AMERICAN STORES CO /NEW/, 424B5, 1997-04-30

AMERICAN STORES CO /NEW/
424B5, 1997-04-30
GROCERY STORES

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<PAGE>

RULE NO. 424(b)(5)
REGISTRATION NO. 33-52331
REGISTRATION NO. 333-25665

PROSPECTUS SUPPLEMENT
(To Prospectus dated November 21, 1994)

LOGO
AMERICAN STORES COMPANY

$100,000,000
7.90% Debentures due May 1, 2017
ISSUE PRICE: 99.961%

$200,000,000
7.50% Debentures due May 1, 2037
ISSUE PRICE: 99.712%

The 7.90% Debentures due 2017 (the "2017 Debentures") and the 7.50% Debentures
due 2037 (the "2037 Debentures" and, together with the 2017 Debentures, the
"Debentures") are being offered by American Stores Company, a Delaware corpo-
ration. Interest on the Debentures will be payable semiannually on May 1 and
November 1 of each year, commencing November 1, 1997. The Debentures will be
unsecured obligations and will rank pari passu with all other unsecured and
unsubordinated debt. The Debentures are not redeemable by the Company prior to
maturity. The 2037 Debentures will be redeemable at the option of each of the
registered holders on May 1, 2009, at a redemption price equal to the princi-
pal amount thereof. To exercise this option, a registered holder must deliver
a notice of exercise of the redemption option to the Company no earlier than
March 2, 2009 and no later than March 31, 2009 and, once given, such notice
will be irrevocable. The Debentures will be represented by certificates in
book-entry form ("Global Debentures") registered in the name of a nominee of
The Depository Trust Company ("DTC"). Owners of beneficial interests in the
Global Debenture representing 2037 Debentures who desire to have DTC or DTC's
nominee exercise the redemption option on their behalf will be required to
give timely notice to DTC through the participant in DTC through which such
beneficial interest is held in accordance with the policies and procedures of
DTC in effect at that time. Beneficial interests in each Global Debenture will
be shown on, and transfers thereof will be effected only through, records
maintained by DTC (with respect to beneficial interests of participants) or by
participants or persons that hold interests through participants (with respect
to beneficial interests of beneficial owners). Owners of beneficial interests
in the Debentures will be entitled to physical delivery of Debentures in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described under "Description of
Debentures--Book-Entry System".

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- -------------------------------------------------------------
<S> <C> <C> <C>
Per 2017 Debenture 99.961% .875% 99.086%
- -------------------------------------------------------------
Total $99,961,000 $875,000 $98,086,000
- -------------------------------------------------------------
Per 2037 Debenture 99.712% .675% 99.037%
- -------------------------------------------------------------
Total $199,424,000 $1,350,000 $198,074,000
- -------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from May 2, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain lia-
bilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses payable by the Company estimated at $425,000.

The Debentures are offered severally by the Underwriters, as specified herein,
subject to prior sale, when, as and if delivered to and accepted by the Under-
writers, and subject to approval of certain matters by counsel. It is expected
that delivery of the Debentures will be made through the facilities of DTC, on
or about May 2, 1997, against payment therefor in immediately available funds.

J.P. MORGAN & CO.
CHASE SECURITIES INC.
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC

April 29, 1997
<PAGE>

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES OR OTHER
SECURITIES OF THE COMPANY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CON-
NECTION WITH THIS OFFERING, AND MAY BID FOR, AND PURCHASE, THE DEBENTURES IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

----------------

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... S-2
The Company.............................................................. S-3
Recent Developments...................................................... S-3
Use of Proceeds.......................................................... S-3
Ratio of Earnings to Fixed Charges....................................... S-3
Capitalization........................................................... S-4
Selected Consolidated Financial Data..................................... S-5
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-6
Description of Debentures................................................ S-12
Underwriting............................................................. S-15
Legal Matters............................................................ S-16
Experts.................................................................. S-16
Index to Consolidated Financial Statements............................... F-1

PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
The Company.............................................................. 4
Use of Proceeds.......................................................... 4
Ratio of Earnings to Fixed Charges....................................... 4
Description of Debt Securities........................................... 4
Plan of Distribution..................................................... 12
Legal Matters............................................................ 13
Experts.................................................................. 13
</TABLE>

CAUTIONARY NOTE: This Prospectus Supplement and certain of the documents incor-
porated herein by reference contain certain forward-looking statements about
the future performance of the Company which are based on management's assump-
tions and beliefs in light of the information currently available to it. These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements including,
but not limited to: competitive practices and pricing in the food and drug
industries generally and particularly in the Company's principal markets; the
ability of the Company to implement the Company's Delta initiatives in accord-
ance with the currently contemplated schedule and budget; changes in the finan-
cial markets which may affect the Company's cost of capital and the ability of
the Company to access the public debt and equity markets to refinance indebted-
ness and fund the Company's capital expenditure program on satisfactory terms;
supply or quality control problems with the Company's vendors; and changes in
economic conditions which affect the buying patterns of the Company's custom-
ers.

AVAILABLE INFORMATION

The Securities and Exchange Commission (the "Commission") maintains a worldwide
web site at http://www.sec.gov at which copies of the Company's reports, proxy
and information statements and other information filed electronically with the
Commission are available.

S-2
<PAGE>

THE COMPANY

American Stores Company is one of the nation's leading food and drug retailers
with annual sales in its fiscal year ended February 1, 1997 of $18.7 billion.
The Company is principally engaged in a single industry segment, the retail
sale of food and drug merchandise. The Company's principal food operations are
Acme Markets, Jewel Food Stores, Lucky Stores Northern California Division,
Lucky Stores Southern California Division and Jewel Osco Southwest. The
Company's drug stores operate under the Osco Drug and Sav-on names. As of Feb-
ruary 1, 1997, the Company operated 1,695 stores in 27 states, including 166
combination stores which are jointly operated by the Company's food and drug-
store operations and are each counted as two separate stores.

The Company's principal executive offices are located at 709 East South Temple,
Salt Lake City, Utah 84102 (telephone: 801-539-0112). References to the "Compa-
ny" in this Prospectus Supplement and in the Prospectus include American Stores
Company and its subsidiaries unless the context otherwise requires.

RECENT DEVELOPMENTS

On April 8, 1997, the Company (i) repurchased 12,222,222 shares of its Common
Stock (the "Repurchase") from members of the family of L. S. Skaggs and certain
Skaggs family and charitable trusts (collectively, the "Selling Stockholders")
and (ii) sold 2,311,186 shares of its Common Stock pursuant to the exercise of
an over-allotment option by the underwriters in connection with a public offer-
ing (the "Secondary Offering") of shares of the Company's Common Stock by the
Selling Stockholders. In connection with the Repurchase, the Company increased
the capacity of its existing revolving credit facility from $1 billion to
$2 billion, which includes a $1.5 billion five-year revolving credit facility
and a $500 million 364-day revolving credit facility (the "Amended Credit
Facilities"). The Repurchase was financed with borrowings of $454 million under
the Amended Credit Facilities and other lines of credit and proceeds from the
exercise of the over-allotment option. Subject to market conditions, the Com-
pany expects to refinance the indebtedness incurred in connection with the
Repurchase through public equity and/or debt issuances over the next six to 12
months. See "Capitalization." Following the Repurchase, Messrs. L. S. Skaggs,
Don L. Skaggs and Michael T. Miller resigned as members of the Company's Board
of Directors.

USE OF PROCEEDS

The net proceeds from the sale of the Debentures will be used to reduce a por-
tion of outstanding debt under the Amended Credit Facilities, incurred in part
to finance the Repurchase, and for general corporate purposes. The amount of
outstanding debt borrowed directly under the Amended Credit Facilities, at a
weighted average interest rate of 5.90%, was $817 million at April 18, 1997, of
which $267 million was borrowed from Morgan Guaranty Trust Company of New York,
the agent bank under the Amended Credit Facilities, and $75 million was owed to
The Chase Manhattan Bank, a managing agent under the Amended Credit Facilities.
Morgan Guaranty Trust Company of New York, a wholly owned subsidiary of
J.P. Morgan & Co. Incorporated, is an affiliate of J.P. Morgan Securities Inc.,
the lead manager of the offering. The Chase Manhattan Bank is an affiliate of
Chase Securities Inc., one of the co-managers of the offering. See "Underwrit-
ing".

RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for the Company for the fiscal years
ended February 1, 1997, February 3, 1996 and January 28, 1995 was 2.76, 3.09
and 3.27, respectively.

S-3
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of February
1, 1997, and as adjusted to give effect to (i) the Repurchase, (ii) the issu-
ance by the Company of 2,311,186 shares of Common Stock upon exercise of the
over-allotment option by the underwriters in the Secondary Offering, (iii)
borrowings under the Amended Credit Facilities in connection with the
Repurchase and (iv) the issuance of the Debentures and the application of the
net proceeds therefrom to repay borrowings under the Amended Credit Facilities.
The Company did not receive any of the proceeds from the sale of shares of Com-
mon Stock in the Secondary Offering, other than proceeds from the sale of
shares sold in connection with the exercise of the over-allotment option.

<TABLE>
<CAPTION>
FEBRUARY 1, 1997
----------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C>
Current maturities of long-term debt.................... $ 57 $ 57
Current obligations under capital leases................ 9 9
Long term debt, less current maturities:
Bank lines of credit(2)............................... 1,140 1,294(3)
Debentures............................................ -- 300
Other unsecured senior debt........................... 1,346 1,346
Debt secured by real estate........................... 71 71
Capital leases........................................ 56 56
------ ------
Total debt.......................................... 2,679 3,133
Shareholders' equity:
Common Stock of $1.00 par value; 325,000,000 shares
authorized; 149,889,236 shares issued................ 150 150
Additional paid-in capital............................ 362 398
Retained earnings..................................... 2,137 2,137
Less cost of treasury stock (3,974,595 shares as of
February 1, 1997; 13,885,631 shares as adjusted)(4).. (114) (604)
------ ------
Total shareholders' equity.......................... 2,535 2,081
------ ------
Total capitalization................................ $5,214 $5,214
====== ======
Total debt to total capitalization(5)............... 51.4% 60.1%
====== ======
</TABLE>
- --------
(1) Does not give effect to the payment by the Company of underwriting dis-
counts and commissions in connection with the Debentures offering.
(2) At February 1, 1997, $957 million was drawn under the Company's $1 billion
Credit Facility, which is available for direct borrowings and as backup
support for commercial paper. At February 1, 1997, the Company also had
available an additional $250 million and $320 million under committed and
uncommitted bank lines, respectively, of which $183 million was outstanding
under the committed bank lines and none was outstanding under the uncommit-
ted bank lines. On March 28, 1997, the Company increased the capacity of
the Credit Facility from $1 billion to $2 billion through the Amended
Credit Facilities, which include a $1.5 billion five-year revolving credit
facility and a $500 million 364-day revolving credit facility.
(3) Does not give effect to the payment by the Company of the underwriting dis-
counts and commissions of $23 million and additional expenses in connection
with the Secondary Offering and the Repurchase.
(4) Shares purchased in the Repurchase resulted in an addition to treasury
shares. Shares sold in connection with the over-allotment option in the
Secondary Offering were from treasury shares.
(5) Total debt consists of debt (including current maturities) plus obligations
under capital leases. Total capitalization consists of total debt plus
shareholders' equity.

S-4
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data in the following table (other than the
information under "Other Data", which is unaudited) for each of the five years
in the period ended February 1, 1997 have been derived from the Company's con-
solidated financial statements which have been audited by Ernst & Young LLP,
independent auditors.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
1997(1) 1996(2) 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND "OTHER DATA")
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Sales.................. $18,678,129 $18,308,894 $18,355,126 $18,763,439 $19,051,180
Cost of merchandise
sold, including
warehousing and
transportation
expenses(3)........... 13,713,151 13,558,690 13,603,882 13,985,115 14,250,344
----------- ----------- ----------- ----------- -----------
Gross profit........... 4,964,978 4,750,204 4,751,244 4,778,324 4,800,836
Operating and
administrative
expenses(3)........... 4,203,302 4,043,381 4,101,176 4,136,442 4,177,522
----------- ----------- ----------- ----------- -----------
Operating profit....... 761,676 706,823 650,068 641,882 623,314
Other income (expense):
Interest expense....... (171,558) (159,545) (170,703) (189,773) (214,394)
Other.................. (85,566) 3,638 126,898 28,696 (30,639)
----------- ----------- ----------- ----------- -----------
Total other income
(expense)............. (257,124) (155,907) (43,805) (161,077) (245,033)
----------- ----------- ----------- ----------- -----------
Earnings before income
taxes and
extraordinary item.... 504,552 550,916 606,263 480,805 378,281
Federal and state
income taxes.......... (217,331) (234,107) (261,079) (218,715) (170,815)
----------- ----------- ----------- ----------- -----------
Earnings before
extraordinary item.... 287,221 316,809 345,184 262,090 207,466
Extraordinary item--
early retirement of
debt, net of taxes.... -- -- -- (15,000) --
----------- ----------- ----------- ----------- -----------
Net earnings........... $ 287,221 $ 316,809 $ 345,184 $ 247,090 $ 207,466
=========== =========== =========== =========== ===========
Average common shares
outstanding (in
thousands)(4)......... 145,888 146,943 142,767 142,202 140,314
Earnings per common
share before
extraordinary
item(4)............... $ 1.97 $ 2.16 $ 2.42 $ 1.85 $ 1.48
Extraordinary item(4).. -- -- -- (.11) --
----------- ----------- ----------- ----------- -----------
Net earnings per common
share(4).............. $ 1.97 $ 2.16 $ 2.42 $ 1.74 $ 1.48
=========== =========== =========== =========== ===========
Fully diluted earnings
per share(4).......... $ 1.97 $ 2.16 $ 2.33 $ 1.69 $ 1.44
=========== =========== =========== =========== ===========
FINANCIAL STATISTICS
Gross profit margin.... 26.6 % 25.9 % 25.9 % 25.5 % 25.2 %
Operating profit
margin................ 4.1 % 3.9 % 3.5 % 3.4 % 3.3 %
Capital
expenditures(5)....... $ 999,986 $ 801,371 $ 565,313 $ 652,928 $ 476,617
Depreciation and
amortization.......... 440,445 404,562 407,286 384,307 370,439
Total assets........... 7,881,405 7,362,964 7,031,566 6,927,434 6,763,793
Working capital........ 364,815 96,264 200,664 (58,290) 101,215
Total debt............. 2,679,147 2,240,168 2,205,291 2,167,999 2,248,316
Shareholders' equity... 2,535,427 2,354,496 2,050,921 1,742,285 1,544,014
FIFO EBITDA(6)......... 1,227,963 1,127,829 1,192,437 1,062,089 979,663
Cash dividends per
common share(4)....... $ .64 $ .56 $ .48 $ .40 $ .36
OTHER DATA
Comparable store sales
increase (decrease)... 3.3 % 1.4 % 0.5 % (0.7)% (0.5)%
Total stores(7)........ 1,695 1,650 1,597 1,695 1,672
Total retail square
footage (in
thousands)............ 33,823 32,523 31,179 32,727 32,320
Number of stores
opened/acquired(7).... 122 92 49 98 151
</TABLE>
- --------
(1) Includes special charges totaling $100 million, pre-tax ($.41 per share
after tax), included in gross profit ($10 million), operating and adminis-
trative expenses ($15.5 million) and other ($74.5 million).
(2) Fifty-three week fiscal year.
(3) Beginning with the first quarter of 1996, advertising expense is classified
as cost of merchandise sold, rather than operating expense. Prior periods
have been reclassified to conform to the new presentation.
(4) Restated as necessary to reflect the April 1994 two-for-one common stock
split.
(5) Amount includes capitalized leases and the net present value of property,
plant and equipment leased under operating leases.
(6) Earnings before LIFO inventory charges, interest expense, taxes, deprecia-
tion and amortization. EBITDA is not derived pursuant to generally accepted
accounting principles ("GAAP") and therefore should not be construed as an
alternative to operating profit, as an alternative to cash flows from oper-
ating activities (as determined in accordance with GAAP) or as a measure of
liquidity.
(7) Includes jointly operated combination stores which are each counted as two
separate stores.

S-5
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

Comparisons between years are rendered difficult due to (i) the fact that not
all fiscal years being compared were the same length; the 1995 fiscal year
included 53 weeks while the 1996 and 1994 fiscal years included 52 weeks and
(ii) the disposition of the 33-store Star Market food division in the third
quarter of 1994 and the 45 Acme Markets stores in the fourth quarter of 1994
(disposed of operations).

Total sales and the percentage change in comparable store sales (sales from
stores that have been open at least one year, including replacement stores) for
the 1996 52-week fiscal year, the 1995 53-week fiscal year and the 1994 52-week
fiscal year, are set forth in the tables below. Sales from continuing opera-
tions increased 2.0% in 1996 and 4.5% in 1995. Adjusting for the extra week in
1995, total sales from continuing operations would have increased 4.0% in 1996
and 2.6% in 1995. The improvement in total and comparable food store operations
sales in 1996 is primarily a result of increased capital spending and more
effective marketing efforts, including customer loyalty cards and targeted mar-
keting promotions. Total and comparable sales in 1996 also increased due to the
impact of a nine-day labor dispute in the first quarter of 1995 in the food
store operations. Drug store operations total and comparable sales increased in
1996 due primarily to capital spending and increased pharmacy sales. The
increase in 1995 sales from continuing operations is primarily a result of
improved performance at both operating divisions and the extra week of opera-
tions.

TOTAL SALES

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Food store operations............................. $13,420 $13,302 $12,959
Drug store operations............................. 5,227 4,995 4,544
Other............................................. 31 12 12
------- ------- -------
Continuing operations............................. 18,678 18,309 17,515
Disposed of operations............................ -- -- 840
------- ------- -------
Total sales..................................... $18,678 $18,309 $18,355
======= ======= =======

COMPARABLE STORE SALES

<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(PERCENTAGE CHANGE)
<S> <C> <C> <C>
Eastern food operations........................... 2.2% 1.5 % 0.7 %
Western food operations........................... 2.4% (0.8)% (1.8)%
Drug store operations............................. 5.8% 4.8 % 4.2 %
Total change...................................... 3.3% 1.4 % 0.5 %
</TABLE>

Beginning in the first quarter of 1996, the Company, in connection with its
consolidation efforts, classified advertising expense as a cost of merchandise
sold. Previously, these expenses were classified as operating expenses. Prior
years have been reclassified to conform to the current year presentation.

Gross profit as a percent of sales increased to 26.6% in 1996, compared to
25.9% in 1995 and 1994. The increase in 1996 gross profit over 1995 is prima-
rily due to benefits realized from centralized procurement, better product mix
and lower warehousing costs. Advertising expense also decreased due to the
shift from

S-6
<PAGE>

newspaper and print advertising to direct mail targeted marketing. These
improvements were partially offset by lower pharmacy margins due to a shift
from cash to lower margin third-party customers and a $10.0 million ($.04 per
share) special charge to adjust inventories to a common inventory valuation
method. Gross profit in 1995 was essentially flat compared to 1994. Gross
profit was favorably impacted in 1995 primarily as a result of the disposed of
operations, which produced lower margins than the continuing operations, and
improvements in the food store operations due to improved product mix and pro-
motional strategies. However, these increases were adversely affected by com-
petitive drug store pharmacy gross margins and the impact of a nine-day labor
dispute in the first quarter of 1995 in the food store operations. The annual
pre-tax LIFO charge to earnings amounted to $11.4 million in 1996, $12.8 mil-
lion in 1995 and $8.2 million in 1994.

Operating expense as a percent of sales increased to 22.5% in 1996, compared to
22.1% in 1995 and decreased compared to 22.3% in 1994. The increase in 1996 is
primarily due to special charges of $15.5 million ($.06 per share) for sever-
ance costs related primarily to the consolidation of certain warehouse and
office facilities and increased costs associated with new stores, offset in
part by lower self-insurance costs, better overall cost control and improved
sales. In 1995, operating expense in the food store operations benefited from
the renegotiation of a labor contract with the United Food and Commercial Work-
ers International. The new contract will expire in 1999, and replaced a con-
tract scheduled to expire in 1996. As a result of the early termination of the
contract, certain health and welfare savings, which were being recognized over
the life of the old contract, were immediately recognized in the third quarter
of 1995. Operating expense in the food store operations also decreased in 1995
due to lower self-insurance costs, productivity improvements and better overall
cost control, which were partially offset by the impact of the nine-day labor
dispute. In addition, improved sales, lower insurance costs and better overall
cost control in the drug store operations helped lower 1995 operating expense
as a percent of sales. Operating expense in 1994 included charges of $23.9 mil-
lion ($.10 per share) for centralization of administrative functions, including
information technology and accounting and expenses for the consolidation of the
computer data centers and a voluntary severance program initiated at Acme Mar-
kets, totaling $11.2 million ($.05 per share).

Total operating profit for the last three fiscal years is set forth in the fol-
lowing table. Operating profit from continuing operations increased 7.8% in
1996, 11.9% in 1995 and 4.4% in 1994. Total operating profit was 4.1% of sales
in 1996, 3.9% of sales in 1995 and 3.5% of sales in 1994. The increase in 1996
operating profit is primarily due to stronger sales and improved gross profit
margins. The increase in 1995 operating profit and operating profit as a per-
cent of sales is primarily due to strong performances from the Company's core
operations and the extra week of operations included in 1995. In addition,
operating profit in the food store operations improved in 1995 due to success-
ful joint marketing of the combination stores, and lower health and welfare
costs associated with the renegotiated labor contract. Operating profit in the
drug store operations improved in 1995 due to lower insurance costs and better
cost control slightly offset by the start-up costs of 71 new stores, including
17 acquired Clark drug stores.

OPERATING PROFIT

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Food store operations................................ $608.3 $542.9 $504.1
Drug store operations................................ 260.0 245.4 228.5
LIFO charge.......................................... (11.4) (12.8) (8.2)
Purchase accounting amortization..................... (78.7) (76.8) (78.6)
Other................................................ (16.5) 8.1 (14.1)
------ ------ ------
Continuing operations................................ 761.7 706.8 631.7
Disposed of operations............................... -- -- 18.4
------ ------ ------
Total operating profit............................. $761.7 $706.8 $650.1
====== ====== ======
</TABLE>

S-7
<PAGE>

Interest expense increased in 1996 due to increased borrowings including the
addition of the $350 million principal amount of 30-year, 8% debentures which
partially replaced short-term variable rate debt. Interest expense decreased in
1995 and 1994 due to lower average interest rates resulting from the
refinancing of high coupon borrowings at lower rates and lower average debt
levels. Interest expense also benefited from the conversion of a portion of the
convertible notes from debt to equity in the first quarter of 1995. The caption
"Other" in 1996 of $85.6 million included special charges of $74.5 million
($.31 per share) for expenses related mainly to the closure of certain stores,
warehouses and offices, and asset impairment charges. The caption "Other" in
1994 of $126.9 million included non-recurring gains of $121.0 million on the
sale of the Star Market food division, $41.2 million on the sale of 45 Acme
Markets stores and a charge of $31.3 million for closed store costs (totaling
$.54 per share).

The Company's effective income tax rates were 43.1% in 1996, 42.5% in 1995 and
43.1% in 1994. The increase in the 1996 effective tax rate is due to lower
earnings caused by the special charges, the impact of goodwill charges and
lower tax credits. The disposition of assets during 1995 and 1994 in states
with higher tax rates resulted in lower effective income tax rates in 1995.

The Company recorded special charges aggregating approximately $100.0 million,
before taxes, or $.41 per share, during 1996 related primarily to its Delta
initiatives. The Delta initiatives are designed to transform the Company from a
holding company to a unified operating company.

The components of the charge include: warehouse consolidation costs, adminis-
trative office consolidation costs, closed store costs, asset impairment costs
and other miscellaneous charges. The cost of consolidating four general mer-
chandise warehouses into one in southern California totaled $26.4 million and
is primarily related to lease termination costs, a reserve for the anticipated
loss on the sale of owned facilities (based on management's estimated fair mar-
ket value) and adjusting inventories to a common inventory valuation method.
The cost of consolidating administrative offices in Salt Lake City and Chicago
totaled $26.3 million and relates to asset write-offs, lease termination costs
and severance costs. The severance components resulted from the Company's com-
mitment to restructure and consolidate human resources, payroll, Drug Store
administration and general merchandise buying functions. Closed store costs
included mainly lease termination costs and fixed asset write-offs totaling
$12.9 million. Asset impairment charges totaling $26.4 million consist of
replacements of outdated computer systems and impairment of groups of stores
and other assets that do not fit the long-term strategic plan of the Company.
In addition, other reserves totaling $8.0 million were recorded. The special
charges are included in cost of merchandise sold ($10.0 million), operating and
administrative expenses ($15.5 million) and other non-operating expense ($74.5
million). As of year-end 1996, the Company charged $18.0 million against the
reserve, of which $12.3 million related to asset impairment. Disposal of
impaired assets is expected to be complete in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities decreased by $111.3 million from 1995 to
1996 primarily due to increased inventory related to new warehouses and
increased store square footage related to the Company's capital program. Cash
and cash equivalents and accounts payable at the end of 1996 were lower than
the end of 1995 and 1994 due primarily to the timing of vendor payments at the
end of the fiscal year.

Cash capital expenditures amounted to $877.6 million in 1996, $750.9 million in
1995 and $538.0 million in 1994. Additional capital expenditures represented by
the net present value of leases amounted to $122.4 million in 1996, $50.5 mil-
lion in 1995 and $27.3 million in 1994. The increase in capital expenditures in
1996 reflects the Company's commitment to its expanded capital expenditure pro-
gram announced in 1992.

S-8
<PAGE>

The following table shows store counts for new, remodeled and closed stores in
total and net of jointly operated combination stores, which are counted in a
food store division and a drug store division as two separate stores:

STORE COUNTS
<TABLE>
<CAPTION>
PROJECTED
1997 1996 1995 1994
--------- ---- ---- ----
NEW
- ---
<S> <C> <C> <C> <C>
Gross.................................................. 100 122 92 49
Combination stores..................................... 20 23 5 4
--- --- --- ---
Net new stores......................................... 80 99 87 45
REMODELS
- --------
Gross.................................................. 100 94 223 166
Combination stores..................................... 20 10 25 11
--- --- --- ---
Net remodels........................................... 80 84 198 155
CLOSED
- ------
Gross.................................................. 77 39 147
Combination stores..................................... 10 1 3
--- --- ---
Net closed stores...................................... 67 38 144
</TABLE>

Capital expenditures for fiscal 1997, including the net present value of
leases, are expected to approximate $1.0 billion and will be funded through
cash flow from operations, credit facilities and other long-term borrowings.

In June of 1996, the Company issued $350 million, 8.0% debentures due June 1,
2026 at 99.3% to yield 8.1% under an $800 million shelf registration statement
filed on February 18, 1994. The Company received net proceeds of approximately
$344 million which were used to pay off financings totaling $100 million at an
average interest rate of 8.25% and to refinance additional short-term variable
rate borrowings under the Company's principal bank credit agreement.

The net increase in debt, including capitalized leases, was $439.0 million and
$34.9 million in 1996 and 1995, respectively. The increases are due to changes
in working capital, increased capital spending and repurchases of common stock
in 1996 and 1995.

The Company's principal bank credit agreement at year-end 1996 was a $1.0 bil-
lion revolving credit facility which expires in 1999 and is used for direct
borrowings and as backup support for commercial paper. The Company also has
$250 million of 364-day committed bank lines and $320 million of uncommitted
bank lines, which are used for overnight and short-term bank borrowings and
$250 million in availability under a shelf registration statement. At year-end
1996, the Company had $957 million of debt supported by the credit facility and
$183 million outstanding under bank lines, leaving unused committed borrowing
capacity of $110 million.

In June of 1996, the Company replaced its existing stock repurchase program
with a new repurchase program which authorizes the repurchase of up to two mil-
lion shares of common stock. During 1996 the Company repurchased 1.1 million
shares of its common stock at an average price of $34.67 per share in accord-
ance with the Company's stock repurchase programs. As of February 1, 1997, an
additional 1.9 million shares remained authorized for repurchase.

Working capital amounted to $364.8 million at year-end 1996 compared to $96.3
million at year-end 1995 and $200.7 million at year-end 1994. Cash and cash
equivalents and accounts payable at the end of 1996 were lower than at the end
of 1995 primarily due to the timing of vendor payments at the end of the fiscal
year.

S-9
<PAGE>

Inventory increased due to new warehouses and increased store square footage
related to the Company's capital program.

The Company's ratio of total debt (debt plus obligations under capital leases)
to total capitalization (total debt plus common shareholders' equity) amounted
to 51.4%, 48.8% and 51.8% at year-end 1996, 1995 and 1994, respectively.

The Company believes that its cash flow from operations, supplemented by the
Amended Credit Facilities, committed and uncommitted credit facilities, other
long-term borrowings, $250 million in availability under a shelf registration
statement, as well as its ability to refinance debt, will be adequate to meet
its presently identifiable cash requirements.

During 1996, the Company entered into an interest rate swap agreement with a
notional amount of $200 million, for the purpose of hedging the interest rate
on debt the Company anticipates issuing in 1997. The estimated fair value of
the interest rate swap agreement based on market quotes at year-end 1996 was
$2.8 million. The swap agreement is being unwound in connection with the sale
of the 2037 Debentures. See "Underwriting".

The Company also uses derivative financial instruments to manage interest and
currency risks on a foreign borrowing, due in 1999, that had an outstanding
principal balance of $160 million at year-end 1996.

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.

CONTINGENCIES

INFLATION

In recent years, the impact of inflation on the Company's results of operations
has been moderate. As operating expenses and inventory costs have increased,
the Company, to the extent permitted by competition, has recovered these
increases in costs by increasing prices over time.

The Company uses the LIFO (last-in, first-out) method of accounting for the
majority of its inventories. Under this method, the cost of merchandise sold
reported in the financial statements approximates current costs and thus
reduces the distortion in reported earnings due to increasing costs.

The historical costs of property, plant and equipment recorded by the Company
were incurred over a period of many years. The cost of replacing property,
plant and equipment is generally greater than the cost on the books of the Com-
pany as a result of inflation that has occurred over the years since the prop-
erty, plant and equipment were placed in service.

DELTA INITIATIVES

Delta is a series of initiatives designed as a self-consolidation and
reengineering program that is transforming the Company from a holding company
to an operating company. Prior to Delta, the Company operated as seven autono-
mous companies with different systems and processes. The goal of Delta is to
build on the size of the Company and to develop common business processes and
systems to best manage growth for the future. Delta is designed to improve the
Company's ability to purchase products and move them through the supply-chain

S-10
<PAGE>

more quickly, efficiently and cost-effectively, which also results in more
efficient store operations. It seeks to achieve these goals through changes in
the Company's purchasing, warehousing, inventory control and distribution sys-
tems. The information gathered from the common systems and processes assists
the Company's marketing and merchandising programs. Each Delta initiative has a
different timeline, but the majority of the supply-chain initiatives are
targeted for completion by the end of 1997. Management believes the benefits of
Delta will begin to exceed costs for the second half of 1997. To continue to
meet customer needs, the Company intends to maintain store operations, market-
ing and merchandising on a local level. Some examples of how Delta has been
implemented into the business are: (i) centralization of the procurement and
logistics groups; (ii) execution of national contracts with selected vendors
for greeting cards, photo-finishing, spices, magazines and, most recently,
whole-bean coffee; (iii) installation of computerized warehouse systems in over
90% of the Company's warehouses, reducing labor cost and increasing the effi-
ciency of replenishment; (iv) consolidation of four general merchandise ware-
houses in southern California into a single facility; and (v) consolidation of
administrative, real estate, construction and information technology functions.

S-11
<PAGE>

DESCRIPTION OF DEBENTURES

The following description of the particular terms of the Debentures offered
hereby (referred to in the Prospectus as the "Offered Debt Securities") supple-
ments the description of the general terms and provisions of Debt Securities
set forth in the Prospectus, to which description reference is hereby made.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Prospectus.

As used in the Prospectus or this Prospectus Supplement, a "holder" refers to a
registered holder of a Debt Security.

2017 DEBENTURES

The 2017 Debentures will mature on May 1, 2017 and will be unsecured obliga-
tions of the Company. The 2017 Debentures will be issued under the Senior Debt
Indenture and will rank pari passu with all other unsecured and unsubordinated
debt of the Company, including the 2037 Debentures. Each 2017 Debenture will
bear interest at the rate of 7.90% per annum from the date of issue, payable
semiannually on May 1 and November 1 of each year, commencing November 1, 1997
to the person in whose name the 2017 Debenture (or any predecessor 2017 Deben-
ture) is registered at the close of business on the April 15 or October 15 next
preceding such interest payment date. The 2017 Debentures will be issued only
in fully registered form in denominations of $1,000 or any integral multiple
thereof.

Redemption

The 2017 Debentures will not be subject to redemption prior to maturity and
will not be subject to any mandatory sinking fund provisions.

2037 DEBENTURES

The 2037 Debentures will mature on May 1, 2037 and will be unsecured obliga-
tions of the Company. The 2037 Debentures will be issued under the Senior Debt
Indenture and will rank pari passu with all other unsecured and unsubordinated
debt of the Company, including the 2017 Debentures. Each 2037 Debenture will
bear interest at the rate of 7.50% per annum from the date of issue, payable
semiannually on May 1 and November 1 of each year, commencing November 1, 1997
to the person in whose name the 2037 Debenture (or any predecessor 2037 Deben-
ture) is registered at the close of business on the April 15 or October 15 next
preceding such interest payment date. The 2037 Debentures will be issued only
in fully registered form in denominations of $1,000 or any integral multiple
thereof.

Redemption

The 2037 Debentures will not be subject to redemption at the option of the Com-
pany prior to maturity and will not be subject to any mandatory sinking fund
provisions.

The 2037 Debentures will be redeemable at the option of each of the holders on
May 1, 2009, at a redemption price equal to the principal amount of the 2037
Debentures. Interest due on May 1, 2009 will be payable on such date to holders
at the close of business on April 15, 2009. To exercise the redemption option,
a holder must deliver a notice of exercise of such option to the Company at the
Corporate Trust Office of the Trustee (or such other location of which the Com-
pany shall notify holders) no earlier than March 2, 2009 and no later than
March 31, 2009. Any such notice of exercise of the redemption option shall be
irrevocable. The redemption option may be exercised by a holder for less than
the entire principal amount of the 2037 Debentures held by such holder, so long
as the principal amount that is to be redeemed is equal to $1,000 or any inte-
gral multiple thereof.

So long as the 2037 Debentures are represented by a Global Debenture held by or
on behalf of DTC, and registered in the name of DTC or DTC's nominee (as
described below), the redemption option for repayment may be exercised only by
DTC or DTC's nominee, as registered holder on behalf of the beneficial owners
of interests in the Global Debenture representing 2037 Debentures. Owners of
beneficial interests in the Global Debenture representing 2037 Debentures who
desire to have DTC or DTC's nominee exercise the redemption option on their
behalf will be required to give timely notice to DTC through the participant in
DTC through which such beneficial interest is held in accordance with the poli-
cies and procedures of DTC in effect at that time. See "--Book Entry System".

S-12
<PAGE>

Under DTC procedures currently in effect: In order to ensure that a notice is
received by the Trustee on a particular day, each beneficial owner of an inter-
est in a Global Debenture representing 2037 Debentures must so direct the par-
ticipant in DTC through which such beneficial owner holds his interest before
such participant's deadline for accepting instructions for that day. Different
firms may have different deadlines for accepting instructions from their cus-
tomers. Accordingly, each beneficial owner of an interest in a Global Debenture
representing 2037 Debentures should consult the participant through which it
owns its interest therein for the deadlines for such participant. All notices
must be executed by a duly authorized officer of such participant (with signa-
ture guaranteed) and must be irrevocable. In addition, each beneficial owner of
an interest in a Global Debenture representing 2037 Debentures must effect
delivery at the time such notices of election are given to DTC by causing the
applicable participant to transfer such beneficial owner's interest in such
Global Debenture representing 2037 Debentures on DTC's records to the Trustee.

GENERAL

Holders of the Debentures may present their Debentures for payment of interest
and principal, or for exchange or transfer of the Debentures, at the office of
the Trustee maintained at First Chicago Trust Company of New York located at 14
Wall Street, 8th Floor, Window 2, New York, New York 10005. The First National
Bank of Chicago, who is acting as the Trustee, is also a lender in the Amended
Credit Facilities.

Settlement by the purchasers of Debentures will be made in immediately availa-
ble funds. The 2017 Debentures and the 2037 Debentures will each be issued in
the form of one fully registered global security, legended as required by the
Senior Debt Indenture, representing the aggregate principal amount of such
series of Debentures, that will be deposited with, or on behalf of, DTC, and
registered in the name of Cede & Co., the nominee of DTC. All payments by the
Company to DTC of principal and interest will be made in immediately available
funds. See "--Book-Entry System".

As of February 1, 1997, the Company's subsidiaries had approximately $3,498
million of debt and other obligations. See "Description of Debt Securities--
General" in the Prospectus.

On April 23, 1997, the Company filed a registration statement pursuant to Rule
462(b) promulgated by the Commission, increasing by $50 million the aggregate
amount of Debt Securities that may be offered pursuant to the Prospectus to
which this Prospectus Supplement relates. The Company has previously issued
$200 million 7.40% Debentures due May 15, 2005 and $350 million 8% Debentures
due June 1, 2026 under the Senior Debt Indenture.

BOOK-ENTRY SYSTEM

The Global Debentures will be registered in the name of DTC's nominee. Except
as set forth below, a Global Debenture may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of
DTC or by DTC or any such nominee to a successor of DTC or a nominee of such
successor.

DTC has advised the Company and the Underwriters that it is a limited-purpose
trust company organized under the laws of the State of New York, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the pro-
visions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC
was created to hold securities of its participants and to facilitate the clear-
ance and settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the partici-
pants, thereby eliminating the need for physical movement of securities certif-
icates. DTC's participants include securities brokers and dealers (including
the Underwriters), banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own DTC.
Access to DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by DTC only through par-
ticipants.

Upon the issuance by the Company of the Global Debentures, DTC will credit, on
its book-entry registration and transfer system, the respective principal
amounts of Debentures to the accounts of participants. The

S-13
<PAGE>

accounts to be credited will be designated by the applicable Underwriter. Own-
ership of beneficial interests in a Global Debenture will be limited to partic-
ipants or persons that may hold interests through participants. Beneficial
interests in a Global Debenture will be shown on, and the transfer thereof will
be effected only through, records maintained by DTC (with respect to beneficial
interests of participants) or by participants or persons that may hold inter-
ests through participants (with respect to beneficial interests of beneficial
owners). The laws of some states require that certain purchasers of securities
take physical delivery of such securities in certificated form. Such limits and
such laws may impair the ability to transfer beneficial interests in a Global
Debenture.

For a Global Debenture, so long as DTC or its nominee is the registered owner
of such Global Debenture, DTC or its nominee, as the case may be, will be con-
sidered the sole owner or holder of the Debentures represented by such Global
Debenture for all purposes under the Senior Debt Indenture. Except as provided
below, owners of beneficial interests in a Global Debenture will not be enti-
tled to have Debentures represented by such Global Debenture registered in
their names, will not receive or be entitled to receive physical delivery of
such Debentures in certificated form and will not be considered the owners or
holders thereof under the Senior Debt Indenture.

Principal and interest payments in respect of the Debentures will be made in
immediately available funds by the Company to DTC or its nominee, as the case
may be, as the holder of the related Global Debentures. Neither the Company nor
the Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership inter-
ests in the Global Debentures, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. Neither the Company
nor the Trustee will have any responsibility or liability for DTC's exercise of
or failure to exercise the redemption option with respect to any of the 2037
Debentures on behalf of any holder of a beneficial interest therein, other than
the Company's obligation to redeem such 2037 Debentures if such option is prop-
erly exercised by DTC or its nominee, as registered holder, in accordance with
the procedures specified therefor. The Company expects that DTC, upon receipt
of any payment of principal or interest in respect of the Global Debentures,
will credit immediately the accounts of the related participants with payment
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in such Global Debentures as shown on the records of DTC.
The Company also expects that payments by participants to owners of beneficial
interests in the Global Debentures will be governed by standing customer
instructions and customary practices, as is now the case, with securities held
for the accounts of customers in bearer form or registered in "street name",
and will be the responsibility of such participants. Payments to DTC in respect
of the Debentures which are represented by the Global Debentures shall be the
responsibility of the Company or the Trustee, disbursement of such payments to
direct participants shall be the responsibility of DTC and disbursement of such
payments to beneficial owners shall be the responsibility of direct and indi-
rect participants.

Conveyance of notices and other communications by DTC to direct participants,
by direct participants to indirect participants and by direct and indirect par-
ticipants to beneficial owners, and vice versa, are governed by arrangements
among them, subject to statutory or regulatory requirements as may be in effect
from time to time; and neither the Company nor the Trustee will have any
responsibility or liability with respect thereto.

The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy of such information.

If DTC is at any time unwilling or unable to continue as depositary and a suc-
cessor depositary is not appointed by the Company within 90 days, the Company
will issue Debentures in certificated form in exchange for each Global Deben-
ture. In addition, the Company may at any time determine not to have Debentures
represented by the Global Debentures. In any such instance, owners of benefi-
cial interests in the Global Debentures will be entitled to physical delivery
of Debentures in certificated form equal in principal amount to such beneficial
interest and to have such Debentures registered in their names. Debentures so
issued in certificated form will be issued in denominations of $1,000 or any
integral multiple thereof and will be issued in registered form only, without
coupons.

S-14
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreements,
each dated April 29, 1997 (the "Underwriting Agreements"), the Company has
agreed to sell to each of the underwriters named below (the "Underwriters"),
and each of the Underwriters has severally agreed to purchase, the principal
amount of the type of Debentures set forth opposite its name below.

<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
UNDERWRITER 2017 DEBENTURES 2037 DEBENTURES
----------- --------------- ---------------
<S> <C> <C>
J.P. Morgan Securities Inc................... $ 25,000,000 $ 50,000,000
Chase Securities Inc. ....................... 25,000,000 50,000,000
Morgan Stanley & Co. Incorporated............ 25,000,000 50,000,000
Salomon Brothers Inc ........................ 25,000,000 50,000,000
------------ ------------
Total...................................... $100,000,000 $200,000,000
============ ============
</TABLE>

Under the terms and conditions of the Underwriting Agreements, the Underwriters
are committed to take and pay for all the Debentures, if any are taken.

The Underwriters propose to offer the 2017 Debentures in part directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession not to exceed .50% of the principal amount of the 2017 Deben-
tures. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed .25% of the principal amount of the 2017 Debentures to certain
brokers and dealers. The Underwriters propose to offer the 2037 Debentures in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession not to exceed .40% of the principal
amount of the 2037 Debentures. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed .25% of the principal amount of the 2037
Debentures to certain brokers and dealers. After the Debentures are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the Underwriters.

The 2017 Debentures and the 2037 Debentures are new issues of securities with
no established trading markets. The Underwriters have advised the Company that
they intend to make markets in the Debentures but are not obligated to do so
and may discontinue market making at any time without notice. No assurance can
be given as to liquidity of the trading markets for the Debentures.

The Company has agreed to indemnify the Underwriters against certain liabili-
ties, including liabilities under the Securities Act of 1933, as amended.

In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Debentures or
other securities of the Company. Specifically, the Underwriters may overallot
the offering, creating a syndicate short position. In addition, the Underwrit-
ers may bid for, and purchase, the Debentures in the open market to cover syn-
dicate shorts or to stabilize the price of the Debentures. Finally, the under-
writing syndicate may reclaim selling concessions allowed for distributing the
Debentures in the offering, if the syndicate repurchases previously distributed
Debentures in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Debentures above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.

In December 1996, the Company entered into an interest rate swap agreement with
J.P. Morgan Securities Inc., as agent for Morgan Guaranty Trust Company of New
York, with a notional amount of $200 million, for the purpose of hedging the
interest rate on debt the Company anticipated issuing in 1997. This interest
rate swap is to be settled in cash by a payment to the Company of approximately
$6.2 million on May 1, 1997 in connection with the sale of the 2037 Debentures.
Such amount will be amortized as a reduction in interest expense payable on the
2037 Debentures over the expected term of the 2037 Debentures.

S-15
<PAGE>

The net proceeds from the sale of the Debentures are expected to be used to
reduce a portion of the outstanding borrowings under the Amended Credit Facili-
ties under which (i) an affiliate of J.P. Morgan Securities Inc. is the agent
bank and a lender and (ii) an affiliate of Chase Securities Inc. is a managing
agent and a lender. See "Use of Proceeds". Because more than 10% of the pro-
ceeds of the offering are intended to be directed to affiliates of J.P. Morgan
Securities Inc. and Chase Securities Inc., the offering is being made pursuant
to the provisions of section (c)(8) of Rule 2710 of the NASD Conduct Rules.
Henry I. Bryant, a Managing Director of J.P. Morgan & Co. Incorporated, the
parent of J.P. Morgan Securities Inc., is a director of the Company.

In the ordinary course of their respective businesses, affiliates of the Under-
writers have engaged, and may in the future engage, in other commercial banking
and investment banking transactions with the Company and its affiliates.

LEGAL MATTERS

The legality of the Debentures is being passed upon for the Company by
Wachtell, Lipton, Rosen & Katz, New York, New York. Certain legal matters in
connection with the Debentures are being passed upon for the Underwriters by
Davis Polk & Wardwell, New York, New York.

EXPERTS

The consolidated financial statements of American Stores Company included
herein and incorporated by reference in the Company's Annual Report on Form 10-
K for the year ended February 1, 1997 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included herein and
therein and incorporated herein by reference. Such financial statements are,
and audited financial statements to be included in subsequently filed documents
will be, incorporated herein in reliance upon the reports of Ernst & Young LLP
pertaining to such financial statements (to the extent covered by consents
filed with the Commission) given upon the authority of such firm as experts in
accounting and auditing.

S-16
<PAGE>

AMERICAN STORES COMPANY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Statements of Earnings for the fiscal years 1996, 1995 and
1994.................................................................... F-3
Consolidated Balance Sheets as of the end of the fiscal years 1996, 1995
and 1994................................................................ F-4
Consolidated Statements of Cash Flows for the fiscal years 1996, 1995 and
1994.................................................................... F-5
Consolidated Statements of Shareholders' Equity for the fiscal years
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

AMERICAN STORES COMPANY

REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
American Stores Company

We have audited the accompanying consolidated balance sheets of American Stores
Company and subsidiaries as of February 1, 1997, February 3, 1996 and January
28, 1995, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
February 1, 1997. 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.

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 February 1, 1997, February 3, 1996 and January 28,
1995, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended February 1, 1997, in con-
formity with generally accepted accounting principles.

ERNST & YOUNG LLP

March 14, 1997, except for
the Subsequent Events Note,
as to which the date is
April 8, 1997
Salt Lake City, Utah

F-2
<PAGE>

AMERICAN STORES COMPANY

CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales.................................. $18,678,129 $18,308,894 $18,355,126
Cost of merchandise sold, including
warehousing and transportation
expenses.............................. 13,713,151 13,558,690 13,603,882
----------- ----------- -----------
Gross profit........................... 4,964,978 4,750,204 4,751,244
Operating and administrative expenses.. 4,203,302 4,043,381 4,101,176
----------- ----------- -----------
Operating profit....................... 761,676 706,823 650,068
Other income (expense):
Interest expense..................... (171,558) (159,545) (170,703)
Other................................ (85,566) 3,638 126,898
----------- ----------- -----------
Total other income (expense)........... (257,124) (155,907) (43,805)
----------- ----------- -----------
Earnings before income taxes........... 504,552 550,916 606,263
Federal and state income taxes......... (217,331) (234,107) (261,079)
----------- ----------- -----------
Net earnings........................... $ 287,221 $ 316,809 $ 345,184
=========== =========== ===========
Average shares outstanding............. 145,888 146,943 142,767
Net earnings per share................. $ 1.97 $ 2.16 $ 2.42
=========== =========== ===========
Fully diluted earnings per share....... $ 1.97 $ 2.16 $ 2.33
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

AMERICAN STORES COMPANY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
YEAR-END
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................. $ 37,467 $ 102,422 $ 195,689
Receivables............................... 318,878 319,688 291,760
Inventories............................... 1,725,542 1,572,242 1,526,770
Prepaid expenses.......................... 66,510 69,098 48,711
Deferred income tax benefits.............. 18,099 20,517 69,165
---------- ---------- ----------
Total current assets...................... 2,166,496 2,083,967 2,132,095
Property, plant and equipment, at cost
Land...................................... 636,068 597,804 522,014
Buildings................................. 1,803,752 1,399,561 1,221,871
Fixtures and equipment.................... 2,616,633 2,415,326 2,168,826
Leasehold improvements.................... 781,454 736,682 654,441
---------- ---------- ----------
5,837,907 5,149,373 4,567,152
Less accumulated depreciation and amortiza-
tion...................................... 2,250,876 2,019,557 1,800,714
---------- ---------- ----------
Net property, plant and equipment.......... 3,587,031 3,129,816 2,766,438
Property under capital leases, less accumu-
lated amortization of $110,379 in 1996,
$106,993 in 1995 and $103,760 in 1994..... 66,682 76,084 84,690
Goodwill, less accumulated amortization of
$471,150 in 1996, $418,006 in 1995 and
$365,271 in 1994.......................... 1,665,242 1,722,892 1,771,121
Other assets............................... 395,954 350,205 277,222
---------- ---------- ----------
Total assets.............................. $7,881,405 $7,362,964 $7,031,566
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...... $ 56,703 $ 125,413 $ 132,019
Current obligations under capital leases.. 9,300 9,739 9,195
Accounts payable.......................... 851,285 996,354 883,329
Accrued payroll and benefits.............. 325,806 331,843 350,637
Current portion of self-insurance
reserves................................. 121,144 153,464 179,595
Income taxes payable...................... 21,290 17,292 46,170
Other current liabilities................. 416,153 353,598 330,486
---------- ---------- ----------
Total current liabilities................. 1,801,681 1,987,703 1,931,431
Long-term debt, less current maturities.... 2,556,734 2,038,636 1,988,710
Obligations under capital leases, less cur-
rent obligations.......................... 56,410 66,380 75,367
Self-insurance reserves, less current por-
tion...................................... 403,981 434,028 464,119
Deferred income taxes...................... 348,846 365,978 320,814
Other liabilities.......................... 178,326 115,743 200,204
Shareholders' equity
Common stock of $1.00 par value, author-
ized 325,000,000 shares; issued
149,889,236 shares in 1996 and 1995 and
144,542,156 shares in 1994............... 149,889 149,889 144,542
Additional paid-in capital................ 362,561 345,118 216,418
Retained earnings......................... 2,136,744 1,942,874 1,708,672
Less cost of treasury stock; 3,974,595
shares in 1996, 3,441,451 shares in 1995
and 1,571,094 shares in 1994............. (113,767) (83,385) (18,711)
---------- ---------- ----------
Total shareholders' equity................ 2,535,427 2,354,496 2,050,921
---------- ---------- ----------
Total liabilities and shareholders'
equity................................. $7,881,405 $7,362,964 $7,031,566
========== ========== ==========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

AMERICAN STORES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................ $ 287,221 $ 316,809 $ 345,184
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............. 440,445 404,562 407,286
Net loss (gain) on asset sales............ 265 (3,219) (158,448)
Self-insurance reserves................... (62,367) (56,222) (22,229)
Other..................................... 59,654 (92,688) (88,160)
(Increase) decrease in current assets:
Receivables............................... 810 (32,694) (26,037)
Inventories............................... (152,920) (54,645) (46,149)
Prepaid expenses.......................... 5,006 28,164 (10,347)
(Decrease) increase in current liabilities:
Accounts payable.......................... (145,069) 124,750 (44,369)
Other current liabilities................. 66,759 23,305 (49,866)
Accrued payroll and benefits.............. (6,037) (18,794) 41,108
Income taxes payable...................... 3,998 (30,249) (66,611)
--------- --------- ---------
Total adjustments....................... 210,544 292,270 (63,822)
--------- --------- ---------
Net cash provided by operating activities..... 497,765 609,079 281,362
--------- --------- ---------
Cash flows from investing activities:
Expended for property, plant and equipment.. (877,630) (750,914) (538,033)
Proceeds from disposition of operations..... 377,618
Proceeds from sale of assets................ 47,670 50,511 21,680
Land investments............................ (65,450) (21,697) (7,262)
--------- --------- ---------
Net cash used in investing activities......... (895,410) (722,100) (145,997)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowing........... 350,000 278,500 530,000
Net addition to (reduction of) existing
long-term debt............................. 99,388 (114,869) (479,967)
Principal payments for obligations under
capital leases............................. (10,409) (10,332) (12,741)
Proceeds from exercise of stock options,
other...................................... 24,860 22,049 31,996
Repurchase of common stock.................. (37,798) (72,987)
Cash dividends.............................. (93,351) (82,607) (68,544)
--------- --------- ---------
Net cash provided by financing activities..... 332,690 19,754 744
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (64,955) (93,267) 136,109
Cash and cash equivalents:
Beginning of year........................... 102,422 195,689 59,580
--------- --------- ---------
End of year................................. $ 37,467 $ 102,422 $ 195,689
========= ========= =========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

AMERICAN STORES COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ---------- ---------- --------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances at beginning of
1994................... $144,542 $190,173 $1,432,032 $ (24,462) $1,742,285
Net earnings--1994 (52
weeks)................. 345,184 345,184
Issuance of 427,512
shares of stock for
stock options and
awards................. 2,629 5,259 7,888
Dividends ($.48 per
share)................. (68,544) (68,544)
Stock Purchase Incentive
Plans including issu-
ance of 40,000 shares.. 21,245 496 21,741
Purchase of 152 shares
for treasury........... (4) (4)
Other................... 2,371 2,371
-------- -------- ---------- --------- ----------
Balances at year-end
1994................... $144,542 $216,418 $1,708,672 $ (18,711) $2,050,921
======== ======== ========== ========= ==========
Net earnings--1995 (53
weeks)................. 316,809 316,809
Issuance of 592,143
shares of stock for
stock options and
awards................. 914 7,583 8,497
Dividends ($.56 per
share)................. (82,607) (82,607)
Stock Purchase Incentive
Plans including issu-
ance of 60,000 shares.. 3,869 733 4,602
Conversion of converti-
ble notes.............. 5,347 119,215 124,562
Purchase of 124 shares
for treasury........... (3) (3)
Stock Repurchase Program
2,522,500 shares....... (72,987) (72,987)
Other................... 4,702 4,702
-------- -------- ---------- --------- ----------
Balances at year-end
1995................... $149,889 $345,118 $1,942,874 $ (83,385) $2,354,496
======== ======== ========== ========= ==========
Net earnings--1996 (52
weeks)................. 287,221 287,221
Issuance of 563,664
shares of stock for
stock options, awards
and Employee Stock
Purchase Plan (ESPP)... 7,891 7,497 15,388
Dividends ($.64 per
share)................. (93,351) (93,351)
Stock Purchase Incentive
Plans.................. 8,856 8,856
Purchase of 6,562 shares
for treasury, including
ESPP buybacks.......... (103) (78) (181)
Stock Repurchase Program
1,090,000 shares....... (37,798) (37,798)
Other................... 799 (3) 796
-------- -------- ---------- --------- ----------
Balances at year-end
1996................... $149,889 $362,561 $2,136,744 $(113,767) $2,535,427
======== ======== ========== ========= ==========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF OPERATIONS

American Stores Company is one of the nation's leading food and drug retailers,
operating 1,695 stores in 27 states, including 166 combination stores which are
jointly operated by a food store division and a drug store division and are
counted as two separate stores. The Company operates in a single industry seg-
ment and its principal lines of business are food, drug and combination
food/drug stores. Food stores account for more than two-thirds of the Company's
sales and operating profit. Principal markets include California, Illinois, New
Jersey, Pennsylvania, Indiana and Arizona, where products are sold primarily to
retail customers.

SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year. The fiscal year of the Company ends on the Saturday nearest to
January 31. All references herein to "1996", "1995" and "1994" represent the
52-week fiscal year ended February 1, 1997, the 53-week fiscal year ended Feb-
ruary 3, 1996, and the 52-week fiscal year ended January 28, 1995, respective-
ly.

Basis of Consolidation. The consolidated financial statements include the
accounts of American Stores Company and all subsidiaries. Accordingly, all ref-
erences herein to "American Stores Company" include the consolidated results of
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying amounts reported in the balance sheet for cash and cash equiva-
lents approximate those assets' fair value. The balance of cash was higher at
year-end 1994 due to proceeds held from the sale of the Star Market food divi-
sion and 45 Acme Markets stores.

Depreciation and Amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements and leased properties under capital leases are amortized over the
estimated useful life of the property or over the term of the lease, whichever
is shorter. The depreciable lives are primarily 20 to 40 years for buildings, 3
to 10 years for fixtures and equipment and 10 to 30 years for leasehold
improvements and property under capital lease, depending on the life of the
lease. Depreciation expense related to property, plant and equipment amounted
to $359.9 million, $324.5 million and $316.2 million in fiscal 1996, 1995 and
1994, respectively.

Goodwill. Goodwill, principally from the acquisition of Lucky Stores, Inc. in
1988, represents the excess of cost over fair value of net assets acquired and
is being amortized over 40 years using the straight-line method.

Costs of Opening and Closing Stores. The costs of opening new stores are
charged against earnings as incurred. When operations are discontinued and a
store is closed, the remaining investment, net of salvage value, is charged
against earnings and, for leased stores, a provision is made for the remaining
lease liability, net of expected sublease income.

Income Taxes. The Company provides for deferred income taxes or credits as tem-
porary differences arise in recording income and expenses between financial
reporting and tax reporting. Amortization of goodwill is not deductible for
purposes of calculating income tax provisions.

Net Earnings Per Share. Net earnings per share are determined by dividing the
weighted average number of shares outstanding during the year into net earn-
ings. Common share equivalents in the form of stock options

F-7
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

are excluded from the calculation of net earnings per share since they do not
have a material dilutive effect on per share figures. Fully diluted earnings
per share in 1994 include the assumed conversion of subordinated convertible
debt.

Environmental Remediation Costs. Costs incurred to investigate and remediate
contaminated sites, caused primarily by defective underground petroleum stor-
age tanks and ground water contamination, are accrued when identified and
estimable. The related costs are expensed unless the remediation extends the
economic useful life of the assets employed at the site.

Self-insurance. The Company is self-insured for property loss, workers' com-
pensation, general liability and automotive liability, subject to specific
retention levels. The Company is required in certain cases to obtain letters
of credit to support its self-insured status. At year-end 1996, the Company's
self-insured liabilities were supported by approximately $221.1 million of
undrawn letters of credit. The Company is also self-insured for health care
claims for eligible active and retired associates. Consulting actuaries assist
the Company in determining its liability for self-insured claims. Self-insured
liabilities, with the exception of postretirement health care benefits, are
not discounted.

Impairment. Impairment is recognized on long-lived assets when indicators of
impairment are present and the undiscounted cash flows are less than the
related assets' carrying value.

Stock-based Compensation. The Company continues to account for stock-based
compensation using the intrinsic value method and provides pro forma footnote
disclosure of the impact of the fair value method.

INVENTORIES

Approximately 94% of inventories are accounted for using the LIFO (last-in,
first-out) method for inventory valuation. If the FIFO and average cost meth-
ods had been used, inventories would have been $324.5 million, $313.1 million
and $300.3 million higher at year-end 1996, 1995 and 1994, respectively. The
LIFO charge to earnings was $11.4 million in 1996, $12.8 million in 1995 and
$8.2 million in 1994. Under this method, the cost of merchandise sold that is
reported in the financial statements approximates current costs and thus
reduces the distortion in reported earnings due to increasing cost.

ADVERTISING EXPENSE

Beginning in the first quarter of 1996, the Company, in connection with its
consolidation efforts, classified advertising expense as a cost of merchandise
sold. Previously these expenses were classified as operating and administra-
tive expenses. Prior years have been reclassified to conform to the current
year presentation.

The Company expenses advertising costs when the advertisement occurs. Total
advertising expense amounted to $133.2 million, $168.3 million and $167.2 mil-
lion in 1996, 1995 and 1994, respectively. Capitalized advertising costs are
immaterial for the periods presented.

DISPOSITION OF OPERATIONS

On September 8, 1994, the Company sold its 33-store Star Market food division
with a basis of $167.0 million for $288.0 million and the assumption of sub-
stantially all of its outstanding liabilities. On January 19, 1995, the Com-
pany sold 45 of its Acme Markets stores with a basis of $48.4 million for
$89.6 million. The assets sold consisted primarily of property, plant, equip-
ment and inventories.

F-8
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DEBT

The Company's principal bank credit agreement at year-end 1996 was a $1.0 bil-
lion revolving credit facility, which expires in 1999. Interest rates for
borrowings under the facility are established at the time of borrowing through
four different pricing options. Terms of the revolving credit facility provide
for borrowings from participating banks or borrowings through issuance of com-
mercial paper that is supported by the facility. The credit facility provides
for a covenant of cash flow to total debt. The Company also has $250 million
of 364-day committed bank lines and $320 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. At year-end 1996,
the Company had $957 million of debt supported by the credit facility and $183
million outstanding under bank lines, leaving unused committed borrowing
capacity of $110 million. The Company has classified short-term borrowings as
long-term due to its intent and ability to refinance these borrowings on a
long-term basis.

The Company capitalized interest costs associated with construction projects
of $10.6 million, $8.5 million and $3.9 million in 1996, 1995 and 1994,
respectively. The Company made cash payments for interest (net of amounts cap-
italized) of $160.8 million, $169.5 million and $172.0 million in 1996, 1995
and 1994, respectively.

The aggregate amounts of debt maturing in each of the next five fiscal years
are listed below:

<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
<S> <C>
1997............................................. $ 56,703
1998............................................. 72,786
1999............................................. 1,323,382
2000............................................. 148,484
2001............................................. 23,383
Thereafter....................................... 988,699
----------
Total Debt..................................... $2,613,437
==========
</TABLE>

The Company's various loans secured by real estate are collateralized by
properties with a net book value of $186.8 million at year-end 1996.

F-9
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of debt is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Public debt (unsecured):
8.0% Debentures due 2026.................... $ 350,000
7.4% Notes due 2005......................... 200,000 $ 200,000
Medium Term Notes--fixed interest rates due
1997 through 2003--average interest rate
7.9%....................................... 250,000 250,000 $ 250,000
9 1/8% Notes due 2002....................... 249,191 249,075 248,966
7 1/4% Convertible Subordinated Notes due
2001....................................... 174,997
Bank borrowings (unsecured):
Revolving credit facility--variable interest
rates, effectively due 1999--average
interest rates 5.7% in 1996, 6.2% in 1995
and 4.8% in 1994........................... 957,000 865,000 645,000
Lines of credit and commercial paper--
variable interest rates, effectively due
1999--average interest rates 5.6% in 1996,
6.4% in 1995 and 4.7% in 1994.............. 183,000 69,000 210,000
Other borrowings--due 2000--average interest
rates 6.6% in 1996, 6.5% in 1995 and 8.8%
in 1994.................................... 75,000 125,000 175,000
Other unsecured debt:
9.8% due in 1999............................ 160,000 210,000 210,000
10.6% due in 2004........................... 108,893 108,893 108,893
Other--due through 2001..................... 2,988 3,625 4,211
Debt secured by real estate:
Fixed interest rates--due through 2014--
average interest rate 13.3% in 1996, 13.3%
in 1995 and 13.4% in 1994.................. 77,365 83,456 93,662
---------- ---------- ----------
Outstanding debt............................ 2,613,437 2,164,049 2,120,729
Less current maturities....................... 56,703 125,413 132,019
---------- ---------- ----------
Long-term debt................................ $2,556,734 $2,038,636 $1,988,710
========== ========== ==========
</TABLE>

During 1996, the Company entered into an interest rate swap agreement with a
notional amount of $200 million, for the purpose of hedging the interest rate
on a portion of the debt the Company anticipates issuing in 1997 under the
shelf registration statement. The 10-year swap calls for the payment of a fixed
interest rate of 6.7% (comprised of a 10-year treasury rate of 6.3% plus the
swap rate) and the receipt of a variable interest rate. Net interest paid or
received related to such agreement at the time of the debt issuance will be
recorded using the accrual method and will be amortized in interest expense
over the life of the financing. As of year-end 1996, the estimated fair value
of the swap agreement based on market quotes was $2.8 million.

The Company also uses derivative financial instruments to manage interest and
currency risks on the 9.8% unsecured debt due in 1999, and accounts for it as a
hedge. The borrowing totaled 22 billion yen at a yen interest rate of 6.0%. At
the time the loan originated, the Company entered into an interest rate and
currency exchange swap agreement (swap) that matches the interest and principal
payments of the yen loan. Under the swap agreement, the Company makes fixed
rate interest payments of 9.8% and principal payments totaling $160 million and
receives payments equal to the underlying yen loan obligation. The proceeds, in
yen, from this swap are used to satisfy the yen-based interest and will be used
to satisfy the principal payment. As of year-end 1996, the estimated fair value
of the remaining swap agreement based on market quotes was approxi-

F-10
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

mately $28 million and equaled the loss on the yen loans due to currency and
interest rate movements, resulting in an aggregate fair value of zero.

The carrying amounts of the Company's bank borrowings with variable interest
rates approximate fair value. The fair value of the Company's borrowings with
fixed interest rates is estimated using discounted cash flow analyses, based on
current market rates where available, or on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The fair value of
outstanding debt as of year-end 1996 was $2.7 billion compared to the carrying
value of $2.6 billion.

LEASES

The Company leases retail stores, offices, warehouses and distribution facili-
ties. Initial lease terms average approximately 20 years, plus renewal options,
and may provide for contingent rent based on sales volume in excess of speci-
fied levels.

The summary below shows the aggregate future minimum rent commitments at year-
end 1996 for both capital and operating leases. Operating leases are shown net
of an aggregate $76.5 million of minimum rent income receivable under non-
cancellable subleases. Operating leases also exclude the amortization of acqui-
sition-related fair value adjustments.

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
1997................................................ $ 172,144 $ 15,008
1998................................................ 154,317 13,655
1999................................................ 144,341 12,016
2000................................................ 131,477 9,775
2001................................................ 118,327 8,316
Thereafter.......................................... 944,774 51,030
------------- -----------
Total minimum rent commitments.................... $ 1,665,380 109,800
=============
Less executory costs (such as taxes, insurance and
maintenance) included in capital leases............ 1,008
-----------
Net minimum lease payments.......................... 108,792
Less amount representing interest................... 43,082
-----------
Obligations under capital leases, including $9.3
million due within one year........................ $ 65,710
===========
</TABLE>

Rent expense, excluding the amortization of acquisition-related fair value
adjustments of $14.2 million in 1996, $14.3 million in 1995 and $14.5 million
in 1994, was as follows:

<TABLE>
<CAPTION>
MINIMUM SUBLEASE CONTINGENT TOTAL
RENT RENT NET RENT RENT
-------- -------- -------- ---------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1996........................ $189,105 $15,663 $173,442 $24,305 $197,747
1995........................ $180,933 $14,782 $166,151 $26,003 $192,154
1994........................ $184,116 $ 9,064 $175,052 $26,508 $201,560
</TABLE>

F-11
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INCOME TAXES

Federal and state income taxes charged to earnings are summarized below:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal....................................... $206,313 $124,317 $229,052
State......................................... 25,731 15,979 34,906
Deferred:
Federal....................................... (12,948) 81,859 (2,469)
State......................................... (1,765) 11,952 (410)
-------- -------- --------
Federal and state income taxes.................. $217,331 $234,107 $261,079
======== ======== ========
</TABLE>

Cash payments of income taxes were $226.8 million, $169.2 million and $354.6
million in 1996, 1995 and 1994, respectively.

The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(PERCENT OF EARNINGS
BEFORE INCOME TAXES)
<S> <C> <C> <C>
Statutory federal income tax rate............... 35.0% 35.0% 35.0%
State income tax rate, net of federal income tax
effect......................................... 4.8 5.1 5.7
Goodwill amortization........................... 4.2 3.8 3.6
Tax credits..................................... (0.1) (0.4) (0.6)
Other........................................... (0.8) (1.0) (0.6)
---- ---- ----
Effective income tax rate..................... 43.1% 42.5% 43.1%
==== ==== ====
</TABLE>

Deferred tax benefits and liabilities as of year-end 1996 related to the fol-
lowing temporary differences:

<TABLE>
<CAPTION>
BENEFITS LIABILITIES TOTAL
-------- ----------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Basis in fixed assets....................... $ 33,678 $(259,105) $(225,427)
Self-insurance reserves..................... 191,391 191,391
Purchase accounting valuation............... 48,546 (327,530) (278,984)
Compensation and benefits................... 45,609 (62,121) (16,512)
Other, net.................................. 91,415 (92,630) (1,215)
-------- --------- ---------
Deferred tax benefits and liabilities..... $410,639 $(741,386) $(330,747)
======== ========= =========
</TABLE>

No valuation allowances have been considered necessary in the calculation of
deferred tax benefits.

STOCK COMPENSATION PLANS

The Company has two stock-based compensation plans, which are described below.

Fixed Stock Option Plans

The Company's 1989 Stock Option and Stock Awards Plan (1989 Plan) provides for
the grant of options to purchase shares of common stock and the issuance of
restricted stock awards for an aggregate of up to 4.8 million shares of common
stock, subject to certain antidilution adjustments. At year-end 1996, there
were 1.8 million shares reserved for future grants under the 1989 Plan.

F-12
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of the Company's stock option activity and related information for
1996, 1995 and 1994 follows:

<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,920 $22.73 1,360 $11.24 2,183 $11.20
Granted................. 1,356 $35.81 1,548 $24.40
Exercised............... (135) $17.40 (826) $ 7.28 (610) $12.14
Forfeited/Expired....... (126) $25.99 (162) $21.01 (213) $ 8.26
----- ----- -----
Outstanding at end of
year................... 3,015 $28.71 1,920 $22.73 1,360 $11.24
===== ===== =====
Exercisable at end of
year................... 212 237 457
Reserved for future
grants................. 1,798 3,117 4,503
</TABLE>

At year-end 1996, there were stock options for 2.4 million shares outstanding
under the 1989 Plan, which expire in 2004 and 0.6 million options outstanding
under an expired plan, which expire through 2002. Exercise prices for outstand-
ing options as of year-end 1996 ranged from $13.69 to $35.81 and the weighted-
average remaining contractual life of those options is 5.9 years. Compensation
expense related to other options decreased pre-tax earnings by $3.4 million in
1995 and $2.9 million in 1994.

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (ESPP), which began January 1, 1996
enables eligible employees of the Company to subscribe for shares of common
stock on quarterly offering dates at a purchase price which is the lesser of
85% of the fair market value of the shares on the first day or the last day of
the quarterly offering period. For financial reporting purposes, the discount
of 15% is treated as equivalent to the cost of issuing stock. During 1996,
employees contributed $13.6 million into the ESPP program and 0.5 million
shares were issued. There were no shares issued in 1995. At year-end 1996, 6.5
million shares were available for future issuances.

Fair Value Disclosures

The Company's pro forma compensation expense under the fair value method, util-
izing the Black-Scholes option valuation model, for fixed stock options granted
in 1996 and 1995 and for the ESPP in 1996, after income taxes, was $4.8 million
for 1996 and $.8 million for 1995. Pro forma net income would have been $282.4
million in 1996 and $316.0 million in 1995. Earnings per share would have been
$1.94 per share for 1996 and $2.15 per share for 1995 for primary earnings per
share and $1.93 per share for 1996 and $2.15 per share for 1995 for fully
diluted earnings per share.

The fair value for these options was estimated at the date of grant assuming an
expected volatility of 21% and a dividend yield of 1.9%. Other assumptions for
1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1996 1996 ESPP 1995
---- --------- ----
<S> <C> <C> <C>
Average risk-free interest rate........................ 6.1% 5.1% 6.8%
Average life of options (years)........................ 4.0 0.25 5.0
Average vesting date (years)........................... 3.0 2.0 5.0
</TABLE>

F-13
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in manage-
ment's opinion, the existing models do not necessarily provide a reliable sin-
gle measure of fair value of its employee stock options.

Because the fair value method of accounting for stock-based compensation has
not been applied to options granted prior to January 1, 1995, the preceding pro
forma compensation cost may not be representative of that to be expected in
future years.

STOCK PURCHASE INCENTIVE PLANS

In 1992, the Company's shareholders approved both the American Stores Company
Key Executive Stock Purchase Incentive Plan and the American Stores Company
Board of Directors Stock Purchase Incentive Plan (Plans). The Plans are
intended to promote the long-term growth and financial success of the Company,
and to strengthen the link between management and shareholders. The Board of
Directors Plan was terminated on March 21, 1995, however the termination does
not affect the terms of any awards outstanding on the date of termination.

Since the Plans' inception, the Company has awarded to certain directors and
key executive officers the right to purchase a specified number of shares of
the Company's stock and extended to such directors and officers full recourse
interest bearing purchase loans to acquire the stock. The stock purchased by
the directors and officers with the purchase loans was issued from treasury
shares. The purchase loans have an eight-year term and accrue interest at rates
ranging from 5.3% to 7.8%. The acquisition price of the stock was the average
of the high and low value on the day acquired, as reported on the New York
Stock Exchange. Shares held by the executives and directors pursuant to the
Plans were 1.8 million for 1996, 2.1 million for 1995 and 1994, with corre-
sponding loan balances of $40.7 million, $42.6 million and $40.3 million,
respectively. The aggregate principal of these notes outstanding is recorded as
a reduction of additional paid-in capital in the balance sheet.

Participants purchasing stock under the Plans are eligible for a deferred cash
incentive award, which is generally payable at the end of a five-year perform-
ance cycle. One-half of the deferred award will be based on the continuation of
service with the Company (Service Component), and the other half will be based
on the Company's relative stock price performance versus a selected group of
companies in the retail food and drug industry (Performance Component). The
maximum combined Performance Component and Service Component payable to partic-
ipants will not exceed the original principal amount of the purchase loan plus
accrued but unpaid interest. The estimated deferred cash incentive award is
recorded as compensation expense on the income statement and amounts earned to
date are recognized as a credit to the note balances in additional paid-in cap-
ital in the balance sheet. See Subsequent Events note, following.

PREFERRED SHARE PURCHASE RIGHTS

During March 1988, the Board of Directors of the Company declared a distribu-
tion of one Preferred Share Purchase Right (Right) for each outstanding share
of the Company's common stock. The Rights were issued pursuant to a Rights
Agreement between the Company and First Chicago Trust Company of New York as
Rights Agent, which agreement has been amended from time to time.

Each Right as amended entitles shareholders to purchase one four-hundredth of a
share of a new series of preferred stock at an exercise price of $62.50. The
Rights will be exercisable only if a person or group acquires

F-14
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10% or more of the Company's common stock or announces a tender offer, the con-
summation of which would result in ownership by a person or group of 10% or
more of the Company's common stock. The Rights will generally not apply to a
10% or greater position held by Mr. L. S. Skaggs, the Company's former Chair-
man, or certain other related parties unless such entities increase their
aggregate beneficial ownership of the Company's common stock by more than 1%
over the amount of their percentage holdings on June 21, 1996, other than
increases resulting from an acquisition of common stock by the Company or the
execution, delivery and performance of the Stock Purchase Agreement and Regis-
tration Rights Agreement dated February 20, 1997 entered into between the Com-
pany and Mr. Skaggs and certain family members and trusts. The Company will be
entitled to redeem the Rights at one-quarter cent per Right any time before a
10% or greater position has been acquired. The authorized capital of the Com-
pany includes 10 million shares of preferred stock, par value $1.00, of which
0.4 million shares have been designated Series A Junior Participating Preferred
Stock.

If the Company is acquired in a merger or other business combination transac-
tion, each Right will "flip over" and entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the Right's exercise price.

In addition, if a person or group acquired 10% or more of the outstanding Com-
pany common stock, each Right will "flip in" and entitle all other holders to
purchase, at the Right's then current exercise price, a number of shares of the
Company's common stock having a market value of twice the Right's exercise
price. Further, at any time after a person or group acquires 10% or more of the
outstanding Company common stock but prior to the acquisition of 50% of such
stock, the Board of Directors may, at its option, exchange part or all of the
Rights (other than Rights held by the acquiring person or group) for shares of
the Company's common stock at an exchange rate of one share of common stock for
each Right.

On February 22, 1995, the Board of Directors expressed its intent, subject to
the exercise of its fiduciary duties, to allow the Rights Agreement pertaining
to the Company's preferred share purchase rights, dated March 18, 1988, as
amended, to expire in accordance with its terms on March 18, 1998, without
renewal or extension.

REPURCHASE OF COMMON STOCK

In June 1996 the Company replaced its existing stock repurchase program with a
new repurchase program which authorizes the repurchase of up to two million
shares of common stock. During 1996 the Company repurchased 1.1 million shares
of its common stock at an average price of $34.67 per share in accordance with
the Company's stock repurchase programs. As of February 1, 1997, an additional
1.9 million shares remained authorized for repurchase. See Subsequent Events
note, following.

POSTRETIREMENT HEALTH CARE BENEFITS

The Company provides certain health care benefits to eligible retirees of cer-
tain defined employee groups under two unfunded plans, a defined dollar and a
full coverage plan.

The accumulated postretirement health care benefit obligation is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current retirees............................. $ 38,107 $ 37,396 $ 35,787
Current active employees..................... 14,776 14,275 13,521
Unrecognized gain............................ 12,969 14,390 16,819
-------- -------- --------
Accumulated postretirement benefit obligation
("APBO").................................... $ 65,852 $ 66,061 $ 66,127
======== ======== ========
Discount rate................................ 7.5% 8.5% 8.5%
</TABLE>

F-15
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The components of postretirement health care benefit expense are as follows:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost--benefits earned during the year.... $ 671 $ 768 $1,013
Interest cost on APBO............................ 3,896 4,006 3,730
Adjustment of APBO............................... (789) (465) (598)
------ ------ ------
Net postretirement health care benefit expense... $3,778 $4,309 $4,145
====== ====== ======
</TABLE>

The Company assumed no increase in the cost of the defined dollar benefit plan
in any year presented. Changes in assumptions do not impact the defined dollar
plan. The assumed health care cost trend rates used to measure the expected
cost of benefits included a rate of increase of 9% for 1997 decreasing to 6%
by the year 2000. Increasing the assumed health care cost trend rates for the
full coverage plan by one percentage point in each year would have resulted in
an increase of $2.4 million in the APBO and no material increase in annual
health care expense.

RETIREMENT PLANS

The Company sponsors and contributes to a defined contribution retirement
plan, American Stores Retirement Estates (ASRE). This plan was authorized by
the Board of Directors for the purpose of providing retirement benefits for
associates of American Stores Company and its subsidiaries. The plan covers
associates meeting age and service eligibility requirements, except those rep-
resented by a labor union, unless the collective bargaining agreement provides
for participation. Contributions to ASRE are made at the discretion of the
Board of Directors.

The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor contracts that
govern the plans. The multi-employer plan contributions are generally based on
the number of hours worked. Information about these plans as to vested and
non-vested accumulated benefits and net assets available for benefits is not
available.

Retirement plans expense was as follows:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
1996 1995 1994
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Company sponsored plans.......................... $ 88,106 $ 81,704 $ 84,149
Multi-employer plans............................. 95,822 86,723 67,391
-------- -------- --------
Retirement plans expense......................... $183,928 $168,427 $151,540
======== ======== ========
</TABLE>

During 1994, the Company entered into Employment Agreements (Agreements) with
17 of the Company's key executive officers. During 1995 the Company entered
into an Agreement with an additional employee. The Agreements are for terms of
either three or five years, may be renewed by the Company for subsequent
three-year or five-year terms, contain usual and customary terms of employment
agreements and provide the officers with a special long-range retirement plan.
Under the retirement plan, 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 retirement benefit 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 benefit
ranges from 9% to 40% based on years of service with the Company. The retire-
ment benefit will be forfeited if the executive enters into competition with
the Company. At year-end 1996 17 of the Agreements remained in effect.

F-16
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

SPECIAL CHARGES

The components of the charge include: warehouse consolidation costs, adminis-
trative office consolidation costs, closed store costs, asset impairment costs
and other miscellaneous charges. The cost of consolidating four general mer-
chandise warehouses into one in southern California totaled $26.4 million and
is primarily related to lease termination costs, a reserve for the anticipated
loss on the sale of owned facilities (based on management's estimated fair mar-
ket value) and adjusting inventories to a common inventory valuation method.
The cost of consolidating administrative offices in Salt Lake City and Chicago
totaled $26.3 million and relates to asset write-offs, lease termination costs
and severance costs. Closed store costs included mainly lease termination costs
and fixed asset write-offs totaling $12.9 million. Asset impairment charges
totaling $26.4 million consist of replacements of outdated computer systems and
impairment of groups of stores and other assets that do not fit the long-term
strategic plan of the Company. In addition, other reserves totaling $8.0 mil-
lion were recorded. The special charges are included in cost of merchandise
sold ($10.0 million), operating expenses ($15.5 million) and other non-operat-
ing expense ($74.5 million). As of year-end 1996, the Company charged $18.0
million against the reserve, of which $12.3 million related to asset impair-
ment. Disposal of impaired assets is expected to be complete in fiscal 1998.

Severance costs included above resulted from the Company's commitment to
restructure and consolidate operations. During the fourth quarter 1996, consol-
idation of human resources, payroll, Drug Store administration and general mer-
chandise buying functions were announced and the related costs were measurable
and recognized. The Company recorded a charge to operating and administrative
expense of $15.5 million, related to termination benefits to be paid to an
estimated 445 employees. There were no payments made nor employees terminated
during the year. The consolidation is expected to be complete in fiscal 1998.

CONTINGENCIES

The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks at various store, warehouse, office and
manufacturing facilities (related to current operations as well as previously
disposed of businesses). At most such locations, remediation is either underway
or completed. Undiscounted reserves have been established for each environmen-
tal 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 envi-
ronmental laws, in excess of current reserves, will not have a material adverse
effect on the financial condition or results of operations of the Company.
Charges against earnings for environmental remediation were not material in
1996, 1995 or 1994.

LEGAL PROCEEDINGS

The Company is involved in various claims, administrative proceedings and other
legal proceedings which arise from time to time in connection with the conduct
of the Company's business. In the opinion of management, such proceedings will
not have a material adverse effect on the Company's financial condition or
results of operations.

SUBSEQUENT EVENTS

On February 20, 1997, the Company and the family of L. S. Skaggs entered into
an agreement for the repurchase by the Company of 12.2 million shares of its
common stock from the Skaggs family and certain family and charitable trusts
for $45 per share, the closing price on the date of the agreement (the
Repurchase).

F-17
<PAGE>

AMERICAN STORES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pursuant to the agreement, the Company filed, at its cost, a registration
statement to enable such shareholders to sell 15.4 million additional shares in
a secondary offering. The closing of the secondary offering, at $43 per share,
and the Repurchase was consummated on April 8, 1997. In addition, the Company
has granted the underwriters for the offering an option to purchase an addi-
tional 2.3 million shares to cover over-allotments. If the option is exercised,
these additional shares would be primary shares to be issued by the Company.
The Company has agreed to reimburse the selling shareholders for underwriting
fees, legal fees and other expenses incurred by them in connection with the
transactions.

The selling shareholders have agreed to enter into a 10-year standstill agree-
ment restricting purchases and sales of the Company's shares, proxy fights and
other actions.

On March 28, 1997, the Company increased the capacity of its existing revolving
credit facility from $1 billion to $2 billion, which includes a $1.5 billion
five-year revolving credit facility and a $500 million 364-day revolving credit
facility (the Amended Credit Facilities). The Company plans to finance the $550
million Repurchase initially through the Amended Credit Facilities. Subject to
market conditions, the Company expects to refinance the indebtedness incurred
in connection with the Repurchase through public equity and/or debt issuances
over the next six to 12 months.

In anticipation of the expiration of the 1992 Key Executive Stock Purchase
Incentive Plan, the Board of Directors recently approved a new stock-based man-
agement incentive program. The new program will continue to link executive
incentive compensation to shareholder return. The program involves the grant of
market-priced stock options that would ordinarily begin to vest on the fifth
anniversary of the grant date but which will vest on an accelerated basis, in
part, if stock ownership requirements are satisfied and, in part, if the Com-
pany achieves annual performance goals. A total of approximately 1.8 million
options were granted to 16 senior officers under the 1989 Stock Option and
Stock Award Plan in connection with the new incentive program on February 24,
1997 and a total of approximately 1.3 million options were granted to an addi-
tional 30 senior officers under a new plan on March 27, 1997, in each case with
an exercise price of $45 per share.

F-18