FORM 10-K/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended February 1, 1997.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to
Commission file number 1-5392
AMERICAN STORES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 87-207226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
709 East South Temple
Salt Lake City, Utah 84102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 539-0112
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock ($1 par value) Chicago Stock Exchange, Inc.
and New York Stock Exchange, Inc.
Preferred Share Purchase Rights Pacific Exchange, Inc.
Registered on: Philadelphia Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
AMERICAN STORES COMPANY
FORM 10-K/A
(Amendment No. 1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 29, 1997:
Common Stock, $1 Par Value -- $5,991,112,220.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 29, 1997:
Common Stock, $1 Par Value -- 145,927,196.
Documents Incorporated by Reference:
Portions of the registrant's 1996 Annual Report to its shareholders for the
fiscal year ended February 1, 1997 (Annual Report), to the extent specifically
incorporated herein, are incorporated by reference into Parts I, II and IV.
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the registrant's Annual Meeting of Shareholders to be
held on June 17, 1997 (Proxy Statement), to the extent specifically incorporated
herein, are incorporated by reference into Part III.
EXPLANATORY NOTE
This amended filing is being submitted to include the signature of the
Company's independent auditors on the Report of Independent Auditors in Item 14,
Exhibit 13.
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(a)(1) - Financial Statements
The following consolidated financial statements of the registrant and
its subsidiaries, included in the Annual Report, are incorporated by
reference in Item 8:
Consolidated Statements of Earnings for the fiscal years 1996, 1995 and
1994;
Consolidated Balance Sheets as of the end of fiscal years 1996, 1995 and
1994;
Consolidated Statements of Cash Flows for the fiscal years 1996, 1995
and 1994;
Consolidated Statements of Shareholders' Equity for the fiscal years
1996, 1995 and 1994;
Notes to Consolidated Financial Statements.
PART IV - (Continued)
Item 14(a)(2) - Supplementary Data and Financial Statement Schedules
The supplementary data entitled "Quarterly Results (Unaudited)" on page
47 of the Annual Report is incorporated by reference in Item 8.
In response to Item 14(d), all schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
Item 14(a)(3) - Exhibits
In response to Item 14(c), the following exhibits are submitted as a separate
section of this report:
3.1 The restated Certificate of Incorporation of American Stores Company, as
amended is incorporated herein by reference to Exhibit 3.1 of the Company's
Form 10-K for the fiscal year ended February 3, 1996 as filed with the
Commission on April 14, 1996.
3.2 The By-Laws of American Stores Company as amended, are incorporated herein
by reference to Form 8-K filed with the Commission on September 29, 1996.
4.1 The Rights Agreement dated March 8, 1988 between the Company and First
Chicago Trust Company of New York, formerly Morgan Shareholder Services
Trust Company, as Rights Agent, and the amendments thereto, are
incorporated by reference to the Registrant's Registration Statement on
Form 8-A as filed with the Commission on March 16, 1988, and Amendment Nos.
1, 2, 3, 4 and 5 to such Registration Statement filed on March 28, 1990,
July 17, 1991, May 17, 1994, July 3, 1996 and February 25, 1997,
respectively.
4.2 Senior Indenture dated May 1, 1995 between the Company and the First
National Bank of Chicago, as Trustee, is incorporated herein by
reference to Exhibit 4.1 of Form 10-Q as filed with the Commission on
June 12, 1995.
4.3 Form of 7-1/4% Debenture due 2005 is incorporated herein by reference to
Exhibit 4.2 of Form 10-Q as filed with the Commission on June 12, 1995.
4.4 Form of 8.0% Debenture Due 2026 is incorporated herein by reference to
Exhibit 4.1 of Form 10-Q as filed with the Commission on September 17,
1996.
10.1 Credit Agreement ($1.5 billion five-year revolving credit facility) dated
as of March 28, 1997 among the Company, the banks listed therein and Morgan
Guaranty Trust Company of New York as Agent.
PART IV - (Continued)
Item 14(a)(3) - Exhibits (Continued)
10.2 Credit Agreement ($500 million 364-day revolving credit facility) dated as
of March 28, 1997 among the Company, the banks listed therein and Morgan
Guaranty Trust Company of New York as Agent.
10.3 Amended and Restated Retirement Plan for Non-Employee Directors is
incorporated herein by reference to Exhibit 10.2 of Form 10-K as filed
with the Commission on April 26, 1995. *
10.4 Non-Employee Directors' Deferred Fee Plan is incorporated herein by
reference to Exhibit 10.3 to Form 8 as filed with the Commission on July
12, 1991. *
10.5 Supplemental Executive Retirement Plan as amended and restated on June 24,
1994 is incorporated herein by reference to Exhibit 10.4 of Form 10-K as
filed with the Commission on April 26, 1995. *
10.6 Third Amendment to the American Stores Company Supplemental Executive
Retirement Plan dated August 16, 1996 is incorporated herein by reference
to Exhibit 10.3 of Form 10-Q as filed with the Commission on September 17,
1996.
10.7 1989 Stock Option and Stock Award Plan is incorporated herein by reference
to the Registrant's S-8 Registration Statement (Registration No. 33-32150)
filed with the Commission on November 16, 1989. *
10.8 Amendment to the 1989 Stock Option and Stock Award Plan, dated as of
September 17, 1996 is incorporated herein by reference to Exhibit 10.3 of
Form 10-Q as filed with the Commission on December 17, 1996.
10.9 Amendment to the 1989 Stock Option and Stock Award Plan, dated April 7,
1997. *
10.10 The 1985 Stock Option and Stock Award Plan is incorporated herein by
reference to the Registrant's S-8 Registration Statement (Registration No.
33-08801) filed with the Commission on September 22, 1986. *
10.11 Amendment to the 1985 Stock Option and Stock Award Plan, dated as of
September 17, 1996 is incorporated herein by reference to Exhibit 10.2 of
Form 10-Q as filed with the Commission on December 17, 1996.
10.12 American Stores Company Key Executive Stock Purchase Incentive Plan is
incorporated herein by reference to Exhibit A to the Registrant's 1992
Proxy Statement filed with the Commission on May 7, 1992. *
* Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item 14(c) of
this report
PART IV - (Continued)
Item 14(a)(3) - Exhibits (Continued)
10.13 American Stores Company Board of Directors Stock Purchase Incentive
Plan as Amended and Restated is incorporated herein by reference to Exhibit
10.11 of Form 10-K as filed with the Commission on April 26, 1995. *
10.14 Description of Key Management Long-Term Performance Incentive Plan
(1995-1997) is incorporated by reference to Exhibit 10.13 of Form 10-K as
filed with the Commission on April 26, 1995. *
10.15 Amendment to the Key Management Long-Term Performance Incentive Plan
(1995-1997) and (1994-1996) dated July 25, 1996 is incorporated herein by
reference to Exhibit 10.1 of Form 10-Q as filed with the Commission on
September 17, 1996. *
10.16 Form of Employment Agreement together with Schedule of eighteen
officers who entered into Employment Agreements with Company is
incorporated herein by reference to Exhibit 10.14 of Form 10-K as filed
with the Commission on April 26, 1995. *
10.17 Form of Amendment to Employment Agreement together with Schedule
of fifteen officers who entered into Amendment to Employment Agreements
with the Company is incorporated herein by reference to Exhibit 10.4 of
Form 10-Q as filed with the Commission on September 17, 1996. *
10.18 Consulting agreement between the Company and L.S. Skaggs is
incorporated herein by reference to Exhibit 10.1 of Form 10-Q as filed with
the Commission on December 11, 1995.*
10.19 Form of Employment Agreement together with Schedule of eleven officers
who entered into Employment Agreements with the Company dated as of July
25, 1996 is incorporated herein by reference to Exhibit 10.5 of Form 10-Q
as filed with the Commission on September 17, 1996. *
10.20 Description of Key Management Long-Term Performance Incentive Plan
(1996-1998) is incorporated herein by reference to Exhibit 10.6 of Form 10-
Q as filed with the Commission on September 17, 1996. *
10.21 Form of Employment Agreement together with Schedule of two executive
officers who entered into Employment Agreements with the Company dated as
of July 25, 1996 is incorporated herein by reference to Exhibit 10.7 of
Form 10-Q as filed with the Commission on September 17, 1996. *
* Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item 14(c) of
this report
PART IV - (Continued)
Item 14(a)(3) - Exhibits (Continued)
10.22 Amendment to the Employment Agreement with Victor L. Lund, dated as of
September 17, 1996 is incorporated herein by reference to Exhibit 10.1 of
Form 10-Q as filed with the Commission on December 17, 1996. *
11. Calculation of earnings per share.
12. Computation of ratio of earnings to fixed charges.
13. Exhibit 13 consists of pages 25 to 47 and page 1 of American Stores
Company's 1996 Annual Report to Shareholders which are numbered as pages 1
to 31 of Exhibit 13. Such report, except to the extent incorporated hereby
by reference, has been sent to and furnished for the information of the
Securities and Exchange Commission only and is not to be deemed filed as
part of this Annual Report on Form 10-K. The references to the pages
incorporated by reference are to the printed Annual Report. The references
to the pages of Exhibit 13 are as follows: Item 1--pages 17, 3 through 10
and 29; Item 2--pages 3 through 10; Item 3--page 29 ; Item 5--page 1; Item
6--page 2; Item 7--pages 3 through 10; Item 8--pages 11 through 31; and
Item 14--pages 12 through 31.
22. Subsidiaries of the Registrant.
23. Consent of Ernst & Young LLP.
27. Financial Data Schedule.
All other exhibits for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instruction or are inapplicable, and therefore have been
omitted.
Item 14(b) - Reports on Form 8-K filed during the last quarter of 1996-
None.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
American Stores Company
(Registrant)
Dated January 28, 1998 /s/ Teresa Beck
Teresa Beck
Chief Financial Officer
(Principal Financial Officer)
EXHIBITS
13. Exhibit 13 consists of pages 25 to 47 and page 1 of American Stores
Company's 1996 Annual Report to Shareholders which are numbered as pages
1 to 31 of Exhibit 13. Such report, except to the extent incorporated
hereby by reference, has been sent to and furnished for the information
of the Securities and Exchange Commission only and is not to be deemed
filed as part of this Annual Report on Form 10-K. The references to the
pages incorporated by reference are to the printed Annual Report. The
references to the pages of Exhibit 13 are as follows: Item 1--pages 17,
3 through 10 and 29; Item 2--pages 3 through 10; Item 3--page 29; Item
5--page 1; Item 6--page 2; Item 7--pages 3 through 10; Item 8--pages 11
through 31; and Item 14--pages 12 through 31.
23. Consent of Ernst & Young LLP.
Exhibit 13
Common Stock Market Prices and Dividends
The following table sets forth the high and low reported sales prices for the
Company's common stock for the fiscal periods indicated as reported on the New
York Stock Exchange Composite Tape and the dividends paid on the common stock
during such periods. The common shares of the Company are listed on the New
York, Philadelphia, Chicago and Pacific stock exchanges under the trading symbol
"ASC". The number of shareholders of record of the Company's common stock at
March 28, 1997, was 31,755.
<TABLE>
1996 1995 1994
Market Price Market Price Market Price
Cash Cash Cash
Dividends Dividends Dividends
High Low Paid High Low Paid High Low Paid
<S> <C> <C> <C> <C> <C>
First Quarter $34 1/4 $25 3/8 $.16 $26 1/8 $23 1/4 $.14 $27 3/16 $20 7/8 $.12
Second Quarter $41 1/4 $32 .16 $29 3/4 $24 3/4 .14 $26 1/8 $23 1/4 .12
Third Quarter $42 3/4 $37 1/2 .16 $30 3/4 $28 1/8 .14 $27 1/8 $23 3/4 .12
Fourth Quarter $45 3/8 $38 3/8 .16 $30 3/4 $24 7/8 .14 $27 3/4 $24 .12
Annual Dividend $.64 $.56 $.48
</TABLE>
Selected Financial Data
The following consolidated selected financial data of the Company for the last
five years should be read in conjunction with the consolidated financial
statements and related notes appearing on pages 12 to 30.
Comparisons of the results of operations between fiscal years 1992 to 1996 are
rendered difficult due to the Company's disposition of stores. These include
the disposition of 45 Acme Markets stores in the fourth quarter of 1994, the 33-
store Star Market food division in the third quarter of 1994 and 74 Jewel Osco
combination food and drug stores in the first quarter of 1992. These disposed
of stores generated sales in the amounts of $.8 billion, $1.2 billion and $1.4
billion in 1994, 1993 and 1992, respectively. In addition, all years included
52 weeks except for 1995, which included 53 weeks.
<TABLE>
(In thousands of dollars, except per share data) 1996 1995 (1) 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Sales $18,678,129 $18,308,894 $18,355,126 $18,763,439 $19,051,180
Earnings before extraordinary item $287,221 $316,809 $345,184 $262,090 $207,466
Extraordinary item - early retire-
ment of debt - net of taxes (15,000)
Net earnings $287,221 $316,809 $345,184 $247,090 $207,466
Average common shares outstanding 145,888 146,943 142,767 142,202 140,314
Earnings per common share before extra-
ordinary item $1.97 $2.16 $2.42 $1.85 $1.48
Extraordinary item - early retirement
of debt - net of taxes (.11)
Net earnings per common share $1.97(5) $2.16 $2.42(6) $1.74 $1.48
Fully diluted earnings per common share $1.97(5) $2.16 $2.33(6) $1.69 $1.44
Cash dividends declared per common share $.64 $.56 $.48 $.40 $.36
Total assets $7,881,405 $7,362,964 $7,031,566 $6,927,434 $6,763,793
Total debt and obligations under
capital leases $2,679,147 $2,240,168 $2,205,291 $2,167,999 $2,248,316
Total capital expenditures (2) $999,986 $801,371 $565,313 $652,928 $476,617
Total stores (3) 1,695 1,650 1,597 1,695 1,672
Selling area square footage (000's) (4) 33,823 32,523 31,179 32,727 32,320
</TABLE>
(1) 53-week fiscal year
(2) Amount includes capitalized leases and the net present value of property,
plant and equipment leased under operating leases
(3) Includes jointly operated combination stores which are each counted as two
separate stores
(4) Selling area square footage was 74% of total retail square footage in 1996
(5) Includes special charges totaling $.41 per share of expense
(6) Includes non-recurring items totaling $.39 per share of income
NOTE: The fiscal year of the Company ends on the Saturday nearest to January
31. All references herein to "1996", "1995", "1994", "1993" and "1992"
represent the fiscal years ended February 1, 1997, February 3, 1996, January 28,
1995, January 29, 1994 and January 30, 1993, respectively. All years include 52
weeks except for 1995, which included 53 weeks.
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
operations 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
marketing 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
operations.
Total Sales
52 weeks 53 weeks 52 weeks
(In millions of dollars) 1996 1995 1994
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
52 weeks 53 weeks 52 weeks
(Percentage change) 1996 1995 1994
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 %
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 primarily due
to benefits realized from centralized procurement, better product mix and lower
warehousing costs. Advertising expense also decreased due to the shift from
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 promotional
strategies. However, these increases were adversely affected by competitive
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 million 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 23.3% in 1994. The increase in 1996 is
primarily due to special charges of $15.5 million ($.06 per share) for severance
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 Workers
International. The new contract will expire in 1999, and replaced a contract
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 $23.9 million
($.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
Markets, totaling $11.2 million ($.05 per share).
Total operating profit for the last three fiscal years is set forth in the
following 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
percent 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 successful
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
52 weeks 53 weeks 52 weeks
(In millions of dollars) 1996 1995 1994
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
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,
administrative office consolidation costs, closed store costs, asset impairment
costs and other miscellaneous charges. The cost of consolidating four general
merchandise 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
market 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
commitment 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
million 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
program announced in 1992.
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
Projected
1997 1996 1995 1994
New
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
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
billion 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.
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). See Subsequent Events discussion
following.
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 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.
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. 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 under the shelf registration
statement. The estimated fair value of the interest rate swap agreement based
on market quotes at year-end 1996 was $2.8 million.
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
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). Although the ultimate outcome and expense of
environmental remediation is uncertain, the Company believes that the required
costs of remediation and continuing compliance with environmental laws, in
excess of current reserves, will not have a material adverse effect on the
financial condition or operating results of the Company.
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
Company as a result of inflation that has occurred over the years since the
property, plant and equipment were placed in service.
Delta Initiatives
Delta is a series of initiatives designed as a self-consolidation and re-
engineering program that is transforming the Company from a holding company to
an operating company. Prior to Delta, the Company operated as seven autonomous
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
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
systems. 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, marketing
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 efficiency of
replenishment; (iv) consolidation of four general merchandise warehouses in
southern California into a single facility; and (v) consolidation of
administrative, real estate, construction and information technology functions.
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).
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
additional 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
agreement restricting purchases and sales of the Company's shares, proxy fights
and other actions.
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
management incentive program. A total of approximately 3.1 million shares were
granted under a new plan and an existing plan at an exercise price of $45 per
share.
Cautionary Note
This report contains certain forward-looking statements about the future
performance of the Company which are based on management's assumptions 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
accordance with the currently contemplated schedule and budget; changes in the
financial 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
indebtedness 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
customers.
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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Stores
Company and subsidiaries at 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
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
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
Consolidated Statements of Earnings
52 weeks 53 weeks 52 weeks
(In thousands, except per share data) 1996 1995 1994
Sales $18,678,129 $18,308,894 $18,355,126
Cost of merchandise sold, including ware-
housing 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
See notes to consolidated financial statements
Consolidated Balance Sheets
Year-end
(In thousands of dollars, except per share data)1996 1995 1994
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
amortization 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
accumulated 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
Consolidated Balance Sheets (concluded)
Year-end
(In thousands of dollars, except per share data)1996 1995 1994
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 current obligations 56,410 66,380 75,367
Self-insurance Reserves, less current portion 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, authorized
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
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
<TABLE>
52 weeks 53 weeks 52 weeks
(In thousands of dollars) 1996 1995 1994
<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
Consolidated Statements of Shareholders' Equity
<TABLE>
Additional
(In thousands of dollars, Common Paid-In Retained Treasury
except per share data) Stock Capital Earnings Stock Total
<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
issuance 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
issuance of 60,000 shares 3,869 733 4,602
Conversion of convertible 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
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
segment 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
February 3, 1996, and the 52-week fiscal year ended January 28, 1995,
respectively.
Basis of Consolidation. The consolidated financial statements include the
accounts of American Stores Company and all subsidiaries. Accordingly, all
references herein to "American Stores Company" include the consolidated results
of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair value. The balance of cash was higher at year-
end 1994 due to proceeds held from the sale of the Star Market food division 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
temporary differences arise in recording income and expenses between financial
reporting and tax reporting. Amortization of goodwill is not deductible for
purposes of calculating income tax provisions.
Net Earnings Per Share. Net earnings per share are determined by dividing the
weighted average number of shares outstanding during the year into net earnings.
Common share equivalents in the form of stock options 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 storage
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'
compensation, 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 methods
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 administrative
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
million 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
substantially all of its outstanding liabilities. On January 19, 1995, the
Company 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,
equipment and inventories.
Debt
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 Company's principal bank credit agreement at year-end 1996 was a $1.0
billion 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
commercial 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
capitalized) 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:
(In thousands of dollars)
1997 $ 56,703
1998 72,786
1999 1,323,382
2000 148,484
2001 23,383
Thereafter 988,699
Total debt $2,613,437
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.
A summary of debt is as follows:
<TABLE>
(In thousands of dollars) 1996 1995 1994
<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 approximately $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 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.
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
facilities. Initial lease terms average approximately 20 years, plus renewal
options, and may provide for contingent rent based on sales volume in excess of
specified levels.
The summary below shows the aggregate future minimum rent commitments at year-
end 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
acquisition-related fair value adjustments.
Operating Capital
(In thousands of dollars) Leases Leases
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
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:
Minimum Sublease Contingent Total
(In thousands of dollars) Rent Rent Net Rent Rent
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
Income Taxes
Federal and state income taxes charged to earnings are summarized below:
52 weeks 53 weeks 52 weeks
(In thousands of dollars) 1996 1995 1994
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
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:
52 weeks 53 weeks 52 weeks
(Percent of earnings before income taxes) 1996 1995 1994
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%
Deferred tax benefits and liabilities as of year-end 1996 related to the
following temporary differences:
(In thousands of dollars) Benefits Liabilities Total
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)
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.
A summary of the Company's stock option activity and related information for
1996, 1995 and 1994 follows:
<TABLE>
1996 1995 1994
Weighted-Average Weighted- Weighted-
Exercise Price Average Average
Exercise Price Exercise
(Options in thousands) Options Options Options Price
<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
outstanding 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,
utilizing 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:
1996 1996 ESPP 1995
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
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options.
Because the fair value method of accounting for stock-based compensation has not
been applied to options granted prior to January 1, 1995, the preceding pro
forma compensation cost may not be representative of 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 corresponding
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
performance 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 participants 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 capital 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 distribution
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 10% or more of the
Company's common stock or announces a tender offer, the consummation 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 Chairman, 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 Registration Rights Agreement
dated February 20, 1997 entered into between the Company 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 Company 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
transaction, 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
Company 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
certain 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:
(In thousands of dollars) 1996 1995 1994
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%
The components of postretirement health care benefit expense are as follows:
52 weeks 53 weeks 52 weeks
(In thousands of dollars) 1996 1995 1994
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
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
represented by a labor union, unless the collective bargaining agreement
provides for participation. Contributions to ASRE are made at the discretion of
the Board of Directors.
The Company also contributes to multi-employer defined benefit retirement plans
in accordance with the provisions of the various labor contracts that govern the
plans. The multi-employer plan contributions are generally based on the number
of hours worked. Information about these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
Retirement plans expense was as follows:
52 weeks 53 weeks 52 weeks
(In thousands of dollars) 1996 1995 1994
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
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 retirement
benefit will be forfeited if the executive enters into competition with the
Company. At year-end 1996 17 of the Agreements remained in effect.
Special Charges
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,
administrative office consolidation costs, closed store costs, asset impairment
costs and other miscellaneous charges. The cost of consolidating four general
merchandise 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
market 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
million were recorded. The special charges are included in cost of merchandise
sold ($10.0 million), operating 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.
Severance costs included above resulted from the Company's commitment to
restructure and consolidate operations. During the fourth quarter 1996,
consolidation of human resources, payroll, Drug Store administration and general
merchandise 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
environmental contamination site unless an unfavorable outcome is remote.
Although the ultimate outcome and expense of environmental remediation is
uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition or results of operations of
the Company. Charges against earnings for environmental remediation were not
material in 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).
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
additional 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
agreement 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
management 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 Company
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 additional 30
senior officers under a new plan on March 27, 1997, in each case with an
exercise price of $45 per share.
Quarterly Results (Unaudited)
In the opinion of management, all adjustments necessary for a fair presentation
have been included:
<TABLE>
(In thousands of dollars, First Second Third Fourth (4) Fiscal
except per share data) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1996 (1)
Sales $4,580,028 $4,625,066 $4,563,362 $4,909,673 $18,678,129
Gross profit 1,195,176 1,226,328 1,216,966 1,326,508 4,964,978
Operating profit 156,814 187,654 177,562 239,646 761,676
Other (5,747) (1,163) (1,550) (77,106) (85,566)
Net earnings 64,240 83,129 75,757 64,095 287,221
Net earnings per share $.44 $.57 $.52 $.44 $1.97
Fully diluted earnings per share .44 .57 .52 .44 1.97
1995 (2)(3)
Sales $4,362,237 $4,494,890 $4,361,183 $5,090,584 $18,308,894
Gross profit (5) 1,120,869 1,150,890 1,145,142 1,333,303 4,750,204
Operating profit 134,576 165,277 154,632 252,338 706,823
Other (852) 3,188 1,435 (133) 3,638
Net earnings 53,883 73,937 67,445 121,544 316,809
Net earnings per share $.37 $.50 $.46 $.83 $2.16
Fully diluted earnings per share .37 .50 .46 .83 2.16
1994
Sales $4,607,652 $4,669,018 $4,431,863 $4,646,593 $18,355,126
Gross profit (5) 1,179,552 1,193,243 1,140,242 1,238,207 4,751,244
Operating profit 131,756 169,830 120,982 227,500 650,068
Other (584) (562) 89,767 38,277 126,898
Net earnings 47,963 69,034 97,934 130,253 345,184
Net earnings per share $.34 $.48 $.69 $.91 $2.42
Fully diluted earnings per share .33 .47 .66 .87 2.33
</TABLE>
(1)Fourth quarter 1996 includes special charges totaling $100.0 million, pre-
tax ($.41 per share, after tax) included in Gross Profit ($10.0 million),
Operating Profit ($25.5 million) and Other ($74.5 million).
(2) 53-week year
(3)The fourth quarter of fiscal 1995 is a 14-week quarter, compared to 13-week
quarters for fiscal 1996 and 1994.
(4)Operating profit in the fourth quarter has exceeded the prior three quarters
in each of the three years presented due to the seasonality of the food and
drug retail business and LIFO inventory adjustments.
The holiday season in the fourth quarter benefits the food and drug retail
business. Increased cold and flu occurrences during this quarter also
benefit the drug store operations.
(5)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.
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated March 14, 1997, except for the
Subsequent Events Note, as to which date is April 8, 1997, included in the
Annual Report on Form 10-K of American Stores Company for the year ended
February 1, 1997, with respect to the consolidated financial statements, as
amended, included in this Form 10-K/A.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Salt Lake City, Utah
January 28, 1998
