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: September 22, 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 September 9, 1999, Albertson's, Inc., a Delaware corporation
("Albertson's" or the "Company") filed its quarterly report on Form 10-Q for the
26 weeks ended July 29, 1999, ("Second Quarter Report"). The Second Quarter
Report contained the consolidated results of operations of the Company and its
subsidiaries for the 13 and 26 week periods ended July 29, 1999. On June 23,
1999, American Stores Company ("ASC") became a wholly-owned subsidiary of the
Company in a transaction accounted for as a pooling of interests for accounting
and financial reporting purposes (the "Merger"). 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, the
historical financial information included in the Company's Second Quarter Report
has been restated as if Albertson's and ASC had been combined for all periods
presented.
On July 9, 1999, the Company filed a Current Report on Form 8-K which was
amended on August 30, 1999, and which included financial statements required to
be filed as a result of the Merger ("July 9, 1999, Form 8-K"). This Current
Report on Form 8-K contains an update to selected financial information included
in the July 9, 1999, Form 8-K. Specifically included are: audited 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;
and, unaudited interim 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.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
The following 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 Consolidated Financial Statements:
Independent Auditors' Report of Deloitte & Touche LLP
Independent Auditors' Report of Ernst & Young LLP
Consolidated Earnings for the years ended January 28, 1999, January 29,
1998, and January 30, 1997
Consolidated Balance Sheets at January 28, 1999, January 29, 1998, and
January 30, 1997
Consolidated Cash Flows for the years ended January 28, 1999, January
29, 1998, and January 30, 1997
Consolidated Stockholders' Equity for the years ended January 28, 1999,
January 29, 1998, and January 30, 1997
Notes to Consolidated Financial Statements
Unaudited Interim Consolidated Financial Statements:
Interim Consolidated Earnings for the 13 weeks ended April 29, 1999 and
April 30, 1998
Interim Consolidated Balance Sheets at April 29, 1999 and January 28,
1999
Interim Consolidated Cash Flows for the 13 weeks ended April 29, 1999
and April 30, 1998
Notes to Interim Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations
(b) Exhibits.
Exhibit No. Description
23 Consent of Deloitte & Touche LLP
23.1 Consent of Ernst & Young LLP
99 Consolidated Financial Statements
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: September 22, 1999 /S/ A. Craig Olson
- --------------------------- ----------------------------
A. Craig Olson
Executive Vice President
and Chief Financial Officer
2
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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 4
23.1 Consent of Ernst & Young LLP 5
99 Consolidated Financial Statements 6
3
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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, 33-59803, 333-82157, and 333-82161 on Form S-8 of
Albertson's, Inc. and subsidiaries of our report dated September 17, 1999, with
respect to the 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 September 22, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boise, Idaho
September 20, 1999
4
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the 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 September 22, 1999, of Albertson's, Inc.,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Ernst & Young LLP
Salt Lake City, Utah
September 17, 1999
5
<PAGE>
Exhibit 99
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following 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 Consolidated Financial
Statements.
Audited Consolidated Financial Statements:
Independent Auditors' Report of Deloitte & Touche LLP 7
Independent Auditors' Report of Ernst & Young LLP 8
Consolidated Earnings for the years ended January 28, 1999,
January 29, 1998, and January 30, 1997 9
Consolidated Balance Sheets at January 28, 1999, January 29,1998,
and January 30, 1997 10
Consolidated Cash Flows for the years ended January 28, 1999,
January 29, 1998, and January 30, 1997 11
Consolidated Stockholders' Equity for the years ended January 28, 1999,
January 29, 1998, and January 30, 1997 12
Notes to Consolidated Financial Statements for the years ended
January 28, 1999, January 29, 1998, and January 30, 1997 13
Unaudited Interim Consolidated Financial Statements:
Interim Consolidated Earnings for the 13 weeks ended April 29,
1999, and April 30, 1998 41
Interim Consolidated Balance Sheets at April 29, 1999, and
January 28, 1999 42
Interim Consolidated Cash Flows for the 13 weeks ended April 29,
1999, and April 30, 1998 43
Notes to Interim Consolidated Financial Statements 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations:
Business Combination - American Stores Company 49
Results of Operations - Annual Periods 49
Results of Operations - Quarterly Periods 51
Liquidity and Capital Resources 53
Divestitures and Merger Related Costs 55
Recent Accounting Standard 56
Quantitative and Qualitative Disclosures about Market Risk 56
Year 2000 Compliance 57
Environmental 58
Cautionary Statement for Purposes of "Safe Harbor Provisions" of
the Private Securities Litigation Reform Act of 1995 59
6
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Independent Auditors' Report of Deloitte & Touche LLP
The Board of Directors and Stockholders of
Albertson's, Inc.:
We have audited the accompanying 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 consolidated earnings, stockholders' equity,
and cash flows for each of the three years in the period ended January 28, 1999.
These 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 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 consolidated financial
statements. 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 consolidated
financial statements totals, and which reflect net income constituting
approximately $234, $281, and $287 million of the related 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
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.
/s/ Deloitte & Touche, LLP
Deloitte & Touche LLP
Boise, Idaho
September 17, 1999
7
<PAGE>
Independent Auditors' Report of Ernst & Young LLP
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 (not presented herein). 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.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Salt Lake City, Utah
March 17, 1999
8
<PAGE>
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
</TABLE>
See Notes to Consolidated Financial Statements
9
<PAGE>
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 8,543,722 7,695,907 6,786,457
Goodwill, net 1,737,936 1,611,812 1,665,242
Other Assets 663,301 557,249 501,920
- --------------------------------------------------------------- ------------------- ------------------ -------------------
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 315,180 438,634 445,221
Deferred Income Taxes 207,833 212,561 204,722
Other Long-Term Liabilities and Deferred Credits
628,155 661,342 656,278
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
------------------- ------------------ -------------------
</TABLE>
See Notes to Consolidated Financial Statements
10
<PAGE>
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 (134,968) (13,679) (73,601)
Unearned income (12,295) 42,105 (10,735)
Other long-term liabilities (1,977) (16,621) 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 632,695 733,444 552,000
Payments on long-term borrowings (212,619) (178,622) (198,611)
Net commercial paper and bank
line activity 129,934 209,592 318,989
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
-------------------- -------------------- -------------------
</TABLE>
See Notes to Consolidated Financial Statements
11
<PAGE>
Consolidated Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Capital In
$1.00 Par Excess of
(Dollars in thousands) Value Par Value Retained Earnings Treasury Stock
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
------------- -------------- ------------------ --------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements
12
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
Business Combination
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.
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.
Basis of Presentation
On September 9, 1999, the Company reported its results of operations
for the second quarter ("Second Quarter Report"). The Second Quarter
Report contained the consolidated results of operations of the Company and
its subsidiaries (including ASC) for the 13 and 26 week periods ended July
29, 1999. The pooling of interests method of accounting is intended to
present as a single interest, two or more common stockholder's interests
that were previously independent; accordingly, these consolidated
financial statements restate the historical financial statements as though
the companies had always been combined. The historical financial
statements of the separate companies have been adjusted in preparing the
restated consolidated financial statements to conform the accounting
policies and financial statement presentations.
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.
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.
13
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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.
14
<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 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 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.
15
<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,
substantially all of these stores have been closed and management believes
the remaining reserves are adequate.
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.
16
<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 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 1,297,922 1,166,003 1,078,032
Capitalized leases 350,025 371,076 363,829
--------------------------------------------- ---------------------- ------------------- --------------------
13,317,752 12,042,454 10,693,439
Accumulated depreciation and
Amortization (4,774,030) (4,346,547) (3,906,982)
--------------------------------------------- ---------------------- ------------------- --------------------
$ 8,543,722 $ 7,695,907 $ 6,786,457
---------------------- ------------------- --------------------
</TABLE>
17
<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 13,515 14,230 14,860
5.96%
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>
18
<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.
19
<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.
20
<PAGE>
Interest
Net interest expense was as follows:
<TABLE>
<CAPTION>
1998 1998 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.
Subsequent Debt Consolidation
Following the Merger the Company has consolidated several of the commercial
paper, bank lines and other financing arrangements. The consolidation of debt
included the repayment of outstanding amounts under ASC's revolving credit
facilities and other debt containing change of control provisions and the tender
for, or open market purchases of, certain higher coupon debt. As a result, the
following debt was extinguished (in millions):
<TABLE>
<CAPTION>
Amount
Debt Description Reason for Repayment Extinguished
- --------------------------------------------------- --------------------------------- --------------------------
<S> <C> <C>
Revolving Credit Facility Change of control $ 500.0
Bank borrowing due 2000 Change of control 75.0
10.6% Note due in 2004 Change of control 93.4
9.125% Notes due 2002 Tender offer 170.1
8.0% Debentures due 2026 Open market purchases 78.3
7.9% Debentures due 2017 Open market purchases 4.5
</TABLE>
In July 1999 the Company issued $500 million of floating rate notes. The
notes are due July 2000 and bear interest based on LIBOR commercial paper rates
that reset monthly. As of July 29, 1999, the interest rate was 5.16% on the
outstanding notes. These notes were issued under the Company's commercial paper
program.
In July 1999 the Company issued $1.3 billion of term notes under a shelf
registration statement filed with the Securities and Exchange Commission in
February 1999. The notes are comprised of: $300 million of principal bearing
interest at 6.55% due August 1, 2004; $350 million of principal bearing interest
at 6.95% due August 1, 2009; and $650 million of principal bearing interest at
7.45% due August 1, 2029. Interest is paid semiannually. Proceeds were used
primarily to repay borrowings under the Company's commercial paper program.
Additional securities up to $1.2 billion remain available for issuance under the
Company's 1999 registration statement.
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 fiscal year-end 1998 was a loss of $5.3 million.
21
<PAGE>
In July 1999 the Company negotiated an amendment to a $200 million term loan
agreement between ASC and a group of commercial banks. The original agreement
contained a change of control provision. The amended agreement has revised
representations, warranties and covenants which substantially mirror the
Company's $1.5 billion revolving credit agreement as well as a guarantee by
Albertson's, Inc. The amended fixed rate loans carry interest based upon a
pricing schedule (which averages 6.75%) dependent upon the Companys long-term
debt rating, and mature July 3, 2004.
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.
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.
22
<PAGE>
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> <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 (563,570) (541,128) (575,353)
Inventory valuation (94,340) (96,852) (92,759)
Compensation and benefits (29,928) (30,063) (44,163)
Other, net (23,901) (40,967) (41,287)
- -------------------------------------------------------- ------------------- -------------------- -------------------
Total deferred tax liabilities (711,739) (709,010) (753,562)
- -------------------------------------------------------- ------------------- -------------------- -------------------
Net deferred tax liability $ (75,268) $ (146,231) $ (151,819)
------------------- -------------------- -------------------
</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.
23
<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.
24
<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, 3.9 million were exercised using the LSAR
feature, 1.1 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 3.9
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.
25
<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>
26
<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.
27
<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.
28
<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>
29
<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.
30
<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>
31
<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:
<TABLE>
<CAPTION>
One-Percentage-Point
Increase Decrease
- ------------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Effect on total of service and interest cost components $ 139 $ (123)
Interest cost 1,992 (1,763)
- ------------------------------------------------------------------------------------- ---------------- ---------------
</TABLE>
32
<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
had a total of 42 employment agreements outstanding.
33
<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.
34
<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 1997
- -------------------------------------- ------------------------- -------------------------- --------------------------
<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.
35
<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 (Lucky) and two other grocery chains operating
in southern California. The complaint alleges, among other things, that ASC
(Lucky) and others conspired to fix the retail price of eggs in southern
California. On September 2, 1999, a jury verdict was rendered in favor of ASC
(Lucky) and the two other grocery chains.
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.
36
<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
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements 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 Company
expects the divestitures to be substantially completed by the end of the third
quarter of 1999.
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 (of which $464
million was recorded in the second quarter of fiscal 1999). 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, transaction and financing fees, the write-down of
assets to net realizable value for stores required to be divested and duplicate
and abandoned facilities, and the limited stock appreciation rights discussed
under the Stock Options and Stock Awards Note.
37
<PAGE>
Recent 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, if any, on the
Company's reporting requirements.
38
<PAGE>
Quarterly Financial Data
(Dollars in thousands except per
share data -Unaudited)
<TABLE>
<CAPTION>
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.
39
<PAGE>
Five Year Summary of Financial Data
<TABLE>
<CAPTION>
(Dollars in thousands
except per share data) 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.
40
<PAGE>
Unaudited Interim Consolidated Financial Statements
Interim 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
</TABLE>
See Notes to Interim Consolidated Financial Statements
41
<PAGE>
Interim 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 8,543,722
Goodwill, net 1,725,171 1,737,936
Other Assets 620,359 663,301
- -------------------------------------------------------------------------- ---------------------- -----------------------
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 380,193 315,180
Deferred Income Taxes 216,367 207,833
Other Long-Term Liabilities and Deferred
Credits 496,506 628,155
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
------------------------ ---------------------
</TABLE>
See Notes to Interim Consolidated Financial Statements
42
<PAGE>
Interim 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
Adjustments to reconcile net earnings to net cash 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 (179,510) (122,578)
Net commercial paper and bank line activity
borrowings 189,651 (79,769)
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
---------------------- ---------------------
</TABLE>
See Notes to Interim Consolidated Financial Statements
43
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
Business Combination - American Stores Company
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.
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.
Basis of Presentation
On September 9, 1999, the Company reported its results of operations for the
second quarter ("Second Quarter Report"). The Second Quarter Report contained
the consolidated results of operations of the Company and its subsidiaries
(including ASC) for the 13 and 26 week periods ended July 29, 1999. 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, the accompanying unaudited interim consolidated financial
statements restate the historical financial statements as though the companies
had always been combined. The historical financial statements of the separate
companies have been adjusted in preparing the restated consolidated financial
statements to conform the accounting policies and financial statement
presentations.
In the opinion of management, the accompanying unaudited interim 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 consolidated financial statements be read in conjunction with
the consolidated financial statements for each of the three years in the period
ended January 28, 1999.
The balance sheet at January 28, 1999, has been taken from the audited
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.
44
<PAGE>
Reporting Periods
The Company's quarterly reporting periods are generally 13 weeks and
periodically consist of 14 weeks because the fiscal year ends on the Thursday
nearest to January 31 each year (the Saturday nearest to January 31 for ASC).
The interim consolidated financial information includes the results of
operations for a full 13 week period with Albertson's period ending April 29,
1999, and ASC's period ending May 1, 1999.
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. Substantially all of these stores have been closed and management
believes the 1998 charge and remaining reserve are adequate.
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.
45
<PAGE>
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 acquisitions 8,000
Liabilities assumed in connection with
asset acquisition 300
</TABLE>
46
<PAGE>
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.
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
47
<PAGE>
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.
In connection with the Merger, the Company entered into agreements with the
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements 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 Company
expects the divestitures to be substantially completed by the end of the third
quarter 1999.
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 (of which $464
million was recorded in the second quarter of fiscal 1999). 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, transaction and financing fees, the write-down of
assets to net realizable value for stores required to be divested and duplicate
and abandoned facilities, and the limited stock appreciation rights discussed
above.
48
<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.
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.
On September 9, 1999, the Company reported its results of operations for the
second quarter ("Second Quarter Report"). The Second Quarter Report contained
the consolidated results of operations of the Company and its subsidiaries
(including ASC) for the 13 and 26 week periods ended July 29, 1999. 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, the accompanying unaudited interim consolidated financial
statements restate the historical financial statements as though the companies
had always been combined. The historical financial statements of the separate
companies have been adjusted in preparing the restated consolidated financial
statements to conform the accounting policies and financial statement
presentations.
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 the 13 weeks of 1999 the Company opened or acquired 199 stores, remodeled
49
<PAGE>
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.
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
50
<PAGE>
(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. Substantially all of these stores have 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.
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
1.4% and comparable store sales, which include replacement stores, increased
1.8%. 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)";
51
<PAGE>
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.
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.
52
<PAGE>
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 $260 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.
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 Securities and
Exchange Commission(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.
53
<PAGE>
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.
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
</TABLE>
(1) Capital includes long-term debt, capitalized lease obligations and
stockholders' equity
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
54
<PAGE>
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
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements 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 Company
expects the divestitures to be substantially completed by the end of the third
quarter of 1999.
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 (of which $464
million was recorded in the second quarter of fiscal 1999). 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, transaction and financing fees, the write-down of
assets to net realizable value for stores to be divested and duplicate and
abandoned facilities, and the limited stock appreciation rights discussed under
Results of Operations above.
55
<PAGE>
Recent 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, if any, 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.
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.
56
<PAGE>
<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 ate 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.
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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.
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.
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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.
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.
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