SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
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 87-0207226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
299 South Main Street
Salt Lake City, Utah 84111
(Address of principal executive offices) (Zip Code)
801-539-0112
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 28, 1998: Common Stock, Par Value $1.00 -
274,935,153 shares.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AMERICAN STORES COMPANY
Consolidated Condensed Statements of Earnings
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
October 31, November 1,
1998 1997
<S> <C> <C>
Sales $4,847,756 $4,647,465
Cost of merchandise sold, including
warehousing and transportation expenses 3,548,005 3,412,766
---------- ----------
Gross profit 1,299,751 1,234,699
Operating and administrative expenses 1,102,028 1,073,231
---------- ----------
Operating profit 197,723 161,468
Other(expense)income:
Interest income 737 1,256
Interest expense (57,050) (54,432)
----------- -----------
Net other(expense)income (56,313) (53,176)
----------- -----------
Earnings before income taxes 141,410 108,292
Federal and state income taxes 60,665 48,017
---------- ----------
Net earnings $ 80,745 $ 60,275
========== ==========
Basic earnings per share $ 0.29 $ 0.22
========== ==========
Diluted earnings per share $ 0.29 $ 0.22
========== ==========
Average number of common shares outstanding
used for basic earnings per share 274,830 273,292
Dilutive common stock options 3,221 1,809
------- -------
Average number of common shares outstanding
used for dilutive earnings per share 278,051 275,101
Dividends per share $0.09 $0.09
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
<PAGE>
AMERICAN STORES COMPANY
Consolidated Condensed Statements of Earnings
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
October 31, November 1,
1998 1997
<S> <C> <C>
Sales $14,670,458 $14,158,283
Cost of merchandise sold, including
warehousing and transportation expenses 10,785,195 10,386,330
----------- -----------
Gross profit 3,885,263 3,771,953
Operating and administrative expenses 3,300,533 3,217,134
Restructuring and impairment 13,400
----------- -----------
Operating profit 584,730 541,419
Other(expense)income:
Interest income 2,556 4,109
Interest expense (176,138) (161,937)
Shareholder related expenses (33,913)
----------- -----------
Net other(expense)income (173,582) (191,741)
------------ ----------
Earnings before income taxes 411,148 349,678
Federal and state income taxes 176,382 165,221
----------- ----------
Net earnings $ 234,766 $ 184,457
=========== ==========
Basic earnings per share $ 0.86 $ 0.67
========== ==========
Diluted earnings per share $ 0.85 $ 0.66
========== ==========
Average number of common shares outstanding
used for basic earnings per share 274,403 277,355
Dilutive common stock options 2,234 1,498
------- -------
Average number of common shares outstanding
used for dilutive earnings per share 276,637 278,853
Dividends per share $0.27 $0.26
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
<PAGE>
AMERICAN STORES COMPANY
Consolidated Condensed Balance Sheets
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 42,974 $ 47,794
Inventories 1,753,633 1,714,229
Other current assets 442,613 499,757
---------- ----------
Total current assets 2,239,220 2,261,780
Property, plant and equipment and property
under capital leases, less accumulated
depreciation and amortization of $2,374,626
on October 31, 1998 and $2,552,723 on
January 31, 1998 4,362,267 4,260,921
Goodwill 1,586,651 1,611,812
Other assets 490,863 401,502
---------- ----------
Assets $8,679,001 $8,536,015
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $1,243,479 $1,186,845
Other current liabilities 714,315 833,554
Current maturities of long-term debt and
capital lease obligations 41,828 100,935
---------- ----------
Total current liabilities 1,999,622 2,121,334
Other liabilities 847,067 903,629
Long-term debt and obligations under capital
leases, less current maturities 3,335,799 3,201,970
Shareholders' Equity - shares outstanding of
274,920,477 on October 31, 1998 and
273,606,510 on January 31, 1998 2,496,513 2,309,082
---------- ----------
Liabilities and Shareholders' Equity $8,679,001 $8,536,015
========== ==========
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
<PAGE>
AMERICAN STORES COMPANY
Consolidated Condensed Statements of Cash Flows
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
October 31, November 1,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $234,766 $184,457
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 367,042 347,561
Net (gain) on asset sales (12,935) (3,304)
Changes in operating assets and liabilities (204,633) 174,825
-------- --------
Total adjustments 149,474 519,082
-------- --------
Net cash provided by operating activities 384,240 703,539
-------- --------
Cash Flows from Investing Activities:
Expended for property, plant and equipment (522,147) (700,099)
Proceeds from sale of other assets 104,648 38,363
-------- ---------
Net cash (used in) investing activities (417,499) (661,736)
-------- --------
Cash Flows from Financing Activities:
Issuance of new debt 145,000 500,000
Payment of long-term borrowing (50,000) (343,000)
Net (decrease) increase in borrowings (19,226) 291,082
Other changes in equity 26,687 34,985
Repurchase of common stock from major stockholder (550,000)
Issuance of common stock for overallotments 95,914
Cash dividends (74,022) (72,443)
-------- --------
Net cash provided by (used in)
financing activities 28,439 (43,462)
Net (decrease) in cash and
cash equivalents (4,820) (1,659)
Cash and cash equivalents:
Beginning of year 47,794 37,467
-------- --------
End of quarter $ 42,974 $ 35,808
======== =========
Supplementary information - Statement of Cash Flows:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 170,507 $ 149,723
Income taxes, net of refunds $ 168,614 $ 205,886
</TABLE>
<PAGE>
AMERICAN STORES COMPANY
Notes to Consolidated Condensed Financial Statements
(unaudited)
October 31, 1998
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of American Stores Company and its
subsidiaries as of October 31, 1998 and January 31, 1998 and the results of its
operations for the thirteen weeks ended October 31, 1998 and November 1, 1997
and results of operations and cash flows for the thirty-nine weeks ended October
31, 1998 and November 1, 1997. The operating results for the interim periods are
not necessarily indicative of results for a full year. For a further discussion
of the Company's accounting policies, please refer to the Company's Form 10-K
for the fiscal year ended January 31, 1998.
Net Earnings Per Share
Earnings per share amounts are calculated in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
Employee Stock Purchase Plan
During the quarter, 385,641 shares were issued under the ESPP at $20.32 per
share and 783,746 shares were issued year-to-date at an average price of $19.33
per share. As of September 30, 1998, purchases of common stock under the ESPP
have been discontinued.
Debt
On September 22, 1998, the Company entered into a $300 million revolving credit
agreement with a financial institution. The agreement bears interest at the
higher of 0.50% above the latest Federal Funds Rate or the rate of interest in
effect as publicly announced by Bank of America in San Francisco as its
reference rate, and terminates on the earlier of i) the effective date of
consummation of the Merger (as defined below), ii) the date which is 30 days
after the date the Merger Agreement is terminated, or iii) July 1, 1999.
On March 19, 1998, the Company issued $45 million of notes under the outstanding
Series B Medium Term Note Program. On March 30, 1998, the Company issued an
additional $100 million of notes under the same Program. The $45 million of
notes bear interest at a rate of 6.5% and mature March 20, 2008. The $100
million of notes bear interest at a rate of 7.1% and mature March 20, 2028.
Proceeds were used to refinance short-term debt and for general corporate
purposes.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.38%.
During 1997 the Company entered into a $100 million treasury rate lock agreement
for the purpose of hedging the interest rate on a portion of debt to be issued
under the Company's universal shelf registration statement. In March 1998, the
treasury lock was terminated in connection with the issuance of $100 million of
notes under the registration statement. The Company realized a net loss of $1.0
million, which is being amortized over the term of the debt as an addition to
interest expense.
Part I - Financial Information (continued)
Notes to Consolidated Condensed Financial Statements (continued)
Repurchase of Common Stock
On April 8, 1997, the Company (i) repurchased 24.4 million shares of its common
stock from the family of L.S. Skaggs, the former Chairman of the Company, and
certain Skaggs family and charitable trusts (the Selling Stockholders) for an
aggregate price of $550 million and (ii) sold 4.6 million shares of common stock
for net proceeds of $95.9 million pursuant to the exercise of an overallotment
option by the underwriters in connection with a public offering of 30.8 million
shares by the Selling Stockholders. On April 8, 1997 the Company also recorded
non-recurring charges totaling $33.9 million, or $0.11 per share, related to
expenses incurred by the Selling Stockholders which were reimbursed by the
Company.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company has not yet determined what effect, if any, this statement will have on
the Company.
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan Of Merger (the
Merger Agreement) between the Company, Albertson's, Inc. (Albertson's) and
Abacus Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub),
pursuant to which Merger Sub would be merged with and into the Company with the
Company surviving the merger as a wholly-owned subsidiary of Albertson's. Each
share of the Company's Common Stock would be converted into the right to receive
0.63 shares of Albertson's Common Stock, with cash paid in lieu of any
fractional shares. The transaction is intended to qualify as a pooling of
interests for accounting purposes and as a tax-free reorganization for U.S.
federal income tax purposes. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
All options and certain shares of restricted stock granted under the Company's
stock option and stock award plans will automatically vest upon a change of
control, which is defined in such plans as stockholder approval of the Merger
Part I - Financial Information (continued)
Notes to Consolidated Condensed Financial Statements (continued)
or, for options granted under the Company's 1997 Stock Option and Stock
Award Plan and the 1997 Stock Plan for Non-Employee Directors (the 1997 Plans),
upon the later of stockholder approval or regulatory approval of the Merger. All
options outstanding on the consummation of the merger will be converted into
options to acquire shares of Albertson's Common Stock. In addition, option
holders have the right (an LSAR), during an exercise period of up to 60 days
after the occurrence of a change of control (but prior to consummation of the
Merger), to elect to surrender all or part of their options in exchange for
shares of Albertson's Common Stock having a value equal to the excess of the
change of control price over the exercise price (which shares will be
deliverable upon the Merger). For those purposes, the change of control price
will be the higher of (i) the highest reported sales price during the 60-day
period ending prior to respective dates of the "change of control", or (ii) the
price paid to stockholders in the merger, subject to adjustment in both cases if
the exercise period is less than 60 days. If the Merger Agreement is terminated
prior to consummation of the Merger, option holders who exercise LSARs will
receive cash in lieu of Albertson's Common Stock.
Subsequent Event
On November 12, 1998, the stockholders of American Stores and Albertson's
approved the Merger Agreement. Approval of the Merger Agreement by the Company's
stockholders accelerated the vesting of approximately 10.2 million stock options
(approximately 60% of the outstanding stock options) and permitted the holders
of these options to exercise LSARs.
The exercisability of approximately 10.2 million LSARs will result in the
Company recognizing an estimated $150 million non-recurring compensation charge
during the fourth fiscal quarter of 1998, based on an average exercise price of
$19.23 and assuming a change of control price of $33.875 (the highest sales
price of the Company's common stock during the 60-day period prior to the
Company's special stockholders meeting), whether or not the Merger is
consummated. LSARs relating to the approximately 6.6 million remaining stock
options will become exercisable upon regulatory approval of the Merger, which
would result in recognition of an additional charge estimated at $67 million
based upon an average exercise price of $23.72 and assuming a change of control
price of $33.875. The actual change of control price used to measure the value
of the LSARs will not be determinable until the date the Merger is consummated
or the Merger Agreement is terminated. Additional charges would be recognized in
the quarter in which the Merger is consummated if the change of control price is
higher than the amounts assumed for purposes of the foregoing estimates. For
every dollar the change of control price exceeds $33.875, the Company will
recognize an additional non-recurring compensation charge of approximately $16.8
million. If the merger is consummated, the foregoing charges will be non-cash.
<PAGE>
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Total sales for the third quarter of 1998 increased 4.3% to $4.8 billion
compared to third quarter 1997 total sales of $4.6 billion. Year-to-date total
sales increased 3.6% in 1998 to $14.7 billion compared to 1997 year-to-date
sales of $14.2 billion. The increase is primarily due to increased retail square
footage from capital spending over the past few years and stronger pharmacy
sales. Net retail square footage increased 3.6% from third quarter 1997 to third
quarter 1998. Comparable store sales (sales from stores that have been open at
least one year, including replacement stores) increased 1.3% in the third
quarter and 1.4% year-to-date 1998 over the corresponding periods of 1997 due
primarily to successful marketing and advertising promotions and stronger
pharmacy sales. Pharmacy department comparable sales in 1998 increased 17.9% in
the third quarter and 16.6% year-to-date over the prior year periods. Pharmacy
departments have benefited from new drug introductions, inflation, and continued
growth in managed care.
Gross profit as a percent of sales increased to 26.8% in the third quarter of
1998 compared to 26.6% in the third quarter of 1997. Year-to-date gross profit
as a percent of sales decreased in 1998 to 26.5% compared to 26.6% in 1997. The
third quarter gross profit percentage increase was primarily due to better
promotional spending and improved product mix in the food departments. The
decreases in year-to-date gross profit as a percent of sales from the prior year
were due mainly to lower pharmacy margins compared to the prior year caused by
the shift to third-party payors from cash customers, increased sales of new,
lower margin drugs and the impact of inflation on gross profit as a percent of
sales.
Operating and administrative expenses as a percent of sales decreased to 22.7%
in the third quarter of 1998 from 23.1% in 1997. Year-to-date, operating and
administrative expenses as a percent of sales decreased to 22.5% in 1998
compared to 22.8% in 1997. Year-to-date 1997 operating and administrative
expenses included costs related to the sale in the first quarter of a division
of the Company's communications subsidiary totaling $13.4 million. The decreases
as a percent to sales from the prior year were primarily attributable to lower
self insurance risk expense, improved labor management and better overall
expense control.
Total operating profit for the third quarter 1998 increased 22.5% to $197.7
million compared to $161.5 million in the third quarter of 1997. Year-to-date
operating profit was $584.7 million in 1998 compared to $541.4 million in 1997,
an increase of 8.0%. Operating profit was 4.1% of sales in the third quarter and
4.0% year-to-date 1998 compared to 3.5% in the third quarter and 3.8%
year-to-date 1997. The increase in 1998 operating profit as a percent of sales,
excluding the 1997 one-time charge, is due primarily to improved gross margins
and lower operating expenses.
Interest expense was $57.1 million in the third quarter of 1998 compared to
$54.4 million in the third quarter of 1997. Year-to-date interest expense
totaled $176.1 million in 1998 compared to $161.9 million in 1997. Outstanding
debt levels were higher during the third quarter and year-to-date 1998 primarily
due to the continued capital expenditure program and the financing of the stock
repurchase (Stock Repurchase) from the Company's former chairman and related
parties in April of 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The Company's effective income tax rate was 42.9% in the third quarter and
year-to-date 1998 compared to 44.3% and 47.2% for the same periods in 1997. The
prior year effective tax rates were higher due to the one-time non-deductible
expenses related to the Stock Repurchase. The year-to-date effective tax rate in
1997 excluding one-time items was 43.4%.
Diluted earnings per share amounted to $0.29 per share in the third quarter and
$0.85 year-to-date 1998 compared to $0.22 and $0.66 per share for the same
periods in the prior year.
The Company recorded special charges aggregating approximately $100.0 million,
before taxes, or $0.21 per share, during 1996 related primarily to its
re-engineering program initiatives. As of the end of the second quarter 1998,
the total reserve had been utilized without any necessary adjustments or
modifications.
Liquidity and Capital Resources
Cash provided by operating activities of $384.2 million year-to-date 1998
compares to $703.5 million in the same period of 1997. The decrease is primarily
attributable to the large amount of cash provided by operating activities during
1997 as a result of the implementation of the Company's working capital
initiatives. The Company initially realized significant cash flow benefits as a
result of the working capital initiatives which have tapered off over time as
payables have become better managed and inefficiencies have been eliminated. The
working capital initiatives are continuing in 1998 and cash provided by
operating activities during the third quarter of 1998 was in line with the
Company's expectations. The balance of the change is due primarily to changes in
the other components of working capital and is not believed to be indicative
of long-term trends.
Cash capital expenditures year-to-date 1998 and 1997 amounted to $522.1 million
and $700.1 million, respectively. Total capital expenditures, including the net
present value of leases, amounted to $629.7 million in 1998, compared to $842.1
million in 1997. For the third quarter of 1998, 21 new stores were opened, 12
stores were closed and 31 stores were remodeled. Year-to-date 1998, 47 new
stores were opened, 36 stores were closed and 49 stores were remodeled. Capital
expenditures for fiscal 1998 are expected to be approximately $1.0 billion. The
Company currently plans to open a total of 65 new stores and remodel 70 stores
in 1998.
On September 22, 1998, the Company entered into a $300 million revolving credit
agreement with a financial institution. The agreement bears interest at the
higher of 0.50% above the latest Federal Funds Rate or the rate of interest in
effect as publicly announced by Bank of America in San Francisco as its
reference rate, and terminates on the earlier of i) the effective date of
consummation of the Merger (as defined below), ii) the date which is 30 days
after the date the Merger Agreement is terminated, or iii) July 1, 1999.
On March 19, 1998, the Company issued $45 million of notes under the outstanding
Series B Medium Term Note Program. On March 30, 1998, the Company issued an
additional $100 million of notes under the same Program. The $45 million of
notes bear interest at a rate of 6.5% and mature March 20, 2008. The $100
million of notes bear interest at a rate of 7.1% and mature March 20, 2028.
Proceeds were used to refinance short-term debt and for general corporate
purposes.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.38%.
During 1997 the Company entered into a $100 million treasury rate lock agreement
for the purpose of hedging the interest rate on a portion of debt to be issued
under the Company's universal shelf registration statement. In March 1998, the
treasury lock was terminated in connection with the issuance of $100 million
of notes under the registration statement. The Company realized a net loss of
$1.0 million, which is being amortized over the term of the debt as an addition
to interest expense.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.38%.
The net increase in debt of $74.7 million in the first thirty-nine weeks of 1998
is compared to a net increase of $448.1 million in the same period of 1997. The
increase in 1997 was due primarily to the Stock Repurchase.
The Company believes that its cash flow from operations, supplemented by credit
available under the Company's existing credit facilities, availability under a
universal shelf registration statement, as well as its ability to refinance
debt, will be adequate to meet its presently identifiable cash requirements.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company has not yet determined what effect, if any, this statement will have on
the Company.
Year 2000
In 1996, the Company formed the Year 2000 Steering Committee to identify the
areas in which the Year 2000 issue could adversely affect the Company, and
develop and implement a comprehensive program to avoid or minimize such effects.
The Committee consists of members of senior management, information technology,
legal, and internal auditing departments. The Committee reports directly to
senior management and regularly advises the Company's Board of Directors on its
progress.
The Committee divided the universe of potential Year 2000 issues into two
categories, (i) internal exposure issues, consisting of potential problems with
the systems and equipment used within the Company, and (ii) external exposure
issues, consisting of potential problems with the systems and equipment of third
parties with whom the Company interfaces or on whom the Company relies for the
provision of critical products or services. To date, the Committee has completed
the following phases of its program with respect to both categories: inventoried
and assessed the exposure associated with each issue, formed specialized teams,
developed software and systems solutions, tested and certified the solutions,
implemented substantially all such software and systems solutions, and contacted
and evaluated responses from third parties with respet to their Year 2000
issues. The remaining phases involve implementation of the remaining solutions,
the development of contingency plans, and follow up on third party inquiries and
evaluations.
With respect to the internal exposure category, the Company identified potential
Year 2000 issues in each of the key areas of its business which
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
utilize computer software programs and operating systems. The Company and
outside contractors developed solutions for each component which was identified
as "non-compliant" and implemented the steps believed necessary to make such
systems Year 2000 compliant. The Company has completed the implementation of
substantially all the new systems/fixes in the internal exposure category. The
Company anticipates that the implementation of remaining systems/fixes will be
completed by the second quarter of 1999. The Company has also identified several
items of equipment such as cash registers, scales, and copy machines that use
embedded chips that may not be Year 2000 compliant. The Company is taking steps
to make them Year 2000 compliant by the second quarter of 1999.
With respect to the external exposure category, the Company has previously
provided Year 2000 questionnaires/certification forms to substantially all the
vendors, financial institutions, suppliers and other third parties with whom the
Company conducts business and is in the process of evaluating responses and
providing follow up communications to those third parties that did not respond
or did not respond satisfactorily to the initial mailing. Based on initial
results, the Company believes that a substantial majority of the vendors,
suppliers, financial institutions and other third parties that provide goods or
services to the Company of a type that are critical to its operations are taking
steps to make their systems Year 2000 compliant on a timely basis. The Company
believes that the most significant third parties from which Year 2000
certifications have not been obtained are the public utilities providing
electric, gas and other utilities to the Company's many store, warehouse and
office locations. In addition, there are several small suppliers of goods and
services, primarily local suppliers or suppliers of specialized goods on a small
scale, that have not responded to the Company's inquiries and that may not be
taking the requisite actions to avoid Year 2000 issues. In most cases, the
Company believes that if Year 2000 problems develop with the systems of such
small suppliers, the Company will be able to obtain comparable products from
other sources or operate without such products until the problems have been
resolved. The Company is continuing its efforts to encourage third parties to
address the Year 2000 issue and certify to the Company that they have
established a plan to make their systems Year 2000 compliant.
The Company estimates that its total cost to resolve internal exposure issues
will be approximately $25 million, substantially all of which has been spent to
date. The Company estimates that total direct costs to resolve external exposure
issues will be approximately $4.1 million, of which approximately $2.7 million
has been spent to date and the remaining $1.4 million will be spent during the
fourth quarter of 1998 and the first quarter of 1999. All of the Year 2000
expenses are being funded through operating cash flows.
The Company is dependent on the proper operation of its internal computer
systems and software for several key aspects of its business operations
including store operations, merchandise purchasing, inventory management,
pricing, sales, warehousing, transportation, financial reporting and
administrative functions. The Company is also dependent on the proper operation
of the computer systems and software of third parties providing critical goods
and services to the Company including vendors, utilities, financial
institutions, government entities and others. The failure or malfunction of such
internal or external systems could impair the Company's ability to operate its
business in the ordinary course and could have a material, adverse effect on its
results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Management of the Company believes it has an effective program in place to
resolve Year 2000 issues in a timely manner. However, since it is not possible
to anticipate all future outcomes, especially when third parties are involved,
there could be circumstances in which the Company's operations would be
disrupted and it would be unable to service customers or maintain adequate
inventory levels. The amount of lost revenue and potential liability associated
with claims related to the disruption of the Company's business and its
inability to deliver products cannot be estimated at this time.
The Company does not have a contingency plan in place but intends to formulate
plans with respect to its most critical applications during the first half of
1999. Contingency plans are expected to involve manual workarounds, increased
inventories of certain products or types of products, and extra staffing.
Environmental
The Company has identified environmental contamination at certain of its store,
warehouse, office and manufacturing facilities (related to current operations as
well as previously disposed of businesses) which are primarily related to
underground petroleum storage tanks (USTs) and ground water contamination. The
Company conducts an on-going program for the inspection and evaluation of new
sites proposed to be acquired by the Company and the remediation/monitoring of
contamination at existing and previously owned sites. The Company anticipates
that all USTs will be in compliance with 1998 UST upgrade requirements
established by the Environmental Protection Agency. Although the ultimate
outcome and expense of environmental remediation is uncertain, the Company
believes that the required costs of remediation, UST upgrades and continuing
compliance with environmental laws will not have a material adverse effect on
the financial condition or operating results of the Company.
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan Of Merger (the
Merger Agreement) between the Company, Albertson's, Inc. (Albertson's) and
Abacus Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub),
pursuant to which Merger Sub would be merged with and into the Company with the
Company surviving the merger as a wholly-owned subsidiary of Albertson's. Each
share of the Company's Common Stock would be converted into the right to receive
0.63 shares of Albertson's Common Stock, with cash paid in lieu of any
fractional shares. The transaction is intended to qualify as a pooling of
interests for accounting purposes and as a tax-free reorganization for U.S.
federal income tax purposes. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
All options and certain shares of restricted stock granted under the
Company's stock option and stock award plans will automatically vest upon a
change of control, which is defined in such plans as stockholder approval of the
Merger or, for options granted under the Company's 1997 Stock Option and Stock
Award Plan and the 1997 Stock Plan for Non-Employee Directors (the 1997 Plans),
upon the later of stockholder approval or regulatory approval of the Merger. All
options outstanding on the consummation of the merger will be converted into
options to acquire shares of Albertson's Common Stock. In addition, option
holders have the right (an LSAR), during an exercise period of up to 60 days
after the occurrence of a change of control (but prior to consummation of the
Merger), to elect to surrender all or part of their options in exchange for
shares of Albertson's Common Stock having a value equal to the excess of the
change of control price over the exercise price (which shares will be
deliverable upon the Merger). For those purposes, the change of control price
will be the higher of (i) the highest reported sales price during the 60-day
period ending prior to respective dates of the "change of control", or (ii) the
price paid to stockholders in the merger, subject to adjustment in both cases if
the exercise period is less than 60 days. If the Merger Agreement is terminated
prior to consummation of the Merger, option holders who exercise LSARs will
receive cash in lieu of Albertson's Common Stock.
Subsequent Event
On November 12, 1998, the stockholders of American Stores and Albertson's
approved the Merger Agreement. Approval of the Merger Agreement by the Company's
stockholders accelerated the vesting of approximately 10.2 million stock options
(approximately 60% of the outstanding stock options) and permitted the holders
of these options to exercise LSARs.
The exercisability of approximately 10.2 million LSARs will result in the
Company recognizing an estimated $150 million non-recurring compensation charge
during the fourth fiscal quarter of 1998, based on an average exercise price of
$19.23 and assuming a change of control price of $33.875 (the highest sales
price of the Company's common stock during the 60-day period prior to the
Company's special stockholders meeting), whether or not the Merger is
consummated. LSARs relating to the approximately 6.6 million remaining stock
options will become exercisable upon regulatory approval of the Merger, which
would result in recognition of an additional charge estimated at $67 million
based upon an average exercise price of $23.72 and assuming a change of control
price of $33.875. The actual change of control price used to measure the value
of the LSARs will not be determinable until the date the Merger is consummated
or the Merger Agreement is terminated. Additional charges would be recognized in
the quarter in which the Merger is consummated if the change of control price is
higher than the amounts assumed for purposes of the foregoing estimates. For
every dollar the change of control price exceeds $33.875, the Company will
recognize an additional non-recurring compensation charge of approximately $16.8
million. If the merger is consummated, the foregoing charges will be non-cash.
Cautionary Note
This report contains certain forward-looking statements about the future
performance of the Company and about its pending merger transaction which are
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
based on management's assumptions and beliefs in light of the information
currently available to it. The Company assumes no obligation to update the
information contained herein. 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 industry generally and particularly
in the Company's principal markets; the implementation of the Company's
re-engineering initiatives in accordance with the currently contemplated
schedule and budget; the Company's relationships with its employees and the
terms of future collective bargaining agreements; the costs and other effects of
legal and administrative cases and proceedings; the nature and extent of
continued consolidation in the food and drug industry; 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; changes in the rate of
inflation; changes in economic conditions which affect the buying patterns of
the Company's customers; the ability of the Company and its vendors, financial
institutions and others to resolve Year 2000 processing issues in a timely
manner; changes in state or federal legislation or regulation; diversion of
management's attention from other business concerns to the assimilation of the
merged operations as contemplated by the pending merger transaction;
uncertainties and difficulties relating to the integration of the merged
companies including the assimilation and retention of employees, challenges in
retaining customers and potential adverse short-term effects on operating
results; and delays or obstacles in obtaining required regulatory approvals
and/or other conditions necessary to satisfactorily close the pending merger
transaction.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings -- For a description of legal proceedings,
please refer to the footnote entitled "Legal Proceedings"
contained in the Notes to Consolidated Financial Statements
section of the Company's Form 10-K for the fiscal year ended
January 31, 1998.
The Company is also involved in various claims, administrative
proceedings and other legal proceedings which arise from time to
time in connection with the ordinary conduct of the Company's
business.
Item 2. Changes in Securities -- None
Item 3. Defaults upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders --
On November 12, 1998, the stockholders of the Company voted on a
proposal to approve and adopt an Agreement and Plan of Merger,
dated as of August 2, 1998 among Albertson's, Inc., Abacus
Holdings, Inc., a Delaware corporation and a wholly owned
subsidiary of Albertson's, and American Stores Company.
For Against Abstain
224,746,602 1,869,320 587,764
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K --
(a) Exhibits --
10.1 Amendment to American Stores Company 1997 Stock
Option and Stock Award Plan, dated as of October
8, 1998.
10.2 Amendment to American Stores Company 1989 Stock
Option and Stock Award Plan, dated as of October
8, 1998.
10.3 Amendment to American Stores Company 1985 Stock
Option and Stock Award Plan, dated as of October
8, 1998.
10.4 Amendment to American Stores Company Supplemental
Executive Retirement Plan 1998 Retirement dated
as of September 15, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter --
Filing of the Press Release issued on November 12,
1998 announcing that the stockholders of the Company
had approved and adopted the Agreement and Plan of
Merger, dated August 2, 1998, among Albertson's,
Inc., Abacus Holdings, Inc., and the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements 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 December 11, 1998 /s/ Neal J. Rider
Neal J. Rider
Chief Financial Officer
(Principal Financial Officer)
Dated December 11, 1998 /s/ Kathleen E. McDermott
Kathleen E. McDermott
Chief Legal Officer and Assistant Secretary
Dated December 11, 1998 /s/ Bradley M. Vierig
Bradley M. Vierig
Senior Vice President and Controller
(Chief Accounting Officer)
EXHIBIT 10.1
AMENDMENT TO AMERICAN STORES COMPANY
1997 STOCK OPTION AND STOCK AWARD PLAN
DATED AS OF OCTOBER 8, 1998
The American Stores Company 1997 Stock Option and Stock Award
Plan (the "1997 Plan") is hereby amended as follows:
1. The last sentence of Section 5(k) of the 1997 Plan is
hereby amended to read in its entirety as follows:
Notwithstanding the foregoing, if any right granted pursuant to this
Section 5(k) would make a Change in Control transaction ineligible for
pooling of interests accounting under APB No. 16 that is intended to be
eligible for such accounting treatment, (i) the Committee shall have
the ability to substitute the cash payable pursuant to this Section
5(k) with common stock with a Fair Market Value equal to the cash that
would otherwise be payable hereunder, (ii) the Exercise Period shall
terminate as of the close of business on the date of consummation of
such Change in Control transaction and (iii) the Change in Control
Price shall be adjusted to provide the holders of options with fair
value in exchange for any reduction in the Exercise Period as
determined by the Committee in its sole.
2. Paragraph (c) of Section 10 of the 1997 Plan is hereby
amended by inserting the words ", subject to adjustment by the Committee
pursuant to Section 5(k)," after the word "means."
3. The foregoing amendment shall apply to options granted
under the 1997 Plan that are outstanding on the date hereof as well as to
options hereafter granted.
CERTIFICATE OF ADOPTION BY BOARD OF DIRECTORS
The undersigned, Mary V. Sloan, Vice President and Secretary
of American Stores Company, hereby certifies that the foregoing Amendment to the
American Stores Company 1997 Stock Option and Stock Award Plan was approved by
the Board of Directors of the Company at a meeting of the Board of Directors
duly called and held on October 8, 1998.
/s/ Mary V. Sloan
Mary V. Sloan
Vice President and Secretary
EXHIBIT 10.2
AMENDMENT TO AMERICAN STORES COMPANY
1989 STOCK OPTION AND STOCK AWARD PLAN
DATED AS OF OCTOBER 8, 1998
The American Stores Company 1989 Stock Option and Stock Award
Plan (the "1989 Plan") is hereby amended as follows:
1. The proviso to the first sentence of the third paragraph of
Section 19 of the 1989 Plan is hereby amended to read in its entirety as
follows:
; provided, that if any right granted pursuant to this sentence would
make a Change of Control transaction ineligible for pooling of
interests accounting under APB No. 16 that is intended to be eligible
for such accounting treatment, (i) the Committee shall have the ability
to substitute the cash payable pursuant to this paragraph with common
stock with a fair market value equal to the cash that would otherwise
be payable hereunder, (ii) the period for the holder to elect such
right shall terminate as of the close of business on the date of
consummation of such Change of Control transaction and (iii) the Change
of Control Fair Market Value shall be adjusted to provide the holders
of such rights with fair value in exchange for any reduction in the
period for such election as determined by the Committee in its sole
judgment.
2. The fourth paragraph of Section 19 of the 1989 Plan is
hereby amended by inserting the words "(or such shorter period as the rights
granted pursuant to the previous paragraph are exercisable)" after each
reference to "60-day period."
3. The last paragraph of Section 19 of the 1989 Plan is hereby
amended by inserting the words ", subject to adjustment by the Committee
pursuant to the third paragraph of Section 19," after the word "mean."
4. The foregoing amendments shall apply to awards granted
under the 1989 Plan that are outstanding on the date hereof as well as to awards
hereafter granted.
CERTIFICATE OF ADOPTION BY BOARD OF DIRECTORS
The undersigned, Mary V. Sloan, Vice President and Secretary
of American Stores Company, hereby certifies that the foregoing Amendment to the
American Stores Company 1989 Stock Option and Stock Award Plan was approved by
the Board of Directors of the Company at a meeting of the Board of Directors
duly called and held on October 8, 1998.
/s/ Mary V. Sloan
Mary V. Sloan
Vice President and Secretary
EXHIBIT 10.3
AMENDMENT TO AMERICAN STORES COMPANY
1985 STOCK OPTION AND STOCK AWARD PLAN
DATED AS OF OCTOBER 8, 1998
The American Stores Company 1985 Stock Option and Stock Award
Plan (the "1985 Plan") is hereby amended as follows:
1. The proviso to the first sentence of the third paragraph of
Section 18(a) of the 1985 Plan is hereby amended to read in its entirety as
follows:
; provided, that if any right granted pursuant to this sentence would
make a Change in Control transaction ineligible for pooling of
interests accounting under APB No. 16 that is intended to be eligible
for such accounting treatment, (i) the Committee shall have the ability
to substitute the cash payable pursuant to this paragraph with common
stock with a fair market value equal to the cash that would otherwise
be payable hereunder, (ii) the period for the holder to elect such
right shall terminate as of the close of business on the date of
consummation of such Change of Control transaction and (iii) the Change
of Control Fair Market Value shall be adjusted to provide the holders
of such rights with fair value in exchange for any reduction in the
period for such election as determined by the Committee in its sole
judgment.
2. The fourth paragraph of Section 18(a) of the 1985 Plan is
hereby amended by inserting the words "(or such shorter period as the rights
granted pursuant to the previous paragraph are exercisable)" after each
reference to "60-day period."
3. The last paragraph of Section 18(a) of the 1985 Plan is
hereby amended by inserting the words ", subject to adjustment by the Committee
pursuant to the third paragraph of Section 18(a)," after the word "mean."
4. The foregoing amendments shall apply to awards granted
under the 1985 Plan that are outstanding on the date hereof as well as to awards
hereafter granted.
CERTIFICATE OF ADOPTION BY BOARD OF DIRECTORS
The undersigned, Mary V. Sloan, Vice President and Secretary
of American Stores Company, hereby certifies that the foregoing Amendment to the
American Stores Company 1985 Stock Option and Stock Award Plan was approved by
the Board of Directors of the Company at a meeting of the Board of Directors
duly called and held on October 8, 1998.
/s/ Mary V. Sloan
Mary V. Sloan
Vice President and Secretary
EXHIBIT 10.4
AMENDMENT TO AMERICAN STORES COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
1998 RESTATEMENT
The American Stores Company Supplemental Executive Retirement
Plan 1998 Restatement is hereby amended effective September 15, 1998 as follows:
Section 6.01(a) shall be amended to read as follows:
A Participant or, after the Participant's death, his or her
Beneficiary may vary or modify the terms of the distribution set forth in any
Deferral Agreement and Distribution Election, but any such modification or
variation shall be made pursuant to a written instrument between the Participant
or Beneficiary, as the case may be, and the Company executed no later than 12
months before the date such modification or variation is to be effective.
Notwithstanding the foregoing, a Participant or Beneficiary, as the case may be,
may vary or modify the terms of the distribution set forth in a Deferral
Agreement and Distribution Election with respect to a Change of Control event by
written instrument between the Participant or Beneficiary, as the case may be,
and the Company executed at any time during which, under the facts and
circumstances then existing and as determined by the Committee (or its delegee),
there is substantial uncertainty as to whether a Change of Control will occur.
CERTIFICATE OF ADOPTION BY BOARD OF DIRECTORS
The undersigned, Mary V. Sloan, Vice President and Secretary
of American Stores Company, hereby certifies that the foregoing Amendment to the
American Stores Company Supplemental Executive Retirement Plan 1998 Restatement
was approved by the Board of Directors of the Company at a meeting of the Board
of Directors duly called and held on September 15, 1998.
/s/ Mary V. Sloan
Mary V. Sloan
Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and income statements for the thirty-nine week period ended October 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 42,974
<SECURITIES> 0
<RECEIVABLES> 362,701
<ALLOWANCES> 0
<INVENTORY> 1,753,633
<CURRENT-ASSETS> 2,239,220
<PP&E> 6,609,578
<DEPRECIATION> 2,301,990
<TOTAL-ASSETS> 8,679,001
<CURRENT-LIABILITIES> 1,999,622
<BONDS> 3,335,799
0
0
<COMMON> 299,778
<OTHER-SE> 2,196,735
<TOTAL-LIABILITY-AND-EQUITY> 8,679,001
<SALES> 14,670,458
<TOTAL-REVENUES> 14,670,458
<CGS> 10,785,195
<TOTAL-COSTS> 10,785,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,138
<INCOME-PRETAX> 411,148
<INCOME-TAX> 176,382
<INCOME-CONTINUING> 234,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234,766
<EPS-PRIMARY> .86<F1>
<EPS-DILUTED> .85<F1>
<FN>
<F1> EPS are not in (000's)
</FN>
</TABLE>
