55,201 (22,124)
Self-insurance (20,847) (21,976)
Unearned income (8,174) 17,763
Other long-term liabilities (13,029) 13,188
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Net cash provided by operating
activities 430,918 304,737
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Cash Flows From Investing Activities:
Capital expenditures (374,769) (270,979)
Business acquisitions, net of cash acquired (121,043)
Increase in other assets (6,936) (8,248)
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Net cash used in investing
activities (381,705) (400,270)
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 306,000
Payments on long-term borrowings (8,815) (122,578)
Net commercial paper activity and bank
borrowings 189,651 (79,769)
Payment on bank line borrowings (170,695)
Proceeds from stock options exercised 7,330 10,574
Cash dividends paid (66,700) (63,949)
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Net cash (used in) provided by
financing activities (49,229) 50,278
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Net decrease in cash and cash equivalents (16) (45,255)
Cash and Cash Equivalents at Beginning of Period 116,139 155,877
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Cash and Cash Equivalents at End of Period $ 116,123 $ 110,622
---------------------- ----------------------
See Notes to Interim Supplemental Consolidated Financial Statements
</TABLE>
Page 63
<PAGE>
Notes to Interim Supplemental Consolidated Financial Statements
(Unaudited)
Basis of Presentation
On August 2, 1998, Albertson's Inc. ("Albertson's" or the "Company")
and American Stores Company ("ASC") entered into a definitive merger agreement
("Merger Agreement") whereby Albertson's would acquire ASC by exchanging 0.63
share of Albertson's common stock for each outstanding share of ASC common
stock, with cash being paid in lieu of fractional shares (the "Merger") and ASC
would be merged into a wholly-owned subsidiary of Albertson's. In addition,
outstanding rights to receive ASC common stock under ASC stock option plans
would be converted into rights to receive equivalent Albertson's common stock.
ASC operates retail food and drugs stores throughout the United States.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. 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 interim supplemental 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. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These supplemental
financial statements do not extend through the date of consummation; however,
they will become the historical financial statements of the Company when the
Company issues its financial statements for the second fiscal quarter of 1999.
In the opinion of management, the accompanying unaudited interim
supplemental 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 1998 impairment charge discussed under
"Impairment - Store Closures" and the 1998 and first fiscal quarter of 1999
merger related option charges discussed under "Merger". 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 interim supplemental consolidated
financial statements be read in conjunction with the supplemental consolidated
financial statements for each of the three years in the period ended January 28,
1999.
The balance sheet at January 28, 1999, has been taken from the audited
supplemental financial statements at January 28, 1999.
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
historical financial statements of Albertson's and ASC for conformity purposes.
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. As of April 29, 1999, 13 of these stores had been closed and
management believes the 1998 charge and remaining reserve are adequate.
Page 64
<PAGE>
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 its $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 bank line
borrowings. There were no amounts outstanding under either revolving credit
agreement as of April 29, 1999.
ASC has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, ASC entered into a $300 million revolving credit agreement with five
financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. As of April 29, 1999, ASC had
$500 million of debt outstanding under the $1.5 billion credit facility, $947
million outstanding under the commercial paper program, and $208 million
outstanding under uncommitted bank lines, leaving unused committed borrowing
capacity of $145 million. Both revolving credit facilities terminated on the
effective date of consummation of the Merger.
Supplemental Cash Flow Information
Selected cash payments and noncash transactions were as follows (in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended
April 29, 1999 April 30,1998
- ----------------------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Cash payments for:
Income taxes $ 74,586 $ 45,384
Interest, net of amounts capitalized 59,134 76,192
Noncash transactions:
Tax benefits related to stock options 1,156 615
Fair market value of stock exchanged
for options and related tax
withholdings 143 313
Capitalized leases incurred 2,211 2,900
Note payable related to business
acquisition 8,000
Liabilities assumed in connection with
asset acquisition 300
</TABLE>
Merger
On August 2, 1998, the Company entered into a definitive merger
agreement with American Stores Company (ASC) which was approved by the
stockholders of Albertson's and ASC on November 12, 1998, and consummated on
June 23, 1999. The agreement provided for a business combination between the
Company and ASC in which ASC became a wholly owned subsidiary of the Company.
Under the terms of the Merger Agreement, the holders of ASC common stock were
issued 0.63 share of Albertson's, Inc., common stock in exchange for each share
of ASC common stock, with cash being paid in lieu of fractional shares, in a
transaction qualifying as a pooling of interests for accounting purposes and as
a tax-free reorganization for federal income tax purposes. The consummation of
the Merger resulted in former stockholders of ASC holding approximately 42% of
the outstanding Albertson's common stock.
Page 65
<PAGE>
The following table compares amounts previously reported by Albertson's
and ASC prior to the Merger transaction and the combined amounts for the 13
weeks ended April 29, 1999, and April 30, 1998 (in millions):
<TABLE>
<CAPTION>
Albertson's ASC Combined
- --------------------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
April 29, 1999:
Net Revenues $ 4,167.6 $ 5,047.7 $ 9,215.3
Net Earnings 137.1 101.4 238.5
April 30, 1998:
Net Revenues 3,848.2 4,872.7 8,720.9
Net Earnings 110.6 65.9 176.5
</TABLE>
In connection with the Merger Agreement, stock options and certain
shares of restricted stock granted under ASC's stock option and stock award
plans automatically vest upon a change of control, which is defined in plans
adopted prior to June 1997 (Pre-1997 Plans) as stockholder approval of the
Merger or, for options granted under the Company's 1997 Stock Option and Stock
Award Plan and the 1997 Stock Plan for Non-Employee Directors (1997 Plans), upon
the later of stockholder approval or regulatory approval of the Merger. In
addition to the conversion of ASC options into rights to acquire shares of
Company common stock, option holders had the right (limited stock appreciation
right or LSAR), during an exercise period of up to 60 days after the occurrence
of a change of control (but prior to consummation of the Merger), to elect to
surrender all or part of their options in exchange for shares of Albertson's
common stock having a value equal to the excess of the change of control price
over the exercise price (which shares were deliverable upon the Merger). The
change of control price is defined as the higher of (i) the highest reported
sales price during the 60-day period ending prior to the respective dates of the
"change of control", or (ii) the price paid to stockholders in the Merger,
subject to adjustment in both cases if the exercise period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998, by ASC's
stockholders accelerated the vesting of 6.4 million equivalent stock options
granted under Pre-1997 ASC Plans (approximately 60% of ASC's outstanding stock
options) and permitted the holders of these options to exercise LSARs. The
exercisability of 6.4 million LSARs resulted in ASC recognizing a $195.3 million
merger related stock option charge (pre-tax) during the fourth fiscal quarter of
1998. This charge was recorded based on the difference between the average
equivalent option exercise price of $30.40 and the average market price at
measurement dates of $60.78. Of the 6.4 million equivalent options, 3.9 million
were exercised using the LSAR feature, 1.1 million were exercised without using
the LSAR, and at expiration of the LSAR on January 10, 1999, 1.4 million
equivalent options reverted back to fixed price options at an average exercise
price of $32.00.
In the first quarter of 1999 a market price adjustment of $28.9 million
of pre-tax income was recorded to reflect a decline in the relevant stock price
at the end of the first fiscal quarter relative to the 3.9 million exercised
LSARs. The actual change of control price used to measure the value of these
exercised LSARs was not determinable until the date the Merger was consummated.
Upon Merger consummation, the change of control price was $53.77 per share,
resulting in the issuance of approximately 1.7 million Company shares.
LSARs relating to the approximately 4.0 million equivalent stock
options issued under the 1997 ASC Plans became exercisable upon regulatory
approval of the Merger, which will result in recognition of an additional
noncash charge of approximately $76 million in the second quarter of fiscal
1999. This charge is based upon an average equivalent exercise price of $37.65,
change of control price of $56.96 which includes an adjustment factor for the
early termination of the LSAR feature. A total of 0.8 million Company shares
were issued in satisfaction of those options for which the LSAR feature was
elected and the remaining options were converted into options to acquire
approximately 1.2 million Company options at an average exercise price of
$37.65.
Page 66
<PAGE>
In connection with the Merger, the Company entered into agreements with
the Attorney Generals 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 require 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 are ASC locations operated
primarily under the Lucky name, and 105 are Albertson's stores operated
primarily under the Albertson's name. In addition, the Company will divest 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 costs of integrating the two companies has and will result in
significant non-recurring charges and incremental expenses. These costs will
have a material effect on 1999 results of operations of the Company and may have
a significant effect on results of operations for the year 2000. The actual
timing of the costs is, in part, dependent upon the actual timing of certain
integration actions. Non-recurring charges and expenses of implementing
integration actions are estimated to total $700 million after income tax
benefits. The cash portion of these charges is estimated at approximately $300
million. When offset by the cash received from the sale of the stores required
to be divested and the net proceeds from the sale of assets that will not be
used in the combined company, the net positive cash flow is approximately $300
million. Merger related costs include the charges for administrative office
consolidation, employee severance under employment contracts and the limited
stock appreciation rights discussed above.
Subsequent Events
On May 14, 1999, ASC terminated its $300 million LIBOR basket swap at a
cost of $0.8 million. The five-year swap agreement had been entered into in 1997
and diversified the indices used to determine the interest rate on a portion of
the Company's variable rate debt by providing for payments based on foreign
LIBOR indices which were reset every three months. The fair value of the
agreement based on market quotes at year-end 1998 was a loss of $5.3 million.
On June 14, 1999, the Company received a commitment from a financial
intermediary to purchase up to $1.0 billion of Albertson's notes with a maturity
of up to 365 days. The agreement provides for various interest terms and as of
the report date, no borrowings have occurred. This commitment will be used as an
alternative to the Company's commercial paper program..
Page 67
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Combinations
On August 2, 1998, Albertson's Inc. ("Albertson's" or the "Company")
and American Stores Company ("ASC") entered into a definitive merger agreement
("Merger Agreement") whereby Albertson's would acquire ASC by exchanging 0.63
share of Albertson's common stock for each outstanding share of ASC common
stock, with cash being paid in lieu of fractional shares (the "Merger") and ASC
would be merged into a wholly-owned subsidiary of Albertson's. In addition,
outstanding rights to receive ASC common stock under ASC stock option plans
would be converted into rights to receive equivalent Albertson's common stock.
ASC operates retail food and drugs stores throughout the United States.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. 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 supplemental 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. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These supplemental
financial statements do not extend through the date of consummation; however,
they will become the historical financial statements of the Company when the
Company issues its financial statements for the second fiscal quarter of 1999.
During 1998 the Company acquired the stock of three separate operating
companies representing 64 retail food and drug stores in transactions accounted
for using the purchase method of accounting. In accordance with an agreement
with the Federal Trade Commission, nine acquired stores and six previously owned
stores were divested. The Company also acquired the assets of other individual
or small groups of stores in isolated transactions. Reported results include
these operations from the date of consummation of the acquisition.
Results of Operations - Annual Periods
Sales for 1998 were $35.9 billion, compared to $33.8 billion in 1997
and $32.5 billion in 1996. The following table sets forth certain income
statement components expressed as a percent to sales and the year-to-year
percentage changes in the amounts of such components:
<TABLE>
<CAPTION>
Percent To Sales Percentage Change
- ------------------------------------------------ ------------------------------------ ------- -------------------------------
1998 1997
1998 1997 1996 vs. 1997 vs. 1996
- ------------------------------------------------ ----------- ----------- ------------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales 100.00 100.00 100.00 6.0 4.2
Gross profit 27.08 26.63 26.35 7.9 5.3
Selling, general and
administrative expenses 21.87 21.67 21.44 7.0 5.3
Operating profit 4.60 4.92 4.68 (0.8) 9.6
Net interest expense 0.94 0.87 0.70 14.6 29.0
Earnings before income taxes 3.73 3.99 4.00 (0.9) 3.9
Net earnings 2.23 2.36 2.41 0.4 2.1
</TABLE>
Increases in sales are primarily attributable to the continued
expansion of net retail square footage and identical and comparable store sales
increases. During 1998 the Company opened or acquired 199 stores, remodeled 104
stores, completed 30 strategic retrofits and closed or sold 71 stores for a net
retail square footage increase of 7.0 million square feet. Included in store
openings are 84 acquired stores (net of 9 acquired stores divested) and included
in store closings are 6 Albertson's stores divested in connection with a
business acquisition. Net retail square footage increased 7.8% in 1998 and 5.3%
in 1997. Identical store sales, stores that have been in operation for two full
fiscal years, increased 0.5% in 1998 and decreased less than 0.1% in 1997.
Comparable store sales, which include replacement stores, increased 1.2% in 1998
and 0.4% in 1997. Identical and comparable store sales continued to increase
through higher average ticket sales per customer. Management estimates that
there was overall deflation in products the Company sells of approximately 0.1%
in 1998 compared to inflation of approximately 0.5% in 1997.
Page 68
<PAGE>
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; 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,
targeted advertising and exciting new and remodeled stores. Future growth will
be affected by the required divestiture of 145 stores in connection with the
Merger (see Divestitures and Merger Related Costs below).
Gross profit, as a percent to sales, increased primarily as a result of
continued improvements made in retail stores, including improvements in
underperforming stores and 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 pre-tax LIFO adjustment, as a percent to sales, reduced gross
margin by 0.04% in 1998, 0.03% in 1997 and 0.08% in 1996.
Selling, general and administrative expenses, as a percent to sales,
increased primarily due to increased salary and related benefit costs resulting
from the Company's initiatives to increase sales, increased depreciation expense
associated with the Company's expansion program and integration costs associated
with the various acquisitions in 1998. These increases were offset, in part, by
improved labor management, lower self-insurance expense and better overall
expense control in ASC operations.
Operating profit for 1998 was reduced by $195.3 million (0.54% to
sales) for stock option expense related to the Merger. The Company's stock
option award plans contain provisions for automatic vesting upon a change of
control. Change of control is defined differently within the respective plans
adopted by Albertson's and ASC. Certain stock option plans adopted by ASC
defined change of control as the date of stockholder approval of the Merger.
Under plans adopted by ASC, option holders had the right (limited stock
appreciation right or LSAR), during an exercise period of up to 60 days after
the occurrence of a change of control (but prior to consummation of the Merger),
to elect to surrender all or part of their options in exchange for shares of
Albertson's common stock having a value equal to the excess of the change of
control price over the exercise price. Approval of the Merger Agreement on
November 12, 1998, by ASC's stockholders accelerated the vesting of 6.4 million
equivalent stock options granted under pre-1997 ASC Plans and permitted the
holders of these options to exercise LSARs. The exercisability of the 6.4
million LSARs resulted in the Company recognizing a $195.3 million merger
related stock option charge during the fourth fiscal quarter of 1998. The actual
change of control price used to measure the value of the exercised LSARs was not
determinable until the date the Merger was consummated. Additional noncash
charges or income were recognized in each quarter up through June 23, 1999
(consummation of the Merger) based on fluctuations in the change of control
price.
Operating profits for 1998, 1997 and 1996 were reduced for impairments
and other restructuring charges of $24.4 million (0.07% to sales), $13.4 million
(0.04% to sales) and $100.0 million (0.31% to sales), respectively. The 1998
charge 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. As of January 28, 1999, 13 of these stores had been closed and
management believes the 1998 charge and remaining reserve are adequate. The 1997
charge related to the sale of a division of ASC's communication subsidiary. The
1996 charges related primarily to ASC's re-engineering initiatives. The
components of the 1996 charges include: warehouse consolidation costs,
administrative office consolidation costs, asset impairment costs, closed store
costs and other miscellaneous charges.
Page 69
<PAGE>
Increases in net interest expense resulted from higher average
outstanding debt. Average outstanding debt has increased as a result of the
Company's continued investment in new and acquired stores.
Earnings before income taxes for 1997 was reduced by $33.9 million
(0.10% to sales) for charges related to the secondary stock offering of shares
held by former ASC chairman L.S. Skaggs and related parties (the "Secondary
Offering").
The Company's effective income tax rate for 1998 was 40.2%, as compared
to 41.0% for 1997 and 39.9% for 1996. Amortization of goodwill, which is
generally not deductible for income taxes, increases the Company's effective
rate. The effect of the increase in the cash surrender value of Company-owned
life insurance, which is a non-taxable item, reduces the effective income tax
rate. The effective income tax rates for 1998 included the non-deductible
portion of the merger related stock option charge. The effective income tax
rates for 1997 included non-deductible expenses related the Secondary Offering.
Results of Operations - Quarterly Periods
Sales for the first quarter of 1999 were $9.2 billion compared to $8.7
billion for the first quarter of 1998. The following table sets forth certain
income statement components expressed as a percent to sales and the year-to-year
percentage changes in the amounts of such components:
<TABLE>
<CAPTION>
Percent to Sales Percentage Change
- ---------------------------------------------- ---------------------------------- ----------------------------------
13 Weeks 1999
1999 1998 vs. 1998
- ---------------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Sales 100.00 100.00 5.7
Gross profit 27.16 26.35 8.9
Selling, general and
administrative expenses 22.33 21.82 8.2
Operating profit 5.14 4.19 29.4
Net interest expense 0.89 0.95 (0.8)
Earnings before income taxes 4.29 3.35 35.3
Net earnings 2.59 2.02 35.2
</TABLE>
Increases in sales are primarily attributable to the continued
expansion of net retail square footage and identical and comparable store sales
increases. During the 13 weeks of 1999 the Company opened or acquired 23 stores
and 9 fuel centers, remodeled 32 stores, completed 9 strategic retrofits and
closed 11 stores. Retail square footage increased to 98.1 million square feet, a
net increase of 5.8% from the first quarter of 1998. Identical store sales
increased 1.8% and comparable store sales, which include replacement stores,
increased 2.2%. Management estimates that there was overall deflation in
products the Company sells of approximately 0.7% (annualized).
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; 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,
targeted advertising and exciting new and remodeled stores. Future growth will
be affected by the required divestitures of 145 stores in connection with the
Merger (see Divestitures and Merger Related Costs below).
Gross profit, as a percent to sales, increased primarily as a result of
continued improvements made in retail stores, including improvements in
underperforming stores and 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 pre-tax LIFO charge reduced gross profit by $9 million (0.10%
to sales) in the first quarter of 1999 as compared to $13 million (0.15% to
sales) in the first quarter of 1998.
Page 70
<PAGE>
Selling, general and administrative expenses, as a percent to sales,
increased primarily due to increased salary and related benefit costs resulting
from the Company's initiatives to increase sales and increased depreciation
expense associated with the Company's expansion program. Included in this
increase is approximately $4.0 million in merger related costs primarily related
to the integration planning and financing activities associated with the Merger.
Operating profit for the first quarter of 1999 was increased by $28.9
million (0.31% to sales) for stock option income related to the Merger. The
Company's stock option award plans contain provisions for automatic vesting upon
a change of control. Change of control is defined differently within the
respective plans adopted by Albertson's and ASC. Certain stock option plans
adopted by ASC defined change of control as the date of stockholder approval of
the Merger. Under plans adopted by ASC, option holders had the right (limited
stock appreciation right or LSAR), during an exercise period of up to 60 days
after the occurrence of a change of control (but prior to consummation of the
Merger), to elect to surrender all or part of their options in exchange for
shares of Albertson's common stock having a value equal to the excess of the
change of control price over the exercise price. Approval of the Merger
Agreement on November 12, 1998, by ASC's stockholders accelerated the vesting of
6.4 million equivalent stock options granted under ASC pre-1997 Plans and
permitted the holders of these options to exercise LSARs. The exercisability of
the 6.4 million LSARs resulted in the Company recognizing a $195.3 million
merger related stock option charge during the fourth fiscal quarter of 1998 and
$28.9 million of income during the first fiscal quarter of 1999. Equivalent
options of 4.0 million issued under the 1997 ASC stock option plan also had an
LSAR feature that became exercisable upon regulatory approval (June 21, 1999)
and no compensation expense was recognizable until that date. The actual change
of control price used to measure the value of the exercised LSARs was not
determinable until the date the Merger was consummated. Additional noncash
charges or income were recognized in each period from November 12, 1998, through
June 23, 1999 (consummation of the Merger) based on fluctuations in the change
of control price (see Divestitures and Merger Related Costs below).
Operating profit for the first quarter of 1998 was reduced for
impairment charges of $29.4 million (0.34% to sales) related to management's
decision to close 16 underperforming stores in 8 states. The charges included
impaired real estate and equipment, as well as the present value of remaining
liabilities under leases, net of expected sublease recoveries. As of April 29,
1999, 13 of these stores had been closed and management believes the 1998 charge
and remaining reserve are adequate.
The decrease in net interest expense resulted primarily from lower
rates on variable rate debt.
Liquidity and Capital Resources
The Company's operating results continue to enhance its financial
position and ability to continue its planned expansion program. Cash provided by
operating activities during 1998 was $1,428 million, compared to $1,815 million
in 1997 and $1,134 million in 1996. During 1998 the Company invested $1,608
million for capital expenditures and $251 million for business acquisitions. The
Company's financing activities for 1998 included net new borrowings of $550
million and $263 million for the payment of dividends (which represents 32.9% of
1998 net earnings).
Cash provided by operating activities during the first quarter of 1999
was $431 million as compared to $305 million during the first quarter of 1998.
During the first quarter of 1999 the Company invested $375 million for net
capital expenditures. The Company's financing activities during the first
quarter of 1999 included net new borrowings of $10 million and $67 million for
the payment of dividends.
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 will begin to consolidate several of
the commercial paper, bank lines and other financing arrangements.
Page 71
<PAGE>
Albertson's, Inc.:
Albertson's had $500 million of commercial paper and bank line
borrowings outstanding at January 28, 1999, compared to $283 million at January
29, 1998 and $329 million at January 30, 1997. As of January 28, 1999,
Albertson's had a revolving credit agreement for $600 million (which was
reserved as alternative funding for Albertson's commercial paper program) and
bank lines of credit for $635 million (of which $174 million was outstanding as
of January 28, 1999). The revolving credit agreement contains certain covenants,
the most restrictive of which requires the Company to maintain consolidated
tangible net worth, as defined, of at least $750 million. During 1998
Albertson's issued a total of $317 million in medium-term notes under a $500
million shelf registration statement filed with the Securities and Exchange
Commission (SEC) in December 1997. Under a shelf registration statement filed
with the SEC in May 1996, Albertson's issued $200 million of medium-term notes
in 1997 and $200 million of 30-year 7.75% debentures in 1996. Proceeds from
these issuances were used to reduce borrowings under Albertson's commercial
paper program.
On March 30, 1999, the Company entered into a revolving credit
agreement with a syndicate of banks, whereby the Company may borrow principal
amounts up to $1.5 billion at varying interest rates any time prior to March 28,
2000 (expiration date). At the expiration of the credit agreement and upon due
notice, the Company may extend the term for an additional 364-day period if
lenders holding at least 75% of commitments agree. The agreement also contains
an option which would allow the Company, upon due notice, to convert any
outstanding amounts at the expiration date to 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.
Albertson's filed a shelf registration statement with the SEC, which
became effective in February 1999, to authorize the issuance of up to $2.5
billion in debt securities. The remaining authorization of $183 million under
the 1997 shelf registration statement was rolled into the 1999 shelf
registration statement. The Company intends to use the net proceeds of any
securities sold pursuant to the 1999 shelf registration statement for retirement
of debt and general corporate purposes.
Since 1987 the Board of Directors of Albertson's has continuously
adopted or renewed programs under which the Company was authorized, but not
required, to purchase and retire shares of its common stock. The remaining
authorization under the program adopted by the Board on March 2, 1998, was
rescinded in connection with the Merger.
American Stores Company:
At year-end 1998 ASC had a $1.0 billion universal shelf registration
statement of which $500 million has been designated for ASC's Series B Medium
Term Note Program. On March 19, 1998, ASC issued $45 million of 6.5% notes due
March 20, 2008, under the outstanding Series B Medium Term Note Program. On
March 30, 1998, ASC issued an additional $100 million of 7.1% notes due March
20, 2028, under the same program. Proceeds were used to refinance short-term
debt and for general corporate purposes. At year-end 1998, ASC had $855 million
available under the universal shelf registration statement.
At year-end 1998, ASC had a $1.0 billion commercial paper program
supported by a $1.5 billion revolving credit facility, and $230 million of
uncommitted bank lines, which were used for overnight and short-term bank
borrowings. On September 22, 1998, ASC entered into a $300 million revolving
credit agreement with five financial institutions which also supported the
commercial paper program. Interest rates for borrowings under the agreement are
established at the time of borrowing through three different pricing options.
Both revolving credit facilities terminated on the effective date of
consummation of the Merger. At year-end 1998, ASC had $325 million of debt
outstanding under the $1.5 billion credit facility, $993 million outstanding
under the commercial paper program, and $226 million outstanding under
uncommitted bank lines, leaving unused committed borrowing capacity of $256
million. The average annual interest rates applicable to the debt issued under
or supported by the revolving credit facilities were 5.8% in 1998, 5.9% in 1997
and 5.7% in 1996.
In June 1996 ASC authorized a stock repurchase program of up to four
million shares of common stock (not including the 1997 repurchase of shares from
ASC's former chairman L.S. Skaggs and certain Skaggs family members and
charitable trusts). During 1996, 0.1 million equivalent shares of common stock
were repurchased. There were no repurchases of common stock under the ASC
repurchase program during 1998 and 1997. On August 2, 1998, in connection with
the Merger, ASC rescinded the remaining authorization under the stock repurchase
program.
Page 72
<PAGE>
At the effective date of the Merger, approximately $900 million of
ASC's debt became due or callable by the creditors due to change of control
provisions, of which approximately $500 million was repaid.
The following leverage ratios demonstrate the Company's levels of
long-term financing as of the indicated year end:
<TABLE>
<CAPTION>
January 28, January 29, January 30,
1999 1998 1997
- ------------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
Long-term debt and capitalized lease
obligations to capital (1) 48.1% 47.8% 43.4%
Long-term debt and capitalized lease
obligations to total assets 33.8 31.5 29.1
(1) Capital includes long-term debt,
capitalized lease obligations and
stockholders' equity
</TABLE>
The Company continues to retain ownership of real estate when possible.
As of January 28, 1999, the Company held title to the land and buildings of 38%
of the Company's stores and held title to the buildings on leased land of an
additional 6% of the Company's stores. The Company also holds title to the land
and buildings of the Company's corporate headquarters in Boise, Idaho, ASC's
corporate headquarters in Salt Lake City, Utah and a majority of the Company's
distribution facilities.
The Company is committed to keeping its stores up to date. In the last
three years, the Company has opened or remodeled 858 stores representing 29% of
the Company's retail square footage as of January 28, 1999. The following
summary of historical capital expenditures includes capital leases, stores
acquired in business and asset acquisitions, assets acquired with related debt
and the estimated fair value of property financed by operating leases (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
New and acquired stores $ 1,146,363 $ 960,309 $ 974,400
Remodels 298,712 215,856 239,045
Retail replacement equipment
and technological upgrades 238,865 279,900 214,190
Distribution facilities and
equipment 138,828 110,187 85,683
Other 50,426 104,857 115,725
- -------------------------------------------------- ---------------------- ---------------------- ---------------------
Total capital expenditures 1,873,194 1,671,109 1,629,043
Estimated fair value of
property financed by
operating leases 223,900 205,100 169,400
- -------------------------------------------------- ---------------------- ---------------------- ---------------------
$ 2,097,094 $ 1,876,209 $ 1,798,443
- -------------------------------------------------- ---------------------- ---------------------- ---------------------
</TABLE>
The Company's strong financial position provides the flexibility for
the Company to grow through its store development program and future
acquisitions. The Board of Directors at its March 1999 meeting increased the
regular quarterly cash dividend to $0.18 per share, for an annual rate of $0.72
per share.
Divestitures and Merger Related Costs
In connection with the Merger, the Company entered into agreements with
the Attorney Generals 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 require 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 are ASC locations operated
primarily under the Lucky name, and 105 are Albertson's stores operated
primarily under the Albertson's name. In addition, the Company will divest four
supermarket real estate sites as required by the agreements. The stores
identified for disposition had sales of $2.3 billion in fiscal 1998.
Page 73
<PAGE>
The costs of integrating the two companies has and will result in
significant non-recurring charges and incremental expenses. These costs will
have a material effect on 1999 results of operations of the Company and may have
a significant effect on results of operations for the year 2000. The actual
timing of the costs is, in part, dependent upon the actual timing of certain
integration actions. Non-recurring charges and expenses of implementing
integration actions are estimated to total $700 million after income tax
benefits. The cash portion of these charges is estimated at approximately $300
million. When offset by the cash received from the sale of the stores required
to be divested and the net proceeds from the sale of assets that will not be
used in the combined company, the net positive cash flow is approximately $300
million. Merger related costs include the charges for administrative office
consolidation, employee severance under employment contracts and the limited
stock appreciation rights discussed under Results of Operations above.
Recent Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 is effective for the Company's 2001 fiscal year. The Company has
not yet completed its evaluation of this standard or its impact on the Company's
reporting requirements.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to certain market risks that are inherent in the
Company's financial instruments which arise from transactions entered into in
the normal course of business. From time to time, the Company enters into
derivative transactions. The objective of these derivative transactions is to
reduce the Company's exposure to changes in interest rates, and each transaction
is evaluated periodically by the Company for changes in market value and
counterparty credit exposure.
The Company is subject to interest rate risk on its long-term fixed
interest rate debt and bank line borrowings. Commercial paper borrowings do not
give rise to significant interest rate risk because these borrowings have
maturities of less than three months. All things being equal, the fair value of
debt with a fixed interest rate will increase as interest rates fall, and the
fair value will decrease as interest rates rise. The Company manages its
exposure to interest rate risk by utilizing a combination of fixed rate
borrowings and commercial paper borrowings.
During 1997 the Company entered into a $300 million five-year LIBOR
basket swap and a $100 million treasury rate lock. The LIBOR basket swap
agreement diversified the indices used to determine the interest rate on a
portion of the Company's variable rate debt by providing for payments based on
an average of foreign LIBOR indices which are reset every three months and also
provided for a maximum interest rate of 8.0%. The Company recognized no income
or expense in 1998 related to this swap. The treasury rate lock agreement was
entered into for the purpose of hedging the interest rate on $100 million of
debt the Company issued in March 1998 under the universal shelf registration
statement. The Company realized a net loss of $1.0 million, which is being
amortized over the term of the debt as an addition to interest expense.
The Company is exposed to credit losses in the event of nonperformance
by the counterparties to its swap agreements. Such counterparties are
highly-rated financial institutions and the Company anticipates they will be
able to satisfy their obligations under the contracts.
There have been no material changes in the primary risk exposures or
management of the risks since the prior year. The Company expects to continue to
manage risks in accordance with the current policy.
Page 74
<PAGE>
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
Following the Merger the Company began to consolidate several of the commercial
paper, bank lines and other financing arrangements. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted average interest rates by expected (contractual) maturity
dates. The $300 million LIBOR basket swap agreement was terminated on May 14,
1999. Notional amounts are used to calculate the contractual payments to be
exchanged under the contracts.
<TABLE>
<CAPTION>
There- Fair
(In millions of dollars) 1999 2000 2001 2002 2003 after Total Value
- ----------------------------------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albertson's, Inc.:
Long-term debt (excluding
commercial paper):
Fixed rate $ 7.0 $ 295.3 $ 1.5 $ 1.7 $ 1.9 $ 726.8 $1,034.2 $1,111.0
Weighted average
interest rate 7.5% 6.3% 9.0% 9.3% 9.5% 6.9% 6.8%
Variable rate $ 173.8 $ 173.8 173.9
Weighted average
interest rate 5.4% 5.4%
American Stores Company:
Long-term debt:
Fixed rate $ 42.9 $ 164.7 $ 35.4 $ 288.8 $117.9 $1,227.2 $1,876.9 2,120.3
Weighted average
interest rate 7.7% 7.5% 8.8% 9.8% 7.7% 7.5% 7.9%
Variable rate $1,544.0 $1,544.0 1,544.0
Weighted average
interest rate 5.1% 5.1%
Interest rate and currency swap:
Pay variable (8% cap)
/Receive variable $ 300.0 $ 300.0 (5.3)
Average pay rate 5.3%
Average receive rate 5.0%
- ----------------------------------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------
</TABLE>
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 is substantially complete and 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 completion of upgrades, validation and forward date testing for
all systems is scheduled for third quarter of 1999 although many systems have
been completed. The Company expects to successfully implement the remediation of
the IT Systems and Non-IT Systems.
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.
Page 75
<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 or
will be expensed and approximately $15 million has been or will be capitalized.
These costs include expenditures accelerated for Year 2000 compliance. As of
April 29, 1999, the Company has spent approximately 95% of the estimated 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 is currently developing its contingency plans and intends to
formalize these plans with respect to its most critical applications during the
third quarter of 1999. Contingency plans may include manual workarounds,
increased inventories and extra staffing.
Environmental
The Company has identified environmental contamination at certain of
its store, warehouse, 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.
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 integrate the operations of ASC.
Page 76
<PAGE>
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.
Page 77
EXHIBIT 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
INDEX TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined financial statements are based on the
historical consolidated financial statements of Albertson's, Inc.("Albertson's")
and American Stores Company ("ASC") and give effect to the merger as a pooling
of interests. The pro forma information includes the historical results of
operations of Albertson's as of and for the 13 weeks ended April 29, 1999 and
the historical results of operations for the 52 weeks ended January 28, 1999,
and the historical results of operations of ASC as of and for the 13 weeks ended
May 1, 1999 and the historical results of operations for the 52 weeks ended
January 30, 1999.
The unaudited pro forma combined financial statements are not
necessarily indicative of the actual or future financial position or results of
operations of the combined company. They should be read in conjunction with the
audited and unaudited historical consolidated financial statements, including
the notes thereto, of Albertson's and ASC.
Unaudited Pro Forma Combined Balance Sheet 79
Unaudited Pro Forma Combined Statement of Earnings for
Fiscal Year 1998 80
Unaudited Pro Forma Combined Statement of Earnings for
First Fiscal Quarter 1999 81
Notes to Unaudited Pro Forma Combined Financial Data 82
Page 78
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
<TABLE>
<CAPTION>
Albertson's ASC
As of As of
(Dollars in thousands) April 29,1999 May 1, 1999 Adjustments Combined
- ------------------------------------------------- ----------------- ------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 74,963 $ 41,160 $ (70,000) (c) $ 46,123
Accounts and notes
receivable 148,844 399,726 548,570
Inventories 1,434,358 1,734,785 20,000 (g) 3,059,143
(130,000) (b)
Prepaid expenses 80,444 82,715 163,159
Deferred income taxes 60,046 56,449 (8,000) (g) 108,495
Assets held for sale 575,000 (b) 575,000
- ------------------------------------------------- ----------------- ------------------- --------------------- --------------------
Total Current Assets 1,798,655 2,314,835 387,000 4,500,490
Land, Buildings and Equipment,
Net 4,021,476 4,706,782 (18,345) (a) 8,209,913
(500,000) (b)
Goodwill, net 147,866 1,577,305 (95,000) (b) 1,630,171
Other Assets 284,898 331,857 3,604 (a) 620,359
- -------------------------------------------------
----------------- ------------------- --------------------- --------------------
Total Assets $ 6,252,895 $ 8,930,779 $ (222,741) $14,960,933
----------------- ------------------- --------------------- --------------------
Liabilities and Stockholders'
Equity
Current Liabilities:
Accounts payable $ 825,521 $ 1,119,584 $ 161,752 (a) $ 2,106,857
Salaries and related
liabilities 183,843 272,880 (9,074) (a) 447,649
Taxes other than income
taxes 72,072 80,862 (a) 152,934
Income taxes 102,145 70,792 (12,900) (a) 131,037
(29,000) (d)
Self-insurance 74,228 78,334 152,562
Unearned income 56,584 39,440 (a) 96,024
Current portion of
capitalized lease
obligations 11,539 6,462 18,001
Current maturities of
long-term debt 96,670 45,268 141,938
Other 72,339 314,883 (272,980) (a) 114,242
- ------------------------------------------------- ----------------- ------------------- --------------------- --------------------
Total Current Liabilities 1,494,941 1,908,203 (41,900) 3,361,244
Long-Term Debt 1,339,669 3,488,601 4,828,270
Capitalized Lease Obligations 156,423 42,422 198,845
Self-Insurance 115,780 264,413 380,193
Deferred Income Taxes 343,108 (126,741) (a) 194,367
(22,000) (b)
Other Long-Term Liabilities
And Deferred Credits 238,886 132,720 (124,900) (a) 496,506
Stockholders' Equity:
Common stock 245,843 299,778 (110,918) (d) 434,703
Capital in excess of par 9,016 430,877 110,918 (d) 123,257
(511,054) (f)
83,500 (d)
Retained earnings 2,652,337 2,531,711 12,000 (g) 4,943,548
(128,000) (b)
(70,000) (c)
(54,500) (d)
Treasury stock (511,054) 511,054 (f)
- ------------------------------------------------- ----------------- ------------------- --------------------- --------------------
Total Stockholders' Equity 2,907,196 2,751,312 (157,000) 5,501,508
Total Liabilities and
Stockholders' Equity $ 6,252,895 $ 8,930,779 $ (222,741) $ 14,960,933
----------------- ------------------- --------------------- --------------------
See Notes to Unaudited Pro Forma Combined Financial Data
</TABLE>
Page 79
<PAGE>
Unaudited Pro Forma Combined Statement of Earnings
<TABLE>
<CAPTION>
Albertson's ASC
52 Weeks 52 Weeks Combined
January 28, January 30, 52 Weeks
(In thousands per share data) 1999 1999 Adjustments 1998
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Sales $ 16,005,115 $ 19,866,725 $ 35,871,840
Cost of sales 11,622,026 14,560,899 $ (26,912) (e) 26,156,013
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Gross profit 4,383,089 5,305,826 26,912 9,715,827
Selling, general and
Administrative expenses 3,385,531 4,437,804 26,912 (e) 7,850,247
Merger related stock option
Charge 195,252 (195,252) (h)
Impairment and restructuring 24,407 24,407
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Operating profit 973,151 672,770 195,252 1,841,173
Other (expenses) income:
Interest, net (107,074) (229,315) (336,389)
Other Net 28,768 28,768
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Earnings before income taxes 894,845 443,455 195,252 1,533,552
Income taxes 327,692 209,711 62,624 (h) 600,027
- -------------------------------------------------
----------------- --------------------- --------------------- ------------------
Net Earnings $ 567,153 $ 233,744 $ 132,628 $ 933,525
----------------- --------------------- --------------------- ------------------
Earnings Per Share:
Basic $ 2.31 $ 0.85 $ 2.23
Diluted 2.30 0.84 2.21
Weighted average common shares
Outstanding:
Basic 245,637 274,790 (101,672) (d) 418,755
Diluted 246,808 277,562 (102,698) 421,672
See Notes to Unaudited Pro Forma Combined Financial Data
</TABLE>
Page 80
<PAGE>
Unaudited Pro Forma Combined Statement of Earnings
<TABLE>
<CAPTION>
Albertson's ASC Combined
13 Weeks 13 Weeks 13 Weeks
April 29, May 1, First Qtr.
(In thousands per share data) 1999 1999 Adjustments 1999
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Sales $4,167,564 $5,047,723 $9,215,287
Cost of sales 3,012,783 3,706,679 $ (6,779) (e) 6,712,683
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Gross profit 1,154,781 1,341,044 6,779 2,502,604
Selling, general and
Administrative expenses 908,755 1,142,614 6,779 (e) 2,058,148
Merger related stock option charge (28,864) 28,864 (h)
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Operating profit 246,026 227,294 (28,864) 444,456
Other (expenses) income:
Interest, net (29,243) (52,788) (82,031)
Other Net 4,300 4,300
- ------------------------------------------------- ----------------- --------------------- --------------------- ------------------
Earnings before income taxes 221,083 174,506 (28,864) 366,725
Income taxes 84,012 73,086 (11,546) (h) 145,552
- -------------------------------------------------
----------------- --------------------- --------------------- ------------------
Net Earnings $ 137,071 $ 101,420 $(17,318) $ 221,173
----------------- --------------------- --------------------- ------------------
Earnings Per Share:
Basic $0.56 $0.37 $0.53
Diluted 0.56 0.36 0.52
Weighted average common shares
Outstanding:
Basic 245,785 276,997 (102,489) (d) 420,293
Diluted 246,852 280,100 (103,637) 423,315
See Notes to Unaudited Pro Forma Combined Financial Data
</TABLE>
Page 81
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Data
Basis of Presentation
On August 2, 1998, Albertson's Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") entered into a definitive merger agreement
("Merger Agreement") whereby Albertson's would acquire ASC by exchanging 0.63
share of Albertson's common stock for each outstanding share of ASC common
stock, with cash being paid in lieu of fractional shares (the "Merger") and ASC
would be merged into a wholly-owned subsidiary of Albertson's. In addition,
outstanding rights to receive ASC common stock under ASC stock option plans
would be converted into rights to receive equivalent Albertson's common stock.
ASC operates retail food and drugs stores throughout the United States.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. 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 pro forma combined 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.
The pro forma adjustments represent management's best estimates based on
currently available information. Actual adjustments will differ from those
reflected in the unaudited pro forma combined financial statements.
Pro Forma Adjustments
(a) Adjustments to reclassify selected assets and liabilities to conform to
ASC or Albertson's classifications.
(b) Adjustments to reclassify assets and liabilities associated with stores
required to be divested and other assets to be disposed of identified
to date and to adjust to estimated net realizable value. The Company
anticipates that it could identify additional other assets to be
disposed of as part of the merger integration.
(c) Adjustment to record direct transaction costs associated with the
Merger. These costs consist primarily of investment banking, legal,
accounting, printing and regulatory filing fees. The unaudited pro
forma combined balance sheet reflects such expenses as if they had been
paid as of the end of the first quarter 1999.
(d) Represents the issuance of approximately 177 million Albertson's shares
in exchange for all of the outstanding ASC common stock shares based on
the exchange ratio, including the issuance of 2.5 million Albertson's
shares in connection with the exercise of LSARs associated with ASC's
stock option plans. Additional non-cash charges of approximately $54.5
million (net of tax) will be recognized in connection with the LSARs
and ASC's long-term performance incentive plan.
(e) Adjustment to reclassify overhead costs from cost of sales to selling,
general and administrative expenses to conform to Albertson's
classification.
(f) Adjustment to record the cancellation of treasury shares.
(g) To record conforming adjustments to state inventories on a consistent
method of valuation.
Page 82
<PAGE>
(h) To eliminate one-time expenses and related tax effects associated with
the Merger.
Merger and Integration Related Costs
Albertson's and ASC expect to incur charges to operations of approximately
$70 million, pre-tax, for transaction fees and costs incident to the Merger.
These direct incremental Merger costs are reflected in the unaudited pro forma
combined balance sheet as if they had been paid as of the end of the first
quarter 1999. Also reflected are the estimated additional charges to be taken in
connection with the ASC LSARs and charges to write down assets held for sale
identified to date to expected net realizable value. The pro forma financial
statements do not reflect the non-recurring costs and expenses associated with
integrating the operations of the two companies, nor any of the anticipated
recurring expense savings arising from the integration. The costs of integrating
the two companies has and will result in significant non-recurring charges and
incremental expenses. These costs will have a material effect on 1999 results of
operations of the Company and may have a significant effect on results of
operations for the year 2000. The actual timing of the costs is, in part,
dependent upon the actual timing of certain integration actions. Non-recurring
charges and expenses of implementing integration actions are estimated to total
$700 million after income tax benefits. The cash portion of these charges is
estimated at approximately $300 million. When offset by the cash received from
the sale of the stores required to be divested and the net proceeds from the
sale of assets that will not be used in the combined company, the net positive
cash flow is approximately $300 million. Merger related costs include the
charges for administrative office consolidation, employee severance under
employment contracts and the limited stock appreciation rights discussed above.
