SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended January 30, 1999.
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 84111-2203
(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.
Registered on: New York Stock Exchange, Inc.
Pacific Exchange, Inc.
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
<PAGE>
AMERICAN STORES COMPANY
FORM 10-K
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 27, 1999:
Common Stock, $1 Par Value -- $9,143,970,293.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 27, 1999:
Common Stock, $1 Par Value -- 276,788,175.
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AMERICAN STORES COMPANY
FORM 10-K
TABLE OF CONTENTS
PART I
Page Number
Cautionary Note............................................ 4
Item 1 Business................................................... 4
Item 2 Properties................................................. 7
Item 3 Legal Proceedings.......................................... 9
Item 4 Submission of Matters to a Vote of Security Holders........ 9
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters........................... 10
Item 6 Selected Financial Data................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 11
Item 7A Quantitative and Qualitative Disclosures About
Market Risk........................................... 19
Item 8 Financial Statements and Supplementary Data............... 20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 41
PART III
Item 10 Directors and Executive Officers of the Registrant........ 42
Item 11 Executive Compensation.................................... 45
Item 12 Security Ownership of Certain Beneficial Owners
and Management........................................ 52
Item 13 Certain Relationships and Related Transactions............ 54
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 55
Signatures................................................ 60
3
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AMERICAN STORES COMPANY
FORM 10-K
PART I
Cautionary Note
This report contains certain forward-looking statements about the future
performance of the Company and about its pending merger transaction which are
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.
Fiscal Year
The fiscal year of the Company ends on the Saturday nearest to January 31. All
references herein to "1998", "1997" and "1996" represent the 52-week fiscal
years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively.
Item 1 Business
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) among the Company, Albertson's, Inc. (Albertson's) and Abacus
Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub), pursuant
to which Merger Sub would be merged with and into the Company with the Company
surviving the merger as a wholly-owned subsidiary of Albertson's. Each share of
the Company's Common Stock would be converted into the right to receive 0.63
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shares of Albertson's Common Stock, with cash paid in lieu of any fractional
shares. The transaction is intended to qualify as a pooling of interests for
accounting purposes and as a tax-free reorganization for U.S. federal income tax
purposes. On November 12, 1998, the stockholders of the Company and Albertson's
approved the Merger Agreement. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary closing
conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
History
American Stores Company (the Company), traces its roots to 1939 with the
purchase of four drug stores in Utah, Idaho and Montana and was incorporated in
Delaware in 1965 under the name of Skaggs Drug Centers, Inc. The Company grew
initially through the acquisition of additional drug stores and, from 1969 to
1977, through a partnership with Albertson's, Inc. that developed food and drug
combination stores. In 1979 in order to enhance its food retailing capabilities,
the Company acquired American Stores Company, including Acme Markets, and
adopted the American Stores Company name. In 1984 Jewel Companies, Inc. was
acquired by the Company, adding Jewel Food Stores and the Osco and Sav-on drug
stores. In 1988 the Company acquired Lucky Stores, Inc., which currently
operates stores in California, Nevada and New Mexico.
After each acquisition mentioned above, the Company has reviewed the
consolidated group and disposed of selected stores and divisions to reduce debt
as well as to focus on growth opportunities available in the remaining markets.
Major dispositions during the past five years included the 33-store Star Market
food division and 45 Acme Markets stores.
Operations
The Company is principally engaged in a single industry segment, the retail sale
of food and drug merchandise. The Company's stores operate under the names of
Acme Markets, Jewel Food Stores, Lucky Stores, Osco Drug and Sav-on.
The Company is one of the nation's leading food and drug retailers, operating
supermarkets, stand-alone drug stores and combination food/drug store units. At
year-end 1998, the Company operated 1,580 stores in 26 states.
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The following is a summary of stores by store type and state as of January 30,
1999:
<TABLE>
<S> <C> <C> <C> <C>
Stand-alone Combination
State Supermarkets Drug Food/Drug Total
- ----- ------------ ----------- ----------- -----
Arizona 76 76
Arkansas 1 1
California 363 283 48 694
Delaware 7 8 15
Illinois 25 87 147 259
Indiana 54 6 60
Iowa 29 2 31
Kansas 26 26
Maine 1 1
Maryland 11 1 12
Massachusetts 56 56
Michigan 2 2
Minnesota 1 1
Missouri 31 31
Montana 10 10
Nebraska 14 14
Nevada 25 35 60
New Hampshire 20 20
New Jersey 50 23 73
New Mexico 4 11 15
North Dakota 6 6
Pennsylvania 42 29 71
South Dakota 3 3
Vermont 1 1
Utah 1 1
Wisconsin 33 8 41
Total 524 773 283 1,580
</TABLE>
See "Item 2 Properties" for additional information concerning properties of the
Company.
The Company tailors the merchandising and advertising of its stores to the
demographics in each area it serves. The merchandise sold by the Company's
stores includes food and drug items, such as grocery products, prescription
drugs, health and beauty aids and sundry merchandise.
The combination stores and many of the supermarkets include departments such as
delicatessens, bakeries, seafood departments and pharmacies. The Company's
private label programs include such brands as "Lucky" at Lucky stores,
"Lancaster" meats and "Acme" groceries at Acme stores, "Jewel" and "President's
Choice" at Jewel stores and "Osco" and "Sav-on" at Osco and Sav-on stores,
respectively. "Value Wise" is used as the Company's budget brand in all stores.
Competition
The Company's business is highly competitive, with competition from local and
national supermarket and drug store chains, as well as independent stores.
Competition also includes such retailers as convenience stores, warehouse
stores, membership or club stores, and specialty stores. Some of the Company's
largest competitors in various regions are Costco, Dominicks, Long's, Pathmark,
Ralphs, Rite Aid, Safeway, Sam's Club, Super Kmart, Vons and Walgreens.
Principal competitive factors in the industry are store location, price and
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quality of products, variety of selection, quality of service and store image,
including cleanliness and promotions.
The Company's business is characterized by narrow profit margins and,
accordingly, its successful financial performance depends primarily on its
ability to maintain relatively high sales volume and control operating costs.
The Company's geographic diversity allows it to reduce the risk that competitive
pressures in individual markets may have on its overall operating results. The
Company's stores collectively operate in 9 of the 25 largest U.S. metropolitan
areas and hold a leading market position (generally first or second in food
and/or drug market share) in each. These market areas include: Los Angeles-Long
Beach (where the Company's food operations are third in overall market share,
the drug operations rank first), Chicago, Philadelphia, Boston, Riverside-San
Bernardino (where the Company's food operations are third in overall market
share, the drug operations rank second), San Diego, Orange County, Phoenix and
Oakland.
Seasonality
The Company is subject to effects of seasonality. Sales are higher in the
Company's fourth quarter than other quarters due to the holiday season and the
increase in cold and flu occurrences.
Employees
At year-end 1998, the Company had approximately 121,000 full and part-time
employees. Approximately 75% of the Company's employees are covered by
collective bargaining agreements negotiated with local unions affiliated with
one of seven different international unions. There are approximately 118 such
agreements, typically having three to five-year terms. Accordingly, the Company
renegotiates a significant number of these agreements every year. The Company
considers its relationships with its employees to be good. The largest
collective bargaining agreement, which covers approximately 17% of the Company's
labor force, expires in October 2002.
See also Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations": "Year 2000" and "Environmental."
Item 2 Properties
The Company categorizes its retail stores into the following types:
supermarkets, stand-alone drug stores and combination food/drug stores. At
year-end 1998, the Company operated 524 supermarkets, 773 stand-alone drug
stores and 283 combination stores.
Combination stores are stores with 40,000 or more square feet, include a
pharmacy department and have an expanded selection of food, drug and general
merchandise. The supermarket category includes stores with service departments
that do not meet the definition of a combination store.
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At year-end 1998, square footage and store count by type of store were as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Super- Stand-alone Combination
(Square footage in thousands) markets Drug Food/Drug Total
- ----------------------------- ------- ----------- ----------- -----
Total square footage 17,727 14,366 16,979 49,072
Average square footage 34 19 60 31
Store count 524 773 283 1,580
</TABLE>
The Company owns approximately 31% of its retail locations; the remaining retail
locations are leased under capitalized or operating leases. At year-end 1998,
owned property with a net book value of approximately $225.6 million was
collateralized by loans secured by real estate of approximately $63.7 million.
The Company currently finances new construction of owned stores through
internally generated funds and borrowings under existing credit facilities.
Throughout the country, the Company leases and owns distribution centers, fleet
maintenance shops and warehouses for merchandise such as dry grocery, produce,
frozen foods and general merchandise. These facilities, which are listed below,
support the Company's retail outlets.
The Company also owns or leases office space, owns land for future development
and operates a bakery in Buena Park, California, which operates at a level of
production required to meet the demands of customers at the Company's local
retail locations.
At year-end 1998, the location and type of the Company's warehouse, distribution
and maintenance facilities and their respective sizes were as follows:
<TABLE>
<S> <C> <C> <C>
Total
Square Feet
Location Type in Thousands
- ---------------------------- ----------------------------------------------- ------------
Arizona Phoenix Liquor 25
California Buena Park Grocery, Meat, Frozen Food, Deli 1,160
Irvine Grocery, Produce 995
La Habra General Merch., Liquor, Bulk, Pharmacy, Reclaim 1,178
San Leandro Meat, Produce, Frozen Food, Bulk 633
Vacaville Grocery 871
Illinois Elgin Reclaim Center 130
Elk Grove General Merch., Health & Beauty, Pharmacy 478
Melrose Park Grocery, Fresh Food, Frozen Food, Storage 1,555
Wood Dale General Merchandise 439
Indiana Indianapolis Liquor, Wine & Tobacco 21
Nevada Las Vegas Liquor, Wine & Tobacco 30
Pennsylvania Lancaster General Merchandise 466
Philadelphia Grocery, Produce 1,061
Utah Payson Fixture Mill 80
-----
Total Warehouse, Distribution and Maintenance Facilities 9,122
</TABLE>
See also Item 1, Business, for additional information on properties of the
registrant.
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See also Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Item 3 Legal Proceedings
On September 13, 1996, a class action lawsuit captioned McCampbell et al. v.
Ralphs Grocery Company, et al. was filed in the San Diego Superior Court of the
State of California against the Company and two other grocery chains operating
in southern California. The complaint alleges, among other things, that the
Company and others conspired to fix the retail price of eggs in southern
California. The plaintiffs claim that the defendants' actions violate provisions
of the California Cartwright Act and constitute unfair competition. Plaintiffs
seek damages in an unspecified amount purportedly sustained by the class and
have produced a damages study which purports to support damages of approximately
$56 million attributable to the Company. If damages were to be awarded, they may
be trebled under the applicable statute. Plaintiffs also seek an injunction
against future actions in restraint of trade or unfair competition. The Company
has filed an answer denying plaintiffs' allegations and setting forth several
defenses. On October 3, 1997, the Court issued an order certifying a class of
retail purchasers of white chicken eggs sold in the one-dozen pack from
defendants' stores within Los Angeles, Riverside, San Bernadino, San Diego,
Imperial and Orange Counties during the period from September 13, 1992 to the
present. It is currently expected that trial will commence during July 1999. The
Company believes it has meritorious defenses to plaintiffs' claims, disputes the
accuracy of plaintiffs' damages study, and plans to vigorously defend the
lawsuit.
The Company is also 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.
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, Merger Sub and the Company, and approve the Merger related
thereto. The results of the voting on the proposal were as follows:
For Against Abstain
224,746,602 1,869,320 587,764
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PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters
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 dividends paid on the common stock during
such periods. The common stock of the Company is 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 27, 1999, was 33,679.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------------- ------------------------------ --------------------------------
Cash Cash Cash
Market Price Dividends Market Price Dividends Market Price Dividends
High Low Paid High Low Paid High Low Paid
-------------------------------- ------------------------------ ---------------------------------
First Quarter $26 1/4 $21 13/16 $.09 $23 3/16 $20 13/16 $.08 $17 1/8 $12 11/16 $.08
Second Quarter $26 7/8 $22 3/4 .09 $27 5/16 $22 .09 $20 5/8 $16 .08
Third Quarter $33 1/4 $26 1/16 .09 $26 $23 .09 $21 3/8 $18 3/4 .08
Fourth Quarter $39 3/16 $31 3/4 .09 $28 $19 3/8 .09 $22 11/16 $19 3/16 .08
---- ---- ----
Annual Dividend $.36 $.35 $.32
==== ==== ====
</TABLE>
Item 6 Selected Financial Data
The following consolidated selected financial data of the Company for the last
five fiscal years should be read in conjunction with the Company's consolidated
financial statements and related notes.
<TABLE>
<S> <C> <C> <C> <C> <C>
(In thousands, except per share
and store count data) 1998(1) 1997(1) 1996(1) 1995(2) 1994(1)
- --------------------------------------------------------------------------------------------------------------------------
Sales $19,866,725 $19,138,880 $18,678,129 $18,308,894 $18,355,126
Net earnings $233,744 $280,620 $287,221 $316,809 $345,184
Basic earnings per share $.85 (5) $1.02 (6) $.98 (7) $1.08 $1.21 (8)
Diluted earnings per share $.84 (5) $1.01 (6) $.98 (7) $1.08 $1.17 (8)
Basic average shares 274,790 276,409 291,776 293,887 285,534
Diluted average shares 277,562 277,769 292,651 294,465 301,889
Cash dividends per share $.36 $.35 $.32 $.28 $.24
Total assets $8,885,299 $8,536,015 $7,881,405 $7,362,964 $7,031,566
Total debt and obligations under
capital leases $3,472,680 $3,302,905 $2,679,147 $2,240,168 $2,205,291
Total capital expenditures (3) $959,277 $1,135,778 $1,065,436 $834,579 $572,575
Store count 1,580 1,557 1,529 1,497 1,448
Selling area square footage (4) 36,043 35,114 33,823 32,523 31,179
(1) 52-week fiscal year.
(2) 53-week fiscal year.
(3) Amount includes capitalized leases and the net present value of property, plant and equipment leased
under operating leases.
(4) Selling area square footage was 73% of total retail square footage in 1998.
(5) Includes a merger related stock option charge of $.48 per share related to the exercisability of
10.2 million limited stock appreciation rights which occurred upon the approval by the Company's
stockholders of the Merger Agreement.
(6) Includes charges related to the repurchase of a major shareholder's stock and the sale of a division
of the Company's communications subsidiary totaling $.14 per share of expense.
(7) Includes charges totaling $.21 per share of expense primarily related to re-engineering activities.
(8) Includes non-recurring items totaling $.19 per share of income related to a gain on the sale of the
45 Acme Markets stores and the 33-store Star Market food division. These disposed of stores generated
sales of $.8 billion in 1994.
</TABLE>
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Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
Total sales increased to $19.9 billion in 1998 from $19.1 billion in 1997 for a
total sales increase of 3.8%. Comparable store sales (sales from stores that
have been open at least one year, including replacement stores) increased in
1998 by 1.5%. The improvement in total sales in 1998 is primarily due to the
increase in net square footage during the year, stronger pharmacy department
sales and successful marketing and advertising promotions. During 1998 the
Company opened or acquired 67 stores, enlarged 9 stores and closed or sold 44
stores resulting in a net increase in retail square footage of 2.6%. Comparable
store sales in 1998 improved primarily due to strong pharmacy department sales.
The increased pharmacy sales are the result of an increase in the number of
prescriptions filled due to new drug introductions and the continued growth in
managed care prescription plans in which the Company is a provider. Drug
inflation is also a large component of the increase in pharmacy sales. Pharmacy
department comparable store sales in 1998 increased 17.1%.
Gross profit as a percent of sales was 26.7% in 1998 and 26.6% in 1997. Gross
profit in 1998 improved primarily due to a more profitable product mix and more
effective promotional strategies in the grocery, general merchandise and produce
departments. Gross margins in the pharmacy departments declined in 1998.
However, pharmacy gross profit dollars increased over prior year. Pharmacy
margins as a percent of sales continue to be pressured by the increased mix of
new branded drugs with lower margin rates and the continued growth of
third-party contracts. The annual pre-tax LIFO charge to earnings amounted to
$7.4 million in 1998 and $2.4 million in 1997.
Operating and administrative expenses as a percent of sales were 23.3% and 22.6%
in 1998 and 1997, respectively. Operating and administrative expense before
unusual items (merger related stock options of $195.3 million in 1998 and
restructuring and impairment of $13.4 million in 1997) improved in 1998 to 22.3%
compared to 22.6% in 1997. In 1998 the Company experienced lower self-insurance
expense, improved labor management and better overall expense control.
Stock options and certain shares of restricted stock granted under the Company's
stock option and stock award plans automatically vest upon a change of control,
which is defined in plans adopted prior to June 1997 (Pre-1997 Plans) as
stockholder approval of the Merger or, for options granted under the Company's
1997 Stock Option and Stock Award Plan and the 1997 Stock Plan for Non-Employee
Directors (1997 Plans), upon the later of stockholder approval or regulatory
approval of the Merger. All options outstanding on the consummation of the
merger will be converted into options to acquire shares of Albertson's Common
Stock. In addition, option holders have the right (limited stock appreciation
right or LSAR), during an exercise period of up to 60 days after the occurrence
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of a change of control (but prior to consummation of the Merger), to elect to
surrender at consummation all or part of their options in exchange for shares of
Albertson's Common Stock having a value equal to the excess of the change of
control price over the exercise price (which shares will be deliverable upon the
Merger). The change of control price is defined as the higher of (i) the highest
reported sales price during the 60-day period prior to the respective dates of
the "change of control", or (ii) the price paid to stockholders in the merger,
subject to adjustment in both cases if the exercise period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998 by the Company's
stockholders accelerated the vesting of 10.2 million stock options granted under
Pre-1997 Plans (approximately 60% of the outstanding stock options) and
permitted the holders of these options to exercise LSARs. The exercisability of
10.2 million LSARs resulted in the Company recognizing a $195.3 million merger
related stock option charge during the fourth fiscal quarter of 1998. This
charge was recorded based on the difference between the average option exercise
price of $19.15 and the average market price at the measurement dates of $38.29.
Of the 10.2 million options, 6.3 million were exercised using the LSAR feature,
1.7 million were exercised without using the LSAR, and 2.2 million shares
reverted back to fixed price options due to the expiration of the LSAR on
January 10, 1999.
The actual change of control price used to measure the value of the 6.3 million
LSARs will not be determinable until the date the Merger is consummated or the
Merger Agreement is terminated. Additional charges or income would be recognized
in each quarter until the Merger is consummated if the change of control price
is higher or lower than the amounts assumed for purposes of the foregoing
estimates. If the Merger is consummated, the foregoing charges will be non-cash.
LSARs relating to the approximately 6.5 million remaining stock options issued
under the 1997 Plans will become exercisable upon regulatory approval of the
Merger, which would result in recognition of an additional charge estimated at
$100 million based on an average exercise price of $23.72 and assuming an
estimated change of control price of $39.19. The actual change of control price
used to measure the value of the LSARs will not be determinable until the date
the Merger is consummated or the Merger Agreement is terminated. If the Merger
is consummated, the foregoing charges will be non-cash.
Operating profit decreased 12.5% in 1998 compared to 1997. Total operating
profit was 3.4% of sales in 1998 and 4.0% of sales in 1997. Operating profit
excluding unusual items (merger related stock options of $195.3 million in 1998
and restructuring and impairment of $13.4 million in 1997) increased 11.0% in
1998 compared to 1997 and was 4.4% of sales in 1998 and 4.1% of sales in 1997.
Interest expense amounted to $232.7 million in 1998 compared to $216.7 million
in 1997. Interest expense increased in 1998 due to higher debt levels, primarily
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from capital expenditure levels, which exceed cash flows from operating
activities.
The Company's effective income tax rates were 47.3% in 1998 and 46.4% in 1997.
The effective income tax rates for 1998 were higher due to the non-deductibility
of a portion of the merger related stock option charge. The effective income tax
rates for 1997 included the non-deductibility of expenses related to the
secondary stock offering of shares held by Former Chairman L.S. Skaggs and
related parties (the Secondary Offering).
Diluted earnings per share amounted to $.84 and $1.01 in 1998 and 1997,
respectively. The merger related stock option charge in 1998 resulted in a
charge of $.48 per diluted share. The restructuring and impairment and
shareholder related expense charges in 1997 resulted in a charge of $.14 per
diluted share.
Fiscal Year 1997 Compared to Fiscal Year 1996
Total sales increased to $19.1 billion in 1997 from $18.7 billion in 1996 for a
total sales increase of 2.5%. Comparable store sales (sales from stores that
have been open at least one year, including replacement stores) increased in
1997 by .9%. The improvement in total sales in 1997 is primarily due to the
increase in net square footage during the year. During 1997 the Company opened
or acquired 96 stores and closed or sold 68 stores resulting in a net increase
of 28 new stores and an increase in retail square footage of 4.2%. Total sales
and comparable store sales in 1997 reflected a strong increase in pharmacy
department sales, food price deflation and increased competitive new store
openings and promotional activity. Comparable store sales in 1997 in the
pharmacy departments increased 11.5%.
Gross profit as a percent of sales was 26.6% in both 1997 and 1996. Gross profit
in 1997 improved due to lower cost of merchandise sold resulting from
centralized buying and a more profitable product mix. However, increased
competition, additional expenses associated with warehouse consolidations in
southern California and increased sales of third-party prescriptions and
name-brand drugs, which yield lower margins, offset these improvements. The
annual pre-tax LIFO charge to earnings amounted to $2.4 million in 1997 and
$11.4 million in 1996.
Operating and administrative expense as a percent of sales was 22.6% in 1997 and
1996. Although the Company made improvements in expense control due to lower
insurance costs, lower health and welfare and pension costs and benefits from
renegotiating an in-store banking service, higher fixed costs due to the
increased number of new stores offset these improvements.
Restructuring and impairment in 1997 of $13.4 million related to charges from
the sale of a division of the Company's communications subsidiary.
In 1996 the Company recorded special charges aggregating approximately $100.0
million before taxes, or $.21 per diluted share, related primarily to its
re-engineering initiatives. The special charges are included in cost of
merchandise sold ($10.0 million), operating and administrative expense ($12.9
million) and restructuring and impairment ($77.1 million). The components of the
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charge include: warehouse consolidation costs, administrative office
consolidation costs, asset impairment costs, closed store costs and other
miscellaneous charges. The remaining reserve as of the 1998 fiscal year end of
$11.2 million relates primarily to the remaining lease commitments for the
administrative office consolidation costs.
Operating profit increased 15.1% in 1997 over 1996. Total operating profit was
4.0% of sales in 1997 and 3.6% of sales in 1996. Operating profit excluding
restructuring and impairment and special charges increased 1.9% in 1997 compared
to 1996 and was 4.1% of sales in both 1997 and 1996.
Interest expense increased in 1997 from 1996 due to higher debt levels primarily
from the Company's financing of the repurchase of shares from former chairman
L.S. Skaggs and related parties in April 1997, as well as increased capital
expenditures.
The caption "Shareholder related expense" in 1997 of $33.9 million includes
charges related to the Secondary Offering.
The Company's effective income tax rates were 46.4% in 1997 and 43.1% in 1996.
The increase in the 1997 effective tax rate is primarily due to the
non-deductibility of expenses related to the Secondary Offering.
Diluted earnings per share amounted to $1.01 and $.98 in 1997 and 1996,
respectively.
Liquidity and Capital Resources
Cash provided by operating activities was $627.6 million, $877.1 million and
$558.2 million for 1998, 1997 and 1996, respectively. Cash provided by operating
activities benefited during 1997 as a result of the Company's successful
accounts payable management program. During 1998 the Company changed its
insurance programs which resulted in higher cash payments.
Cash capital expenditures amounted to $830.4 million in 1998, $974.7 million in
1997 and $943.1 million in 1996. Additional capital expenditures represented by
the net present value of leases amounted to $128.9 million in 1998, $161.1
million in 1997 and $122.4 million in 1996.
Capital expenditures for fiscal 1999, including the net present value of leases,
are expected to be approximately $1.0 billion and will be funded through cash
flows from operations, credit facilities and other long-term borrowings. The
Company has no material commitments for capital other than those related to its
capital program.
14
<PAGE>
The following table shows actual and projected store counts:
Projected
1999 1998 1997 1996
- -------------------------------------------------------------------------
New or acquired 80 67 96 99
Remodels 88 77 65 84
Closed or sold 49 44 68 67
The Company has a $1.0 billion universal shelf registration statement of which
$500 million has been designated for the Company's Series B Medium Term Note
Program. On March 19, 1998, the Company issued $45 million of 6.5% notes due
March 20, 2008, under the outstanding Series B Medium Term Note Program. On
March 30, 1998, the Company issued an additional $100 million of 7.1% notes due
March 20, 2028, under the same program. Proceeds were used to refinance
short-term debt and for general corporate purposes. At year-end 1998, the
Company had $855 million available under the universal shelf registration
statement.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.4%.
The Company has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, the Company entered into a $300 million revolving credit agreement with
five financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. The agreement terminates on
the earlier of i) effective date of consummation of the Merger, ii) the date
which is 30 days after the date the Merger Agreement is terminated, or iii) July
1, 1999. At year-end 1998, the Company had $325 million of debt outstanding
under the $1.5 billion credit facility, $993 million outstanding under the
commercial paper program, and $226 million outstanding under uncommitted bank
lines, leaving unused committed borrowing capacity of $256 million. The average
annual interest rates applicable to the debt issued under or supported by the
revolving credit facilities were 5.7% in 1998, 5.9% in 1997 and 5.7% in 1996.
The net increase in debt, including capitalized leases, was $169.8 million and
$623.8 million in 1998 and 1997, respectively. The increases are due to changes
in working capital, capital spending and the repurchase of 24.4 million shares
in the Secondary Offering in 1997.
In June 1996 the Company authorized a stock repurchase program of up to four
million shares of common stock (not including the repurchase of shares from the
Selling Shareholders). During 1996 0.1 million shares were repurchased. There
were no repurchases of common stock under the repurchase program during 1998 and
1997. On August 2, 1998, the Company terminated the stock repurchase program.
15
<PAGE>
Working capital amounted to $355.4 million at year-end 1998 compared to $140.4
million at year-end 1997 and $364.8 million at year-end 1996. Working capital
increased primarily due to lower accounts payable, an increase in deferred
income tax benefits (related to the merger related stock option charge), a
decrease in other current liabilities and a decrease in current debt.
The Company's ratio of total debt (debt plus obligations under capital leases)
to total capitalization (total debt plus common shareholders' equity) amounted
to 56.3%, 58.9% and 51.4% at year-end 1998, 1997 and 1996, respectively.
The Company believes that its cash flows from operations, supplemented by its
revolving credit facilities, uncommitted credit facilities, other long-term
borrowings, availability under a universal shelf registration statement and its
ability to refinance debt, will be adequate to meet its presently identifiable
cash requirements.
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 a member of senior management and representatives from
the 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 computer systems and equipment used and supported by the Company, and (ii)
external exposure issues, consisting of potential problems with the software and
hardware not supported by the Company's Information Technology Department, 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, and
equipment with embedded chips.
With respect to the internal exposure category, the Company identified potential
Year 2000 issues in each of the key areas of its business which 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 the remaining systems/fixes will be completed by the
end of the second quarter of 1999, except fixes to a small number of legacy
systems the Company had originally planned to discontinue and the roll out of
in-store hardware and software that are targeted for completion during the third
quarter of 1999.
With respect to issues in the external exposure category, the Company is
continuing to follow-up with third parties that have not responded
16
<PAGE>
satisfactorily or at all to the Company's initial mailing of Year 2000
questionnaires/certification forms. While the initial response rate to the
Company's requests for information appeared favorable, there are still a
significant number of third parties that have not responded satisfactorily or at
all to the Company's requests. The Company's focus during the first two quarters
of 1999 will be to communicate with those third parties providing critical
products or services to the Company to determine the extent to which they are
addressing their own Year 2000 issues and to take additional actions based on
the information received.
Additionally the Company is attempting to identify all critical equipment with
embedded chips and is developing plans to test identified equipment for Year
2000 compatibility. These items include equipment not supported by the Company's
Information Technology Department such as heating units, alarm systems, vaults
and similar items that are widely used in the Company's operations. The Company
intends, when necessary, to contact the manufacturers of such equipment to
obtain their assistance in further testing, upgrading or repairing such items.
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 $3.4 million
has been spent to date and approximately $.7 million will be spent during the
first and second quarters 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, governmental entities and others. The failure or malfunction of
such internal or external systems, or of equipment containing embedded chips,
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.
Management of the Company believes it has an effective program in place to
resolve internal Year 2000 issues in a timely manner and is continuing to take
steps to communicate with third parties with respect to their own Year 2000
issues. 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.
17
<PAGE>
The Company is in the process of finalizing a contingency plan with respect to
internal exposure issues and plans to develop contingency plans with respect to
external exposure issues and equipment containing embedded chips. Contingency
plans are expected to involve manual work arounds, 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. 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.
Inflation
In recent years the impact of deflation or inflation on the Company's results of
operations has been moderate. As operating expenses and inventory costs change,
the Company adjusts its retail prices accordingly.
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 several 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.
New Accounting Standard
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". The statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has
determined that this statement will not have a material impact on the financial
results of the Company.
18
<PAGE>
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
The Company's major market risk exposure is changing interest rates. From time
to time, the Company enters into derivative transactions. The objective of these
derivative transactions is to reduce the Company's exposure to changes in
interest rates, and each transaction is evaluated periodically by the Company
for changes in market value and counterparty credit exposure.
During 1997 the Company entered into a $300 million five-year LIBOR basket swap
and a $100 million treasury rate lock. The LIBOR basket swap agreement
diversifies the indices used to determine the interest rate on a portion of the
Company's variable rate debt by providing for payments based on an average of
foreign LIBOR indices which are reset every three months and also provides for a
maximum interest rate of 8.0%. The Company recognized no income or expense in
1998 related to this swap. The treasury rate lock agreement was entered into for
the purpose of hedging the interest rate on $100 million of debt the Company
issued in March 1998 under the universal shelf registration statement. The
Company realized a net loss of $1.0 million, which is being amortized over the
term of the debt as an addition to interest expense.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its swap agreements. Such counterparties are highly-rated
financial institutions and the Company anticipates they will be able to satisfy
their obligations under the contracts.
There have been no material changes in the primary risk exposures or management
of the risks since the prior year. The Company expects to continue to manage
risks in accordance with the current policy.
Interest Rate Sensitivity
The table below provides information about the Company's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
Value @
(In thousands of dollars) 1999 2000 2001 2002 2003 Thereafter Total 1/30/99
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities
Long-term debt, including current portion
Fixed rate $42,880 $164,747 $35,426 $288,757 $117,856 $1,227,208 $1,876,874 $2,120,268
Average interest rate 7.7% 7.5% 8.8% 9.8% 7.7% 7.5% 7.9%
Variable rate $1,543,966 $1,543,966 $1,543,966
Average interest rate 5.1% 5.1%
Interest Rate Derivative Financial Instruments Related to Long-term Debt
Interest rate and currency swap
Pay variable (8% cap)/Receive variable $300,000 $300,000 $(5,303)
Average pay rate 5.3%
Average receive rate 5.0%
</TABLE>
19
<PAGE>
Item 8 Financial Statements and Supplementary Data
Report of Independent Auditors
Ernst & Young LLP
Shareholders and Board of Directors
American Stores Company
We have audited the accompanying consolidated balance sheets of American Stores
Company and subsidiaries as of January 30, 1999, January 31, 1998 and February
1, 1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Stores
Company and subsidiaries at January 30, 1999, January 31, 1998 and February 1,
1997, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 17, 1999
Salt Lake City, Utah
20
<PAGE>
<TABLE>
Consolidated Statements of Earnings
<S> <C> <C> <C>
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Sales $19,866,725 $19,138,880 $18,678,129
Cost of merchandise sold, including ware-
housing and transportation expenses 14,560,899 14,039,263 13,713,151
----------- ----------- -----------
Gross profit 5,305,826 5,099,617 4,964,978
Operating and administrative expenses 4,437,804 4,317,576 4,220,187
Merger related stock options 195,252
Restructuring and impairment 13,400 77,151
----------- ----------- -----------
Operating profit 672,770 768,641 667,640
Other income (expense):
Interest income 3,337 5,647 8,470
Interest expense (232,652) (216,710) (171,558)
Shareholder related expense (33,913)
----------- ----------- ----------
Total other income (expense) (229,315) (244,976) (163,088)
----------- ----------- ----------
Earnings before income taxes 443,455 523,665 504,552
Federal and state income taxes (209,711) (243,045) (217,331)
----------- ----------- ----------
Net earnings $ 233,744 $ 280,620 $ 287,221
=========== =========== ==========
Basic earnings per share $.85 $1.02 $.98
==== ===== ====
Diluted earnings per share $.84 $1.01 $.98
==== ===== ====
Average number of common shares outstanding
used for basic earnings per share 274,790 276,409 291,776
Dilutive common stock options 2,772 1,360 875
------- ------- -------
Average number of common shares outstanding
used for dilutive earnings per share 277,562 277,769 292,651
======= ======= =======
Outstanding employee stock options having
no dilutive effect 4,350
See notes to consolidated financial statements
</TABLE>
21
<PAGE>
<TABLE>
Consolidated Balance Sheets
<S> <C> <C> <C>
Year-End
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 35,493 $ 47,794 $ 37,467
Receivables 427,911 399,319 318,878
Inventories 1,726,015 1,714,229 1,725,542
Prepaid expenses 67,929 71,855 66,510
Deferred income tax benefits 83,055 28,583 18,099
---------- ---------- ----------
Total Current Assets 2,340,403 2,261,780 2,166,496
Property, Plant and Equipment and Property Under
Capital Leases, at cost
Land 927,021 856,967 734,726
Buildings 2,452,509 2,325,388 1,980,660
Fixtures and equipment 3,000,732 2,877,019 2,616,786
Leasehold improvements 927,441 831,364 781,454
---------- ---------- ----------
7,307,703 6,890,738 6,113,626
Less accumulated depreciation and amortization (2,683,628) (2,552,723) (2,361,255)
---------- ---------- ----------
Net Property, Plant and Equipment 4,624,075 4,338,015 3,752,371
Goodwill, net of accumulated amortization 1,589,614 1,611,812 1,665,242
Other Assets 331,207 324,408 297,296
---------- ---------- ----------
Total Assets $8,885,299 $8,536,015 $7,881,405
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,147,510 $1,186,845 $ 851,285
Accrued payroll and benefits 333,917 301,656 325,806
Current portion of self-insurance reserves 99,643 108,263 121,144
Income taxes payable 15,392 11,293 21,290
Other current liabilities 338,842 412,342 416,153
Current maturities of long-term debt and
obligations under capital leases 49,651 100,935 66,003
---------- ---------- ----------
Total Current Liabilities 1,984,955 2,121,334 1,801,681
Self-insurance Reserves, less current portion 266,661 390,661 403,981
Deferred Income Taxes 361,566 349,041 348,846
Other Liabilities 149,892 163,927 178,326
Long-term Debt and Obligations Under
Capital Leases, less current maturities 3,423,029 3,201,970 2,613,144
Shareholders' Equity
Common stock of $1.00 par value, authorized
700,000 shares; issued 299,778 shares 299,778 299,778 299,778
Additional paid-in capital 463,246 269,205 212,672
Retained earnings 2,455,223 2,320,322 2,136,744
Less cost of treasury stock; 23,103 shares
in 1998, 26,172 shares in 1997 and
7,949 shares in 1996 (519,051) (580,223) (113,767)
---------- ---------- ----------
Total Shareholders' Equity 2,699,196 2,309,082 2,535,427
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $8,885,299 $8,536,015 $7,881,405
========== ========== ==========
See notes to consolidated financial statements
</TABLE>
22
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<S> <C> <C> <C>
(In thousands of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $233,744 $280,620 $287,221
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 487,304 468,869 440,445
Merger related stock option charge 195,252
Net (gain) loss on asset sales (15,818) (772) 265
Self-insurance reserve decrease (132,620) (26,201) (62,367)
Other 5,865 (78,004) 120,070
(Increase) decrease in current assets:
Receivables (28,592) (80,441) 810
Inventories (11,786) 11,313 (152,920)
Prepaid expenses (50,546) (15,829) 5,006
(Decrease) increase in current liabilities:
Accounts payable (39,335) 335,560 (145,069)
Other current liabilities (52,256) 16,137 66,759
Accrued payroll and benefits 32,261 (24,150) (6,037)
Income taxes payable 4,099 (9,997) 3,998
-------- -------- --------
Total adjustments 393,828 596,485 270,960
-------- -------- --------
Net cash provided by operating activities 627,572 877,105 558,181
-------- -------- --------
Cash Flows from Investing Activities:
Expended for property, plant and equipment (830,376) (974,724) (943,080)
Proceeds from sale of assets 115,450 39,447 47,670
Increases in other assets (56,813) (43,638) (60,416)
-------- -------- --------
Net cash used in investing activities (771,739) (978,915) (955,826)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from long-term borrowing 145,000 500,000 350,000
Payment of long-term borrowing (50,000) (160,000) (100,000)
Net addition to debt and obligations
under capital leases 75,748 279,101 188,979
Proceeds from exercise of stock options, other 59,961 44,164 24,860
Repurchase of common stock (37,798)
Repurchase of common stock from major shareholder (550,000)
Issuance of common stock for over-allotments 95,914
Cash dividends (98,843) (97,042) (93,351)
-------- -------- --------
Net cash provided by financing activities 131,866 112,137 332,690
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents (12,301) 10,327 (64,955)
Cash and Cash Equivalents:
Beginning of Year 47,794 37,467 102,422
-------- -------- --------
End of Year $ 35,493 $ 47,794 $ 37,467
======== ======== ========
See notes to consolidated financial statements
</TABLE>
23
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity
<S> <C> <C> <C> <C> <C>
Additional
(In thousands, Common Paid-In Retained Treasury
except per share data) Stock Capital Earnings Stock Total
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of 1996 $299,778 $195,229 $1,942,874 $ (83,385) $2,354,496
======== ======== ========== ========= ==========
Net earnings -- 1996 287,221 287,221
Issuance of 1,127 shares of
stock for stock options, awards and
Employee Stock Purchase Plan (ESPP) 7,891 7,497 15,388
Dividends ($.32 per share) (93,351) (93,351)
Stock Purchase Incentive Plans 8,856 8,856
Purchase of 13 shares for treasury,
including ESPP buybacks (103) (78) (181)
Stock Repurchase Program 2,180 shares (37,798) (37,798)
Other 799 (3) 796
-------- -------- ---------- ---------- ----------
Balances at year-end 1996 $299,778 $212,672 $2,136,744 $(113,767) $2,535,427
======== ======== ========== ========= ==========
Net earnings -- 1997 280,620 280,620
Issuance of 1,652 shares of
stock for stock options, awards and
Employee Stock Purchase Plan (ESPP) 5,983 24,704 30,687
Shares related to directors' stock
compensation plan - 193 shares 3,931 86 4,017
Dividends ($.35 per share) (97,042) (97,042)
Stock Purchase Incentive Plans 10,425 10,425
Purchase of 59 shares for treasury,
including ESPP buybacks (967) (967)
Stock Repurchase from major shareholder -
24,444 shares (550,000) (550,000)
Stock issuance for over-allotments -
4,622 shares 36,194 59,721 95,915
-------- -------- ---------- --------- ----------
Balances at year-end 1997 $299,778 $269,205 $2,320,322 $(580,223) $2,309,082
======== ======== ========== ========= ==========
Net earnings -- 1998 233,744 233,744
Issuance of 3,158 shares of
stock for stock options and awards (11,367) 62,816 51,449
Merger related stock options 195,252 195,252
Dividends ($.36 per share) (98,843) (98,843)
Stock Purchase Incentive Plans 1,358 1,358
Purchase of 101 shares for
treasury, including ESPP buybacks (1,824) (1,824)
Shares related to directors' stock
compensation plan - 20 shares 3,174 180 3,354
Other 5,624 5,624
-------- -------- ---------- --------- ----------
Balances at year-end 1998 $299,778 $463,246 $2,455,223 $(519,051) $2,699,196
======== ======== ========== ========= ==========
See notes to consolidated financial statements
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements
Nature of Operations
American Stores Company is one of the nation's leading food and drug retailers,
operating 1,580 stores in 26 states. The Company operates in a single industry
segment and its principal formats include supermarkets, stand-alone drug stores
and combination food/drug stores. Principal markets, where products are sold
primarily to retail customers, include California, Illinois, New Jersey,
Pennsylvania, Nevada, Indiana, Massachusetts and Arizona.
Significant Accounting Policies
Fiscal Year. The fiscal year of the Company ends on the Saturday nearest to
January 31. All references herein to "1998", "1997" and "1996" represent the
52-week fiscal years ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively.
Basis of Consolidation. The consolidated financial statements include the
accounts of American Stores Company and all subsidiaries. Accordingly, all
references herein to "American Stores Company" include the consolidated results
of its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair value.
Depreciation and Amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements and leased properties under capital leases are amortized over the
estimated useful life of the property or over the term of the lease, whichever
is shorter. The depreciable lives are primarily 20 to 25 years for buildings, 3
to 10 years for fixtures and equipment and 20 to 25 years for leasehold
improvements and property under capital lease, depending on the life of the
lease. Depreciation expense related to property, plant and equipment amounted to
$407.5 million, $390.4 million and $359.9 million in fiscal 1998, 1997 and 1996,
respectively. Amortization expense related to property under capital leases
amounted to $7.6 million, $8.5 million and $9.2 million in fiscal 1998, 1997 and
1996, respectively.
Goodwill. Goodwill, principally from the acquisition of Lucky Stores, Inc. in
1988, represents the excess of cost over fair value of net assets acquired and
is being amortized over 40 years using the straight-line method. Accumulated
amortization amounted to $579.1 million, $524.6 million and $471.2 million in
1998, 1997 and 1996, respectively.
Costs of Opening and Closing Stores. The costs of opening new stores are charged
against earnings as incurred. When operations are discontinued and a store is
25
<PAGE>
closed, the remaining investment, net of salvage value, is charged against
earnings and, for leased stores, a provision is made for the remaining lease
liability, net of expected sublease income.
Derivative Financial Instruments. The Company enters into interest rate swaps
and similar agreements to modify the interest rate characteristics of its
outstanding debt or on anticipated public debt financing of the Company and
holds them strictly for purposes other than trading. The objective of these
derivative transactions is to reduce the Company's exposure to changes in
interest rates, and each transaction is evaluated periodically by the Company
for changes in market value and counterparty credit exposure.
The agreements are usually in notional amounts less than the total amount of the
anticipated debt issue and are generally in effect for a period estimated to
expire concurrent with the anticipated debt issue. They involve the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which the payments are based. The difference to be paid or received as
interest rates change is recognized quarterly in the case of the LIBOR basket
swap. The fair value of any treasury rate locks is being amortized over the term
of debt issued as an addition to interest expense. In the event of the early
extinguishment of an obligation, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment of the
obligation.
Income Taxes. The Company provides for deferred income taxes or credits as
temporary differences arise in recording income and expenses between financial
reporting and tax reporting. Amortization of goodwill is not deductible for
purposes of calculating income tax provisions.
Environmental Remediation Costs. Costs incurred to investigate and remediate
contaminated sites are accrued when identified and estimable. The related costs
are expensed unless the remediation extends the economic useful life of the
assets employed at the site.
Insurance Programs. The Company is self-insured for property loss, workers'
compensation, general liability and automotive liability, for claims occurring
through the 1997 fiscal year end, subject to specific retention levels. Claims
for workers' compensation, general liability and automotive liability are
insured for fiscal 1998. The Company is required in certain cases to obtain
letters of credit to support its self-insured status. At year-end 1998, the
Company's self-insured liabilities were supported by approximately $150.0
million of undrawn letters of credit. The Company is also self-insured for
health care claims for eligible active and retired associates. Self-insured
liabilities, with the exception of postretirement health care benefits, are not
discounted.
The basis for the amount of the Company's accrual for self insurance claims is
determined by an independent actuary who arrives at the ultimate costs of claims
that have occurred by analyzing amounts already paid to claimants, open case
reserves and an estimate of incurred but not reported losses, including both
claims that are unreported as of the valuation date and the future growth in
26
<PAGE>
claim value that will occur as more information about each claim becomes known.
Impairment. Impairment is recognized on long-lived assets when indicators of
impairment are present and the undiscounted cash flows are less than the related
assets' carrying value.
Stock-based Compensation. The Company continues to account for stock-based
compensation using the intrinsic value method and provides pro forma footnote
disclosure of the impact of the fair value method.
Employees
The largest collective bargaining agreement, which covers approximately 17% of
the Company's labor force, expires in October 2002.
Advertising Expense
The Company includes advertising expenses in cost of goods sold when the
advertisement occurs. Total gross advertising expense amounted to $337.6
million, $336.0 million and $325.7 million in 1998, 1997 and 1996, respectively.
Capitalized advertising costs were $1.7 million, $2.5 million and $4.0 million
in 1998, 1997 and 1996, respectively.
Reclassification
The 1997 and 1996 financial statements have been reclassified to conform to the
current year presentation.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". The statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has
determined that this statement will not have a material impact on the financial
results of the Company.
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) among the Company, Albertson's, Inc. (Albertson's) and Abacus
Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub), pursuant
to which Merger Sub would be merged with and into the Company with the Company
surviving the merger as a wholly-owned subsidiary of Albertson's. Each share of
the Company's Common Stock would be converted into the right to receive 0.63
shares of Albertson's Common Stock, with cash paid in lieu of any fractional
shares. The transaction is intended to qualify as a pooling of interests for
accounting purposes and as a tax-free reorganization for U.S. federal income tax
purposes. On November 12, 1998, the stockholders of the Company and Albertson's
approved the Merger Agreement. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary closing
conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
27
<PAGE>
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
Inventories
Approximately 94% of inventories are accounted for using the LIFO (last-in,
first-out) method for inventory valuation. If the FIFO (first-in, first-out) and
average cost methods had been used, inventories would have been $334.3 million,
$327.0 million and $324.5 million higher at year-end 1998, 1997 and 1996,
respectively. The LIFO charge to earnings was $7.4 million in 1998, $2.4 million
in 1997 and $11.4 million in 1996. Under this method, the cost of merchandise
sold that is reported in the financial statements approximates current costs and
thus reduces the distortion in reported earnings due to inflation or deflation.
Debt
The Company has a $1.0 billion universal shelf registration statement of which
$500 million has been designated for the Company's Series B Medium Term Note
Program. On March 19, 1998, the Company issued $45 million of 6.5% notes due
March 20, 2008, under the outstanding Series B Medium Term Note Program. On
March 30, 1998, the Company issued an additional $100 million of 7.1% notes due
March 20, 2028, under the same program. Proceeds were used to refinance
short-term debt and for general corporate purposes. At year-end 1998, the
Company had $855 million available under the universal shelf registration
statement.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.4%.
The Company has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, the Company entered into a $300 million revolving credit agreement with
five financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. The agreement terminates on
the earlier of i) effective date of consummation of the Merger, ii) the date
which is 30 days after the date the Merger Agreement is terminated, or iii) July
1, 1999. At year-end 1998, the Company had $325 million of debt outstanding
under the $1.5 billion credit facility, $993 million outstanding under the
commercial paper program, and $226 million outstanding under uncommitted bank
lines, leaving unused committed borrowing capacity of $256 million.
The Company capitalized interest costs associated with construction projects of
$6.2 million, $16.2 million and $10.6 million in 1998, 1997 and 1996,
28
<PAGE>
respectively. The Company made cash payments for interest (net of amounts
capitalized) of $235.7 million, $204.3 million and $160.8 million in 1998, 1997
and 1996, respectively.
The aggregate amounts of debt maturing in each of the next five fiscal years are
listed below:
(In thousands of dollars)
- ----------------------------------------------------------------------
1999 $ 42,880
2000 164,747
2001 35,426
2002 1,832,723
2003 117,856
Thereafter 1,227,208
----------
Total debt 3,420,840
Capital lease obligations 51,840
----------
Total debt and obligations under capital leases $3,472,680
==========
The Company's various loans secured by real estate are collateralized by
properties with a net book value of $225.6 million at year-end 1998.
29
<PAGE>
<TABLE>
A summary of debt is as follows:
<S> <C> <C> <C>
(In thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Public Debt (unsecured):
7.5% Debentures due 2037, put option 2009 $ 200,000 $ 200,000
8.0% Debentures due 2026 350,000 350,000 $ 350,000
7.9% Debentures due 2017 100,000 100,000
7.4% Notes due 2005 200,000 200,000 200,000
Medium Term Notes--fixed interest rates due
1999 through 2028--average interest rate
7.3% in 1998 and 7.9% in 1997 and 1996 295,000 200,000 250,000
9-1/8% Notes due 2002 249,461 249,320 249,191
Bank Borrowings (unsecured):
Revolving credit facilities--variable
interest rates, effectively due 2002--
average interest rates 5.8% in 1998,
5.9% in 1997 and 5.7% in 1996 325,000 512,000 957,000
Lines of credit and commercial paper--
variable interest rates, effectively
due 2002--average interest rates 5.7%
in 1998, 5.9% in 1997 and 5.6% in 1996 1,218,966 945,899 183,000
Notes due 2004--average interest rate 6.3% 200,000 200,000
Other borrowings--due 2000--average
interest rates 6.6% in 1998, 1997 and 1996 75,000 75,000 75,000
Other Unsecured Debt:
9.8% due in 1999 160,000
10.6% due in 2004 93,337 108,893 108,893
Other--due through 2001 50,343 31,505 2,988
Debt Secured by Real Estate:
Fixed interest rates--due through 2014--
average interest rate 13.4% in 1998,
13.4% in 1997 and 13.3% in 1996 63,733 69,548 77,365
---------- ---------- ----------
Outstanding debt 3,420,840 3,242,165 2,613,437
Capital lease obligations 51,840 60,740 65,710
---------- ---------- ----------
Total debt and obligations under capital
leases 3,472,680 3,302,905 2,679,147
Less current maturities:
Debt 42,880 92,407 56,703
Capital lease obligations 6,771 8,528 9,300
---------- ---------- ----------
Long-term debt and obligations under
capital leases 3,423,029 3,201,970 2,613,144
Long-term capital lease obligations 45,069 52,212 56,410
---------- ---------- ----------
Long-term debt $3,377,960 $3,149,758 $2,556,734
========== ========== ==========
</TABLE>
During 1997 the Company entered into a $300 million five-year LIBOR basket swap.
The agreement diversifies the indices used to determine the interest rate on a
portion of the Company's variable rate debt by providing for payments based on
foreign LIBOR indices which are reset every three months and also provides for a
maximum interest rate of 8.0%. The Company recognized no income or expense in
1998 related to this swap. As of year-end 1998, the estimated fair value of the
agreement based on market quotes was a loss of $5.3 million.
On December 15, 1997, a $100 million treasury rate lock agreement was entered
into for the purpose of hedging the interest rate on a portion of the debt the
Company issued in 1998 under a universal shelf registration statement. In March
1998 the treasury lock was terminated in connection with the issuance of $100
million of notes under the registration statement. The Company realized a net
30
<PAGE>
loss of $1.0 million, which is being amortized over the term of the debt as an
addition to interest expense.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its swap agreement. Such counterparties are highly-rated
financial institutions and the Company anticipates they will be able to satisfy
their obligations under the contract.
The carrying amounts of the Company's bank borrowings with variable interest
rates approximate fair value. The fair value of the Company's borrowings with
fixed interest rates is estimated using current market quotes, or discounted
cash flow analyses, or on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The fair value of outstanding debt as
of year-end 1998 was $3.7 billion compared to the carrying value of $3.4
billion.
Leases
The Company leases retail stores, offices and warehouse and distribution
facilities. Initial lease terms average approximately 20 years, plus renewal
options, and may provide for contingent rent based on sales volume in excess of
specified levels.
The summary below shows the aggregate future minimum rent commitments at
year-end 1998 for both capital and operating leases. Operating leases are shown
net of an aggregate $115.1 million of minimum rent income receivable under
non-cancelable subleases. Operating leases also exclude the amortization of
acquisition-related fair value adjustments.
<TABLE>
<S> <C> <C>
Operating Capital
(In thousands of dollars) Leases Leases
- -------------------------------------------------------------------------------------------
1999 $ 181,980 $ 12,430
2000 169,962 10,604
2001 158,306 9,177
2002 146,916 8,246
2003 138,193 7,564
Thereafter 1,254,516 44,355
---------- -------
Total minimum rent commitments $2,049,873 92,376
==========
Less executory costs (such as taxes, insurance
and maintenance) included in capital leases 512
-------
Net minimum lease payments 91,864
Less amount representing interest 40,024
-------
Obligations under capital leases, including $6,771
due within one year $51,840
=======
</TABLE>
31
<PAGE>
There were no additions to obligations under capital leases in 1998. Rent
expense, excluding the amortization of acquisition-related fair value
adjustments of $13.5 million in 1998, $13.9 million in 1997 and $14.2 million in
1996, was as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Minimum Sublease Contingent Total
(In thousands of dollars) Rent Rent Net Rent Rent
- --------------------------------------------------------------------------------------------------
1998 $215,880 $20,296 $195,584 $21,342 $216,926
1997 $206,749 $17,591 $189,158 $22,729 $211,887
1996 $189,105 $15,663 $173,442 $24,305 $197,747
</TABLE>
Income Taxes
Federal and state income taxes charged to earnings are summarized below:
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------
Current:
Federal $228,621 $214,005 $206,313
State 24,852 23,572 25,731
Deferred:
Federal (38,821) 4,847 (12,948)
State (4,941) 621 (1,765)
-------- -------- --------
Federal and state income taxes $209,711 $243,045 $217,331
======== ======== ========
Cash payments of income taxes were $247.6 million, $263.3 million and $226.8
million in 1998, 1997 and 1996, respectively.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:
(Percent of earnings before income taxes) 1998 1997 1996
- ---------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax rate, net of federal
income tax effect 4.9 4.9 4.8
Goodwill amortization 4.7 4.0 4.2
Merger related stock option charge 3.3
Expenses for repurchase of major
shareholders' common stock 2.3
Tax credits (0.3) (0.1) (0.1)
Other (0.3) 0.3 (0.8)
---- ---- ----
Effective income tax rate 47.3% 46.4% 43.1%
==== ==== ====
32
<PAGE>
Deferred tax benefits and liabilities as of year-end 1998 related to the
following temporary differences:
(In thousands of dollars) Benefits Liabilities Total
- --------------------------------------------------------------------------------
Basis in fixed assets $ 33,808 $(267,107) $(233,299)
Self-insurance reserves 122,887 122,887
Purchase accounting valuation 16,299 (253,483) (237,184)
Compensation and benefits 127,698 (30,250) 97,448
Other, net 97,221 (125,584) (28,363)
-------- --------- ---------
Deferred tax benefits and liabilities $397,913 $(676,424) $(278,511)
======== ========= =========
No valuation allowances have been considered necessary in the calculation of
deferred tax benefits.
Stock Compensation Plans
Variable Accounting Treatment for Option Plans
Stock options and certain shares of restricted stock granted under the Company's
stock option and stock award plans automatically vest upon a change of control,
which is defined in plans adopted prior to June 1997 (Pre-1997 Plans) as
stockholder approval of the Merger or, for options granted under the Company's
1997 Stock Option and Stock Award Plan and the 1997 Stock Plan for Non-Employee
Directors (1997 Plans), upon the later of stockholder approval or regulatory
approval of the Merger. All options outstanding on the consummation of the
merger will be converted into options to acquire shares of Albertson's Common
Stock. In addition, option holders have the right (limited stock appreciation
right or LSAR), during an exercise period of up to 60 days after the occurrence
of a change of control (but prior to consummation of the Merger), to elect to
surrender all or part of their options in exchange for shares of Albertson's
Common Stock having a value equal to the excess of the change of control price
over the exercise price (which shares will be deliverable upon the Merger). The
change of control price is defined as the higher of (i) the highest reported
sales price during the 60-day period ending prior to the respective dates of the
"change of control", or (ii) the price paid to stockholders in the Merger,
subject to adjustment in both cases if the exercise period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998 by the Company's
stockholders accelerated the vesting of 10.2 million stock options granted under
Pre-1997 Plans (approximately 60% of the outstanding stock options) and
permitted the holders of these options to exercise LSARs. The exercisability of
10.2 million LSARs resulted in the Company recognizing a $195.3 million merger
related stock option charge during the fourth fiscal quarter of 1998. This
charge was recorded based on the difference between the average option exercise
price of $19.15 and the average market price at measurement dates of $38.29. Of
the 10.2 million options, 6.3 million were exercised using the LSAR feature, 1.7
million were exercised without using the LSAR, and 2.2 million shares reverted
back to fixed price options due to the expiration of the LSAR on January 10,
1999.
The actual change of control price used to measure the value of the 6.3 million
LSARs will not be determinable until the date the Merger is consummated or the
33
<PAGE>
Merger Agreement is terminated. Additional charges or income would be recognized
in each quarter until the Merger is consummated if the change of control price
is higher or lower than the amounts assumed for purposes of the foregoing
estimates. If the Merger is consummated, the foregoing charges will be non-cash.
LSARs relating to the approximately 6.5 million remaining stock options issued
under the 1997 Plans will become exercisable upon regulatory approval of the
Merger, which would result in recognition of an additional charge estimated at
$100 million based upon an average exercise price of $23.72 and assuming an
estimated change of control price of $39.19. The actual change of control price
used to measure the value of the LSARs will not be determinable until the date
the Merger is consummated or the Merger Agreement is terminated. If the Merger
is consummated, the foregoing charges will be non-cash.
Fixed Stock Option Plans
The Company's Stock Option and Stock Award Plans (Plans) provide for the grant
of options to purchase shares of common stock and the issuance of restricted
stock awards, subject to certain antidilution adjustments. At year-end 1998,
there were 7.1 million shares reserved for future grants or awards under the
Company's Plans.
A summary of the Company's stock option activity and related information for
1998, 1997 and 1996 follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------- ------------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Options in thousands) Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 18,268 $20.67 6,030 $14.36 3,840 $11.37
Granted 214 $24.82 13,210 $23.14 2,712 $17.91
Exercised
Cash (2,374) $15.91 (436) $11.34 (269) $ 8.70
LSARs (6,337) $20.03
Forfeited / Expired (1,128) $20.19 (536) $18.21 (253) $13.00
------ ------ -----
Outstanding at end of year 8,643 $22.61 18,268 $20.67 6,030 $14.36
====== ====== =====
Exercisable at end of year 2,833 $20.36 1,056 $15.13 424 $ 8.70
Reserved for future grants 7,071 6,368 3,596
</TABLE>
Exercise prices for outstanding options as of year-end 1998 ranged from $8.72 to
$24.88 and the weighted-average remaining contractual life of those options is
6.8 years.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (ESPP), which began January 1, 1996
enables eligible employees of the Company to subscribe for shares of common
stock on quarterly offering dates at a purchase price which is the lesser of 85%
of the fair market value of the shares on the first day or the last day of the
quarterly offering period. For financial reporting purposes, the discount of 15%
is treated as equivalent to the cost of issuing stock. During 1998 employees
contributed $15.2 million to the ESPP program and 0.8 million shares were
issued. Since the ESPP's inception, employees have contributed $45.9 million and
2.6 million shares have been issued. Purchases of stock through ESPP were
34
<PAGE>
suspended following the third quarter 1998 purchases pursuant to the Merger
Agreement with Albertson's.
Long Term Incentive Plans
During 1997 the Company modified the Long Term Incentive Plan for 1996-1998 to
provide participants with the option to receive shares of restricted stock in
lieu of cash as originally provided. The number of shares issued to participants
electing to receive shares of stock was based on the projected value of the Plan
pay-out. The 184,701 shares issued under the 1996-1998 Plan will vest on April
1, 1999.
Performance Incentive Program
The 1998 Performance Incentive Program provides certain of the Company's key
executives an incentive award of shares of two-year restricted stock if certain
Company performance objectives are attained for the 1998 fiscal year. The
Company exceeded its annual performance goal for 1998 and awards under this
program amount to approximately 209,000 shares which will be issued in March
1999.
Key Executive Equity Program
In 1997 the Company established the Key Executive Equity Program (KEEP), a
stock-based management incentive program. A total of approximately 13.4 million
stock options were granted to 169 of the Company's officers in connection with
the KEEP with an exercise price of $22.50 to $24.88 per share. The KEEP involves
the grant of market-priced stock options that would ordinarily begin to vest on
the fifth anniversary of the grant date but which will vest on an accelerated
basis with respect to one-half of the grant if minimum stock ownership
requirements are satisfied, and with respect to the other half of the grant if
the ownership requirements are met and the Company achieves annual performance
goals. The KEEP options will vest and the minimum stock ownership requirements
will expire upon regulatory approval of the merger.
To assist the KEEP participants in meeting the stock ownership requirement, the
Company issued full recourse interest bearing stock purchase loans to 18
participants to acquire additional shares of the Company's stock. The stock
purchased by the participants was purchased on the open market. The purchase
loans have a maturity date of April 1, 2002 and accrue interest at 8.5%, reset
annually at the then current prime rate. Outstanding loan balances at year-end
1998 totaled $1.9 million.
Stock Plan for Non-Employee Directors
During 1997 the shareholders approved the 1997 Stock Plan for Non-Employee
Directors (Directors' Plan), which provides for: 1) the grant of 2,000 shares
annually of the Company's Common Stock (Retainer Stock), 2) the grant on an
annual basis of stock options to acquire 1,200 shares of common stock to each
participant who satisfies the Minimum Stock Ownership Requirement, and 3) the
one time issuance of common stock (173,000 shares in total) to compensate such
directors for their respective interests in the Non-Employee Directors'
Retirement Plan (Retirement Stock), which was terminated concurrently with the
adoption of the Directors' Plan.
35
<PAGE>
Retirement Stock (and dividends thereon which are reinvested in stock) will be
delivered to a participant on the earlier of: 1) death of Participant, 2) change
of control or, 3) the later of the date the Participant attains age 65 or the
date the Participant ceases to serve as a Director. Compensation expense related
to the Retirement Stock and Retainer Stock decreased pre-tax earnings by $3.4
million in 1998 and $4.0 million in 1997. The options vest upon regulatory
approval of the Merger.
Fair Value Disclosures
The Company's pro forma compensation expense under the fair value method,
utilizing the Black-Scholes option valuation model, for fixed stock options
granted and for the ESPP in 1998, 1997 and 1996, after income taxes, was $15.1
million for 1998, $12.9 million for 1997 and $4.8 million for 1996. Pro forma
net income would have been $351.3 million in 1998, $267.7 million in 1997 and
$282.5 million in 1996. Diluted earnings per share would have been $1.26 for
1998, $.97 for 1997 and $.97 for 1996.
The 1998 pro forma net income of $351.3 million resulted from reported net
income of $233.7 million, less the 1998 pro forma compensation expense after
income taxes of $15.1 million, and the elimination of the merger related stock
option charge of $132.7 million ($195.3 million pretax less $62.6 million tax
impact).
The fair value of options estimated at the date of grant assumes an average
expected volatility of 21.2% and dividend yield of 1.8%. Other assumptions for
1998, 1997 and 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
--------------- --------------- --------------
Options ESPP Options ESPP Options ESPP
- ---------------------------------------------------------------------------------------------
Average risk-free interest rate 4.7% 5.1% 6.6% 5.0% 6.1% 5.1%
Average life of options (years) 6.5 .25 7.0 .25 4.0 .25
Average vesting date (years) 3.9 2.0 5.0 2.0 3.0 2.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options.
Because the fair value method of accounting for stock-based compensation has not
been applied to options granted prior to January 1, 1995, the preceding pro
forma compensation cost may not be representative of expected costs in future
years.
36
<PAGE>
Stock Purchase Incentive Plans
In 1992 the Company's shareholders approved both the American Stores Company Key
Executive Stock Purchase Incentive Plan and the American Stores Company Board of
Directors Stock Purchase Incentive Plan (Plans). The Company awarded to certain
directors and key executive officers the right to purchase a specified number of
shares of the Company's stock and extended to such directors and officers full
recourse interest bearing, 8-year loans to acquire the stock.
During fiscal 1997 and 1998 the performance cycle for participants in the Plans
ended and each received a deferred award, which was applied toward repayment of
their loans. The balance of the loans, together with accrued and unpaid interest
thereon, is payable in three equal installments on the sixth, seventh and eighth
anniversaries of the purchase date. The aggregate principal of these loans
outstanding is recorded as Other Assets in the balance sheet and as of January
30, 1999, the aggregate outstanding balance (including accrued and unpaid
interest) was $1.9 million.
Repurchase of Common Stock
In June 1996 the Company authorized a stock repurchase program of up to four
million shares of common stock (not including the repurchase of shares from the
Selling Stockholders). During 1996 0.1 million shares were repurchased. There
were no repurchases of common stock under the repurchase program during 1998 and
1997. On August 2, 1998, the Company terminated the stock repurchase program.
Postretirement Health Care Benefits
The Company provides certain health care benefits to eligible retirees of
certain defined employee groups under two unfunded plans, a defined dollar and a
full coverage plan.
Change in Benefit Obligation
(In thousands of dollars) 1998 1997 1996
- -------------------------------------------------------------------------------
Benefit obligation at beginning of year $54,029 $52,883 $51,671
Service cost (with interest) 670 917 671
Interest cost 3,471 3,816 3,896
Plan amendments 496
Actuarial (gain)/loss (6,880) 431 632
Benefits paid (4,069) (4,018) (3,987)
------- ------- -------
Benefit obligation at end of year $47,717 $54,029 $52,883
======= ======= =======
37
<PAGE>
Change in Plan Assets
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $ 0 $ 0 $ 0
Employer contribution 4,069 4,018 3,987
Benefits paid (4,069) (4,018) (3,987)
------ ------ ------
Fair value of plan assets at
end of year $ 0 $ 0 $ 0
====== ====== ======
Funded status $(47,717) $(54,029) $(52,883)
Unrecognized net actuarial (gain) (18,098) (12,058) (12,969)
Unrecognized prior service cost 446
Accrued postretirement benefit
obligation (APBO) $(65,369) $(66,087) $(65,852)
======== ======== ========
Discount rate as of end of year 7.0% 7.5% 7.5%
For measurement purposes, a 7% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease to 6% for 2000 and remain at that level thereafter. For the defined
dollar plan, no future increases in the Company's subsidy level was assumed.
Components of Net Periodic Benefit Cost
(In thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------
Service cost (with interest) $ 670 $ 917 $ 671
Interest cost 3,471 3,816 3,896
Amortization of prior service cost 50
Recognized net actuarial (gain) (840) (480) (789)
------ ------ ------
Net periodic benefit cost $3,351 $4,253 $3,778
====== ====== ======
A prior service cost is caused by plan changes. The Company amended the plan to
reduce the first eligibility age for retirement from age 57 (with 10 years of
full-time service or 20 years of part-time service) to age 54 (with 10 years of
full-time service or 20 years of part-time service). The cumulative effect of
this plan change results in an APBO increase of $496,000.
The Company has multiple nonpension postretirement benefit plans. With the
exception of the plans for grandfathered retirees, the health care plans are
contributory, with participants' contributions adjusted annually. The accounting
for the health care plans anticipates that the Company will not increase its
contribution for health care benefits for non-grandfathered retirees in future
years.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
38
<PAGE>
One-Percentage-Point
(In thousands of dollars) Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest
cost components $139 $(123)
Effect on postretirement benefit obligation $1,992 $(1,763)
Since the subsidy level for the defined dollar plan is fixed, a trend increase
or decrease has no impact on that portion of the obligation.
Retirement Plans
The Company sponsors and contributes to a defined contribution retirement plan,
American Stores Retirement Estates (ASRE). This plan was authorized by the Board
of Directors for the purpose of providing retirement benefits for associates of
American Stores Company and its subsidiaries. The plan covers associates meeting
age and service eligibility requirements, except those represented by a labor
union, unless the collective bargaining agreement provides for participation.
Contributions to ASRE are made at the discretion of the Board of Directors.
The Company also contributes to multi-employer defined benefit retirement plans
in accordance with the provisions of the various labor contracts that govern the
plans. The multi-employer plan contributions are generally based on the number
of hours worked. Information about these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
Retirement plans expense was as follows:
(In thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------
Company sponsored plans $ 92,966 $ 93,342 $ 88,106
Multi-employer plans 76,202 71,938 95,822
-------- -------- --------
Retirement plans expense $169,168 $165,280 $183,928
======== ======== ========
Restructuring and Impairment
In 1996 the Company recorded special charges aggregating approximately $100.0
million before taxes, or $.21 per diluted share, related primarily to its
re-engineering initiatives. The special charges are included in cost of
merchandise sold ($10.0 million), operating and administrative expense ($12.9
million) and restructuring and impairment ($77.1 million). The components of the
charge include: warehouse consolidation costs, administrative office
consolidation costs, asset impairment costs, closed store costs and other
miscellaneous charges. The remaining reserve as of the 1998 fiscal year end of
$11.2 million relates primarily to the remaining lease commitments for the
administrative office consolidation costs.
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and ground water contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). The Company conducts
39
<PAGE>
an on-going program for the inspection and evaluation of new sites proposed to
be acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition or results of operations of
the Company. Charges against earnings for environmental remediation were not
material in 1998, 1997 or 1996.
Legal Proceedings
On September 13, 1996, a class action lawsuit captioned McCampbell et al. v.
Ralphs Grocery Company, et al. was filed in the San Diego Superior Court of the
State of California against the Company and two other grocery chains operating
in southern California. The complaint alleges, among other things, that the
Company and others conspired to fix the retail price of eggs in southern
California. The Company believes it has meritorious defenses to plaintiffs
claims and plans to vigorously defend the lawsuit.
The Company is also involved in various other claims, administrative proceedings
and other legal proceedings which arise from time to time in connection with the
conduct of the Company's business. In the opinion of management, such
proceedings will not have a material adverse effect on the Company's financial
condition or results of operations.
Employment Contracts
During 1994 and 1995 the Company entered into Employment Agreements (Agreements)
with 17 of the Company's key executive officers. The Agreements, as amended,
expire on October 31, 2001 and are automatically renewed for subsequent one-year
terms, unless they are individually terminated by the Company at least two years
prior to the end of the term. Each Agreement contains usual and customary terms
of employment agreements and provides the officers with a special long-range
payout. The executives are entitled to receive an annual payment for a period of
20 years beginning at age 57 or upon termination of employment, whichever occurs
later. The payout is calculated as a percentage of the executive's average
target compensation objective during the last two years of his or her employment
under the Agreement. The payout ranges from 9% to 40% based on years of service
with the Company. The payout will be forfeited if the executive enters into
competition with the Company.
The Company also entered into an employment agreement with the Company's
Chairman and Chief Executive Officer in 1994 which, as amended, expires on
October 31, 2002, and is automatically renewed for subsequent two-year terms
unless terminated by the Company at least three years prior to the end of the
term. The agreement provides for an annual payout that vests over an eight-year
period which, if fully vested, would equal approximately $710,000 adjusted for
inflation. Payments will be made over the life of the executive and his spouse.
The payout will be forfeited if the executive enters into competition with the
Company. In the event the Merger closes, the foregoing agreement will be
superseded by a Termination and Consulting agreement (the Consulting Agreement)
between the executive, the Company and Albertson's, Inc. The Consulting
Agreement provides, among other things, for a lump sum payment of the present
40
<PAGE>
value of the payout, which is currently estimated at $11.0 million based upon
an assumed discount rate of 7.75%, and which will have vested in full upon
consummation of the Merger.
<TABLE>
Quarterly Results (unaudited)
In the opinion of management, all adjustments necessary for a fair presentation
have been included:
<S> <C> <C> <C> <C> <C>
(In thousands of dollars, First Second Third Fourth Fiscal
except per share data) Quarter Quarter Quarter Quarter (4) Year
- ------------------------------------------------------------------------------------------------------
1998 (1)
Sales $4,872,686 $4,950,016 $4,847,756 $5,196,267 $19,866,725
Gross profit 1,266,542 1,318,970 1,299,751 1,420,563 5,305,826
Operating profit 174,515 212,492 197,723 88,040 672,770
Net earnings 65,861 88,160 80,745 (1,022) 233,744
Basic earnings per share $.24 $.32 $.29 $.00 $.85
Diluted earnings per share .24 .32 .29 .00 .84
1997 (2)
Sales $4,747,644 $4,763,174 $4,647,465 $4,980,597 $19,138,880
Gross profit 1,250,805 1,286,449 1,234,699 1,327,664 5,099,617
Operating profit 167,531 212,420 161,468 227,222 768,641
Net earnings 34,225 89,957 60,275 96,163 280,620
Basic earnings per share $.12 $.33 $.22 $.35 $1.02
Diluted earnings per share .12 .33 .22 .35 1.01
1996 (3)
Sales $4,580,028 $4,625,066 $4,563,362 $4,909,673 $18,678,129
Gross profit 1,195,176 1,226,328 1,216,966 1,326,508 4,964,978
Operating profit 149,376 185,195 173,985 159,084 667,640
Net earnings 64,240 83,129 75,757 64,095 287,221
Basic earnings per share $.22 $.28 $.26 $.22 $.98
Diluted earnings per share .22 .28 .26 .22 .98
</TABLE>
(1) Fourth quarter 1998 "Operating profit" included a merger related stock
option charge of $195.3 million ($.47 per share after tax) related to the
exercisibility of 10.2 million limited stock appreciation rights due to
the approval by the Company's stockholders of the Merger Agreement.
(2) First quarter 1997 "Other" included charges of $33.9 million related to
the sale of stock by a major shareholder and operating profit included
charges of $13.4 million related to the sale of a division of the
Company's communications subsidiary (total of $.14 per share).
(3) Fourth quarter 1996 included special charges totaling $100.0 million pre-
tax ($.21 per share, after tax) in operating profit, including $10.0
million in gross profit.
(4) Operating profit, before special charges and merger related stock option
charge, in the fourth quarter has exceeded the prior three quarters in
each of the three years presented due to the seasonality of the food and
drug retail business and LIFO inventory adjustments. The holiday and the
cold and flu season in the fourth quarter benefits the food and drug
retail business.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
41
<PAGE>
PART III
Item 10 Directors and Executive Officers of the Registrant
Information regarding Directors and Executive Officers of the registrant as of
March 31, 1999 is set forth below:
<TABLE>
<S> <C> <C>
Director Offices Held Age
- ------------------------------------------------------------------------------------
Pamela G. Bailey Director since 1997. Chief Executive 50
Officer of The Healthcare Leadership
Council since 1990. President of the
National Committee for Quality Health
Care from February 1987 to January 1997.
Henry I. Bryant Director since 1992. Retired. Former 56
Managing Director in the Corporate Finance
Unit of J.P. Morgan & Co. Incorporated, an
investment banking firm, from August 1994
until February 1, 1998.
Arden B. Engebretsen Director since 1988. Chairman of the 67
Board of Herpak Limited, an international
financial consulting firm, since January
1991. Partner in the law firm of Morris,
James, Hitchens & Williams since October 1994.
Prior to 1991, Vice Chairman of the Board
and Chief Financial Officer of Hercules
Incorporated. Director of Mellon Bank
Delaware and member of the National
Advisory Council, University of Utah.
James B. Fisher Director since 1988. Retired. Former 67
President and a director of J.G. Boswell
Company, an agricultural production,
processing and marketing company, from 1980
to 1984.
Fernando R. Gumucio Director since 1991. Owner and President 64
of The Lafayette Group, a management
consulting company, since 1993. Chairman
of the Board and Chief Executive Officer
of Del Monte USA from 1987 to 1988 and
President from 1985 to 1987. Director
of Basic Vegetable Products Corporation.
Leon G. Harmon Director since 1982. Retired. Former 73
President and Chief Executive Officer
of First Interstate Bank of Utah N.A.
from July 1981 to October 1987.
42
<PAGE>
Director Offices Held Age
- ------------------------------------------------------------------------------------
Victor L. Lund Director since 1988. Chairman of the 51
Board of the Company since June 1995 and
Chief Executive Officer since August 1992.
President of the Company from August 1992
to June 1995. Director of Borders Group, Inc.
David L. Maher Director since 1998. Vice Chairman of 59
the Board of the Company since March
1998 and Chief Operating Officer since
March 1995. President from June 1995 to
March 1998, and Senior Executive Vice
President and Chief Operating Officer-
Drug from March 1993 to March 1995. Director
of the Company from 1991 to 1992.
John E. Masline Director since 1988. Retired. Former Partner 71
with the accounting firm of Ernst &
Young from 1967 until 1986.
Barbara Scott Preiskel Director since 1985. Retired. Former 74
Senior Vice President and General Counsel
of the Motion Picture Association of America,
a trade association, from 1977 to 1983.
Director of The Washington Post Co.
J.L. Scott Director since 1987. Retired. Former 69
Co-Chief Executive Officer of the
Company from March 1992 to August 1992,
Chief Executive Officer from February 1989
to March 1992, and President from September
1990 to August 1992. Vice Chairman of the
Board of the Company from September 1987 to
June 1990. Director of TJ International.
Arthur K. Smith Director since 1992. Chancellor of the 61
University of Houston System and President
of the University of Houston main campus
since April 1997. Prior thereto, President
of the University of Utah from August 1991
through March 1997. Director of Shell
Exploration and Production Company, a
subsidiary of Shell Oil Company.
Officer Offices Held Age
- ------------------------------------------------------------------------------------
Kent T. Anderson Chief Operating Officer - Strategy and 45
Development of the registrant since August
1995; Chief Strategy Officer from March 1995
to August 1995; Executive Vice President and
General Manager - American Stores
Properties, Inc. from March 1993 to March
1995.
43
<PAGE>
Officer Offices Held Age
- ------------------------------------------------------------------------------------
Teresa Beck President of the registrant since March 1998; 44
Chief Financial Officer from March 1995 to
March 1998; Executive Vice President and Chief
Financial Officer from June 1994 to March 1995;
Executive Vice President Finance from March
1994 to June 1994; Assistant Secretary from
June 1989 until March 1995. Director of
Textron, Inc.
James R. Clark Chief Planning Officer of the registrant since 55
March 1995; Senior Vice President Strategy and
Change Management from December 1993 to March
1995.
Stephen L. Mannschreck Chief Human Resources Officer of the registrant 53
since March 1995; Executive Vice President
Human Resources from June 1994 to March 1995;
Executive Vice President and General Manager
- Osco Drug from March 1993 to June 1994.
Kathleen E. McDermott Chief Legal Officer of the registrant since 49
May 1995 and Assistant Secretary since June
1993; Executive Vice President and General
Counsel from June 1993 to May 1995.
Edward J. McManus Chief Operating Officer - Procurement & 53
Logistics of the registrant since March 1997;
Senior Vice President and General Manager -
Jewel Food Stores from April 1995 to March 1997;
Senior Vice President Operations of Jewel Food
Stores, Inc. from July 1994 to April 1995;
Vice President - Distribution of Jewel Food
Stores, Inc. from April 1992 to July 1994.
Francis J. Raucci Chief Labor Officer of the registrant since 62
May 1995; Executive Vice President and Chief
Labor Counsel from June 1994 to May 1995;
Senior Vice President and Chief Labor
Counsel from December 1993 to June 1994.
Neal J. Rider Chief Financial Officer of the registrant 37
since March 1998; Senior Vice President
Supply Chain Planning and Administration -
American Procurement and Logistics Company
from July 1997 to March 1998; Senior Vice
President - Health Care Operations of the
registrant from June 1995 to July 1997;
Senior Vice President and Treasurer from
March 1994 to June 1995.
44
<PAGE>
Officer Offices Held Age
- ------------------------------------------------------------------------------------
Martin A. Scholtens Chief Operating Officer - Retail of the 56
registrant since March 1995; Executive Vice
President and General Manager - Lucky Southern
California Division from March 1994 to March
1995.
J. Greg Spencer Senior Vice President, Treasurer and Assistant 42
Secretary of the registrant since June 1995;
Vice President, Corporate Transactions and
Senior Counsel from March 1992 to June 1995.
Bradley M. Vierig Senior Vice President of the registrant since 41
June 1995 and Controller since March 1994.
</TABLE>
Item 11 Executive Compensation
Directors' Compensation
Fees
Employee directors receive no additional compensation for serving on the Board
or its Committees other than their normal compensation. All other directors
receive an annual cash retainer fee of $40,000 and are entitled to receive stock
and options under the American Stores Company Stock Plan for Non-Employee
Directors, which was approved by the shareholders at the 1997 Annual Meeting.
Under this plan, non-employee directors receive an annual grant of 2,000 shares
of the Company's Common Stock (the "Retainer Stock"), which is forfeited if the
non-employee director terminates service prior to the next shareholders' meeting
at which directors are elected. Non-employee directors also receive an annual
grant of options to acquire 1,200 shares of the Company's Common Stock at the
market price for the stock on the date of grant (the "Retainer Options") if they
meet the minimum stock ownership requirement of 6,000 shares. New directors have
three years to meet the minimum stock ownership requirement. The Retainer
Options vest in two equal annual installments of 600 shares each beginning on
the date of the next annual shareholders' meeting at which directors are
elected. Non-employee members of the Investment Management Subcommittee of the
Company (Messrs. Fisher, Harmon, and Masline) are paid $7,000 for each meeting
of that Subcommittee attended. No fees are paid to such members for meetings
held by telephone conference.
Plans and Programs
Deferred Compensation Plan. Non-employee directors may defer the compensation
they earn for Board service until after they are no longer a director.
Health Program. Non-employee directors and their spouses are eligible and
encouraged to participate in the Scripps Executive Health Program that is
available to certain key executive officers of the Company and its subsidiaries.
The program consists of a comprehensive physical evaluation, private
consultations covering exercise, nutrition and stress management, and attendance
at a seminar covering various topics. The frequency of the examination is
generally based on the director's age. The cost of the examination, including
travel and hotel expenses, is paid by the Company.
45
<PAGE>
Director Stock Plan. At the 1997 Annual Meeting, the shareholders approved the
American Stores Company Stock Plan for Non-Employee Directors (the "Director
Stock Plan"). Under the Director Stock Plan, non-employee directors receive
annual grants of Retainer Stock and Retainer Options, as described above under
"Fees."
Directors' Former Stock Purchase Plan. The Board of Directors Stock Purchase
Incentive Plan (the "Directors' Former Stock Plan") was in effect from 1992
through March 21, 1995 and is described in the Company's 1997 proxy statement.
During 1992, certain non-employee directors received full-recourse interest
bearing loans for the purchase of Common Stock pursuant to the terms of the
Directors' Former Stock Plan. Messrs. Engebretsen, Fisher, Gumucio, Harmon and
Masline and Mrs. Preiskel each received a loan in the amount of $348,750.00 with
an interest rate of 7.04%. Messrs. Bryant and Smith received loans with an
interest rate of 6.15% for $65,344 and $435,625, respectively. The Directors'
Former Stock Plan also entitled the participating directors to receive a
deferred cash incentive award, which was generally payable at the end of a
five-year performance cycle. The deferred award had to be applied toward
repayment of the loan. During fiscal 1997, the five-year performance cycle
ended, and the participating directors each received a deferred award. The
after-tax amount of the deferred awards was applied toward repayment of the
directors' loans, and the balance of the loans are payable in three equal
installments on the respective anniversaries of the dates the shares were
purchased. Mr. Harmon and Mrs. Preiskel paid their loans in full during fiscal
1997. As of January 30, 1999, the aggregate outstanding balance of loans made
pursuant to the Directors' Former Stock Plan was $988,853, which includes
accrued and unpaid interest. The largest aggregate amount outstanding during the
fiscal year was $1,533,211.
Executive Compensation
The following table shows compensation paid by the Company to the Chairman of
the Board and Chief Executive Officer and the four other most highly compensated
executive officers at January 30, 1999 for services performed by such
individuals for all capacities in which they served during the last three fiscal
years:
46
<PAGE>
<TABLE>
Summary Compensation Table
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation(1)
-----------------------------------
Annual Compensation (1) Awards Payouts
------------------------------- ---------------------- -----------
Other
Name and Annual Restricted All Other
Principal Position Compen- Stock Options/ LTIP Compen-
at End of 1998 Salary Bonus sation Awards SARs Payouts sation
Fiscal Year Year ($) ($)(2) ($)(3) ($)(4) (#) ($) ($)(5)
- ----------------------------- ------- --------- --------- --------- ---------- ---------- ----------- -----------
Victor L. Lund 1998 845,833 418,281 161,093 264,359 0 0 177,666
Chairman of the Board 1997 812,500 50,482 99,312 284,526 1,080,000 2,438,816 178,467
& Chief Executive Officer 1996 750,000 422,195 ------- 0 120,000 138,722 135,047
Teresa Beck 1998 441,666 131,098 138,092 0 0 69,677
President 1997 383,333 17,885 ------- 124,244 520,000 365,822 69,845
1996 295,833 125,006 ------- 0 40,000 48,141 60,372
David L. Maher 1998 555,833 164,934 173,734 0 0 107,505
Vice Chairman & Chief 1997 531,667 24,765 ------- 188,470 360,000 1,341,349 108,018
Operating Officer 1996 512,500 216,439 ------- 0 60,000 89,655 121,400
Edward J. McManus 1998 318,749 94,646 99,695 0 0 49,751
Chief Operating Officer 1997 274,167 12,769 ------- 88,015 237,200 0 49,857
Procurement & Logistics 1996 216,320 97,717 ------- 0 60,000 31,697 45,635
Martin A. Scholtens 1998 422,166 125,268 131,951 0 0 77,065
Chief Operating Officer 1997 396,500 18,441 ------- 135,588 520,000 365,822 77,410
Retail 1996 366,667 155,017 ------- 0 40,000 57,210 68,782
</TABLE>
(1) Compensation deferred at the election of the executive, pursuant to the
American Stores Retirement Estates 401(k) plan ("ASRE") and the
Supplemental Executive Retirement Plan ("SERP"), is included in the
year earned. The amounts of salary and bonus that the executives
deferred during fiscal year 1998 to such plans were as follows: Mr.
Lund - $229,828; Ms. Beck - $145,117; Mr. Maher - $118,845; Mr. McManus
- $40,390; and Mr. Scholtens - $160,388.
(2) The bonus amount is payable pursuant to the Company's Key Management
Annual Incentive Plan. Cash bonuses for services rendered in fiscal
years 1998, 1997 and 1996 have been listed in the year earned, and were
generally paid in April of the following fiscal year.
(3) During the 1998 fiscal year, the Company did not pay or provide
perquisites and other benefits to any named executive officer in an
aggregate amount exceeding $50,000, except Mr. Lund. The perquisites
paid or provided to Mr. Lund included (i) $68,381 for the personal use
of corporate aircraft by Mr. Lund and his spouse, the value of which
was determined in accordance with applicable Internal Revenue Service
regulations, (ii) $81,064 for the filing fee paid by the Company on Mr.
Lund's behalf to the Federal Trade Commission in connection with the
Albertson's Merger, including reimbursement for tax liabilities
relating to such filing fee, and (iii) $11,648 for personal use of his
Company car.
(4) The dollar amount shown equals the value of the award earned under the
Company's Performance Incentive Plan during fiscal 1998. The award was
made in March 1999 in shares of restricted stock.
47
<PAGE>
(5) The compensation reported represents (a) Company contributions under
ASRE, (b) Company contributions under SERP, and (c) the dollar value of
Company paid term life insurance premiums for the executives. The
amounts contributed by the Company during fiscal year 1998 to the
executives' ASRE and SERP accounts, and the insurance premiums paid
were as follows: Mr. Lund - $16,819, $156,675, $4,172; Ms. Beck -
$16,819, $50,680, $2,178; Mr. Maher - $16,819, $87,945, $2,741; Mr.
McManus - $16,819, $31,360, $1,572; and Mr. Scholtens - $16,819,
$58,164, $2,082.
The following table shows information concerning the exercise of stock options
by each of the named executive officers and the fiscal year-end value of
unexercised options.
<TABLE>
Aggregated Options/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Value
<S> <C> <C> <C> <C> <C> <C>
Number of Unexercised Value of Unexercised
Options/SARs at Fiscal In-The-Money Options/SARs
Shares Year End (#) at Fiscal Year End ($) (2)
Acquired on Value ------------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable (1) Exercisable Unexercisable
- ------------------- ------------ ------------ ----------- ----------------- ----------- -------------
Victor L. Lund 0 0 990,500 269,500 14,259,994 3,377,158
Teresa Beck 0 0 470,500 129,500 7,043,075 1,622,790
David L. Maher 0 0 470,000 ------- 7,253,747 ---------
Edward J. McManus 13,333 $161,663 265,067 58,800 4,185,059 736,835
Martin A. Scholtens 0 0 470,500 129,500 7,043,075 1,622,790
</TABLE>
(1) If a Change of Control (as defined in the stock option plan under which
the options were granted) were to occur before these options otherwise
become exercisable, the options would become immediately exercisable
subject to satisfaction of the stock ownership requirements.
(2) Represents the difference between the closing price of the Company's
Common Stock at 1998 fiscal year-end ($36.25 per share)and the exercise
price of the options.
Pension Plans
The following tables show the estimated annual special retirement benefits
payable to the named executive officers other than Mr. Lund and Mr. McManus
pursuant to their employment agreements with the Company. The executives are
entitled to receive an annual payment from the Company for twenty years
beginning at the later of age 57 or upon termination of employment with the
Company. The payments will terminate if the Executive enters into competition
with the Company. The retirement benefit is calculated as a percentage of the
executive's average annual target compensation objective ("TCO") for the two
years prior to the termination of employment based on the years of service
completed under the employment agreement. The executives became entitled to the
minimum benefit when they completed three years of service under the employment
agreements in November 1997 and will be entitled to the maximum benefit after
they have completed ten years of service in November 2004. Executives who are
terminated for cause or who voluntarily terminate employment are entitled to a
retirement benefit equal to the amounts vested at that time. Executives who are
terminated without cause or in connection with a change in control will be
48
<PAGE>
deemed to have served for the full ten-year period and will be entitled to the
maximum benefit. Upon termination of an executive's employment, his or her
retirement benefit will be funded through an irrevocable grantor trust. If the
executive dies, his or her estate will receive a lump sum payment equal to the
present value of the remaining retirement benefit to which the executive would
otherwise be entitled. The employment agreements are described in more detail
under the caption "Employment Agreements" immediately following this section.
Mr. Lund's annual special retirement benefit is described in the section below
captioned "Employment Agreement with Chief Executive Officer."
The following table illustrates the estimated annual benefit payable to Mr.
Maher, which ranges from 12% to 40% of his two-year average TCO. As of January
30, 1999, Mr. Maher's average TCO for the 1997 and 1998 fiscal years was
$815,625, and he had been credited with four full years of service under his
employment agreement.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Remuneration
(Average Two-Year Years of Service
TCO) (Years Of Service Under Employment Agreements)
---------------------------------------------------------------------------------------------
3 4 5 6 7 8 9 10
- ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$700,000 . . . . 84,000 112,000 140,000 168,000 196,000 224,000 252,000 280,000
$750,000 . . . . 90,000 120,000 150,000 180,000 210,000 240,000 270,000 300,000
$800,000 . . . . 96,000 128,000 160,000 192,000 224,000 256,000 288,000 320,000
$900,000 . . . . 108,000 144,000 180,000 216,000 252,000 288,000 324,000 360,000
$1,000,000 . . . . 120,000 160,000 200,000 240,000 280,000 320,000 360,000 400,000
</TABLE>
The following table illustrates the estimated annual benefits payable to Ms.
Beck and Mr. Scholtens, which range from 9% to 30% of their two-year average
TCOs except that Mr. Scholtens' agreement provides for a minimum payment of
$225,000 as long as he does not voluntarily terminate employment prior to April
1, 2000. As of January 30, 1999, the two-year average TCOs of Ms. Beck and Mr.
Scholtens for the 1997 and 1998 fiscal years were $618,750 and $614,000
respectively. As of January 30, 1999, each of such persons had been credited
with four years of service under his or her employment agreement. Mr. McManus'
employment agreement does not provide for an annual special retirement benefit.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Remuneration
(Average Two-Year Years of Service
TCO) (Years Of Service Under Employment Agreements)
---------------------------------------------------------------------------------------------
3 4 5 6 7 8 9 10
- --------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$500,000 . . . . . 45,000 60,000 75,000 90,000 105,000 120,000 135,000 150,000
$550,000 . . . . . 49,500 66,000 82,500 99,000 115,500 132,000 148,500 165,000
$600,000 . . . . . 54,000 72,000 90,000 108,000 126,000 144,000 162,000 180,000
$650,000 . . . . . 58,500 78,000 97,500 117,000 136,500 156,000 175,500 195,000
$700,000 . . . . . 63,000 84,000 105,000 126,000 147,000 168,000 189,000 210,000
</TABLE>
Employment Agreements
Employment Agreement with Chief Executive Officer
The Company employs Mr. Lund as its Chairman and Chief Executive Officer under
an employment agreement dated November 1, 1994, as amended. The agreement
expires on October 31, 2002 and will be automatically renewed for additional
terms of two years each unless the Company provides notice of termination three
years prior to the termination date.
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The agreement provides for compensation in the form of an annual base salary and
participation in the Company's annual and long term bonus plans and other
benefit plans available to senior executive officers. Mr. Lund is also entitled
to an annual retirement benefit commencing the later of November 1, 2002, or the
date Mr. Lund's employment terminates. The benefit vests over an eight year
period ending October 31, 2002 and will be deemed to be fully vested in
instances including Mr. Lund's death or disability, the termination of his
employment without cause, or the removal of Mr. Lund as Chief Executive Officer
following a Change in Control (as defined in the Agreement). The benefit, which
if fully vested would equal approximately $710,000 as adjusted for inflation
through the date his employment terminates, will be payable to Mr. Lund for life
and thereafter to his wife for her life if he should die before she does. The
payments terminate if Mr. Lund competes with the Company. In certain
extraordinary events, the Company will pay Mr. Lund the present value of the
remaining benefits on an after-tax basis together with a gross-up payment as
necessary to place Mr. Lund in the same position as if the payments had been
made on an annual basis. The Company has established an irrevocable grantor
trust for Mr. Lund's benefit.
Following the termination of Mr. Lund's employment, the Company will provide
medical benefits for Mr. Lund and his wife and reimburse Mr. Lund for his
reasonable office and secretarial costs for a period of ten years.
If Mr. Lund's employment is terminated other than for "cause" or if he resigns
for "good reason," Mr. Lund will receive a prorated portion of his annual salary
and bonuses through the termination date and will receive a lump sum payment
equal to the value of salary and target bonuses that would have been payable for
the remainder of the term. In such event, Mr. Lund's benefit will also become
fully vested.
Mr. Lund is subject to certain confidentiality and non-competition restrictions
under the agreement.
Termination and Consulting Agreement with Chief Executive Officer
Mr. Lund, ASC and Albertson's entered into a Termination and Consulting
Agreement (the "Consulting Agreement") dated as of August 2, 1998 which in the
event the Merger closes will supersede Mr. Lund's Employment Agreement, and his
Change of Control Employment Agreement (the "Employment Agreements"). The
Consulting Agreement provides that Mr. Lund will be appointed to the Board of
Directors of Albertson's for a term or terms extending until the third annual
meeting of Albertson's following the Merger, and that while he is a member of
such board, he will serve as its Vice Chairman. Mr. Lund has also agreed to
provide specified consulting services of up to 1,000 hours to Albertson's and
the Company for one year following the termination of his employment, for a fee
of $850,000. Similar to Mr. Lund's Employment Agreements, the Consulting
Agreement will provide Mr. Lund and his wife certain lifetime health coverage
benefits and with additional cash payments if necessary to make them whole for
any taxes imposed on such benefits. Instead of providing office space and
operating services through October 31, 2012, as required by the Employment
Agreements, the Company has agreed to pay Mr. Lund $39,000 per year (adjusted
for inflation) and will provide specified secretarial services through that
date, or until his earlier death. Upon termination of his employment, Mr. Lund
will receive title to his company-owned vehicle. During the one-year consulting
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term, Mr. Lund will receive fringe benefits (including expense reimbursement and
transportation) consistent with the fringe benefits provided to him immediately
before the merger consummation. Upon Mr. Lund's permanent disability or death,
he or his estate, as applicable, will receive a lump sum payment of the
consulting fee for the remainder of the one-year consulting term. Upon a
termination of his consulting services for "cause," no further payments would be
made.
Mr. Lund will be subject to a noncompetition covenant while serving as a
consultant or member of the Albertson's Board of Directors and to a
confidentiality covenant. The Company and Albertson's will indemnify Mr. Lund
with respect to his consulting services. As provided under the Employment
Agreements, Mr. Lund would be entitled to an additional payment for any excise
tax on excess parachute payments to which he may be subject. Albertson's has
agreed to guarantee all payments and benefits under the Consulting Agreement.
The Consulting Agreement also acknowledges that the consummation of the Merger
will permit Mr. Lund to terminate his employment and receive the severance
benefits called for by the Employment Agreements. The Consulting Agreement
acknowledges that upon the termination of his employment after the Merger, he
will receive a cash lump sum payment equal to the sum of (i) his base salary to
the extent not theretofore paid; (ii) pro rata bonuses for the year of
termination; (iii) three times his base salary and bonus amount (approximately
$4.3 million); and (iv) a lump sum payment of the present value of the
retirement benefit under his Employment Agreement which will have vested in full
upon consummation of the Merger (approximately $11.0 million, based upon an
assumed discount rate of 7.75%).
Employment Agreements With Other Named Executive Officers
Ms. Beck and Messrs. Maher, McManus and Scholtens have also entered into
Employment Agreements (the "Agreements") with the Company. A description of the
Agreements, as amended, follows.
Term. The Agreements expire on November 1, 2001 and will be automatically
renewed for additional terms of one year each unless the Company provides notice
of termination two years prior to the termination date.
Payments Under the Agreement. The Agreements provide for compensation in the
form of an annual base salary and participation in the Company's annual and
long-term bonus plans and other bonus plans available to senior executive
officers. If an executive is terminated without cause, he or she is entitled to
a lump sum payment in an amount equal to his or her base salary and bonuses
prorated through the termination date and an amount equal to three times his or
her TCO. The executives are subject to certain confidentiality and
non-competition restrictions under the Agreements.
Special Retirement Benefit. The Agreements provide the executives with a special
long-range retirement benefit which is described in detail under the caption
"Pension Plans" immediately preceding this section. This special payout is the
only provision of the Agreements that is not superseded by the Change of Control
Agreements described below.
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Duties and Job Titles Under the Agreements. The Company can change the
executives' duties and job titles at will, and can relocate the executives as
needed, including a transfer to one of the Company's subsidiaries. However, the
executives must remain officers of the Company or its subsidiaries and must
perform duties of an executive nature equal in status, dignity and
responsibility to their duties at the time the Agreements were entered into.
Change of Control Agreements
The Company has entered into Change of Control Agreements with certain senior
officers of the Company and its subsidiaries, including the executive officers
named in the Summary Compensation Table. The Change of Control Agreements become
effective upon a Change of Control (as defined in the Change of Control
Agreements) or in the event of a termination of employment in anticipation of a
Change of Control, and upon the occurrence of such an event, supersede certain
provisions of the employment agreements described above. Mr. Lund's Change of
Control Agreement will be superseded by the Consulting Agreement. The Agreements
provide for a three-year term after the Change of Control, during which time the
status quo is preserved for the executive in terms of duties, responsibilities
and employee benefits. A Change of Control and an involuntary termination or
constructive termination is required to trigger a severance benefit. A severance
benefit is also payable after a voluntary termination of employment following
the Change of Control, whether or not for good reason, provided that such
voluntary termination occurs during a 30-day window period beginning one year
after the Change of Control. The severance benefit payable to the named
executive officers is three times the executive's annual TCO and is subject to
certain tax reimbursements if the executive's Change of Control benefit is
subject to special excise taxes. However, any executive whose total parachute
payment from all sources exceeds the permitted amount by not more than 10% would
not be entitled to reimbursement for excise tax and would have other severance
payments reduced to the level where it does not trigger the excise tax.
Compensation Committee Interlocks and Insider Participation
The following non-employee directors served on the Compensation and Stock Option
Committee during fiscal 1998: Leon G. Harmon (Chairman), Arden B. Engebretsen,
James B. Fisher, Fernando R. Gumucio, John E. Masline and Barbara S. Preiskel.
There were no Compensation Committee interlocks with respect to any member of
that Committee during fiscal 1998.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of Securities
The following table shows, as of January 30, 1999, the number of shares of the
Company's Common Stock owned by the Company's directors, the five executive
officers named in the Summary Compensation Table and by all executive officers
and directors as a group. The information set forth below also includes the
number of shares of the Company's Common Stock owned by each person known to the
Company to be a beneficial owner of more than five percent of such stock as of
January 30, 1999.
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Percent of
Number of Shares Shares
Name (1) Beneficially Beneficially
- -------- Owned (2) Owned (3)
------------------ -----------------
Pamela G. Bailey .................... 4,642 *
Teresa Beck.......................... 601,344 *
Henry I. Bryant...................... 17,289 *
Arden B. Engebretsen................. 84,534 *
James B. Fisher...................... 75,527 *
Fernando R. Gumucio.................. 29,609 *
Leon G. Harmon....................... 89,955 *
Victor L. Lund ...................... 2,060,562 *
David L. Maher....................... 1,002,831 *
John E. Masline...................... 66,134 *
Edward J. McManus.................... 316,939 *
Barbara Scott Preiskel............... 59,302 *
Martin A. Scholtens.................. 620,946 *
J. L. Scott.......................... 84,141 *
Arthur K. Smith...................... 51,799 *
All directors and executive
officers as a group (23 Persons) 7,173,427 2.6%
Albertson's Inc. (4) 54,500,000 19.7%
Capital Research and Management 27,758,000 10%
Company
* Does not exceed one percent of the outstanding shares.
(1) Correspondence to all officers and directors of the Company may be
mailed to 299 South Main Street, Salt Lake City, Utah 84111. The
address of Albertson's, Inc. is 250 Parkcenter Boulevard, Boise, Idaho
83726. The address of Capital Research and Management Company is 333
South Hope Street, Los Angeles, California 90071.
(2) These totals include, pursuant to rules of the Securities and Exchange
Commission (the "SEC"), shares as to which sole or shared voting power
or dispositive power is possessed. These totals also include: (i) the
indicated number of shares of Common Stock that were the subject of
stock options, which such persons exercised as LSARs and which will be
settled at closing as described in "Stock Compensation Plans: Variable
Accounting Treatment for Option Plans": Ms. Beck--489,000; Mr.
Lund--1,029,000; Mr. Maher--470,000; Mr. McManus--273,467; Mr.
Scholtens--489,000; all directors--600 each; and all directors and
executive officers as a group (23 persons)--4,186,185; and (ii) the
following number of shares of Common Stock that could be allocated to
the American Stores Retirement Estates accounts of such persons for
voting purposes on December 31, 1998: Ms. Beck--0; Mr. Lund--0; Mr.
Maher--24,508; Mr. McManus--31,749; Mr. Scholtens--0; and all directors
and executive officers as a group (23 persons)--195,465.
(3) On January 30, 1999, there were 276,675,823 shares of Common Stock
issued and outstanding.
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(4) Concurrently with the execution of the Merger Agreement, Albertson's
and the Company entered into a Stock Option Agreement (the "ASC Stock
Option Agreement"), pursuant to which the Company granted Albertson's
an option (the "ASC Option") to purchase, pursuant to the terms and
conditions thereof, up to 54,500,000 shares of ASC Common Stock at a
price of $30.24 per share (subject to adjustment as provided in the ASC
Stock Option Agreement). The ASC Stock Option Agreement provides that
Albertson's may exercise the ASC Option, in whole or in part, at any
time or from time to time following the occurrence of a Triggering
Event (as defined below) and prior to the expiration of the ASC Option
(which is generally 120 days after the Triggering Event). For purposes
of the ASC Stock Option Agreement, a "Triggering Event" occurs if
Albertson's becomes entitled to receive a termination fee from ASC
pursuant to the Merger Agreement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and greater than 10% shareholders to file reports
of ownership and changes in ownership of Common Stock with the SEC and the New
York Stock Exchange and to provide the Company with copies of such reports.
Based solely on a review of these reports and of certifications furnished to the
Company, the Company believes that all of these reporting persons complied with
their filing requirements for the Company's 1998 fiscal year.
Item 13 Certain Relationships and Related Transactions
The information under the caption "Item 11. Executive Compensation: Directors'
Compensation" is incorporated herein by reference.
Certain Relationships and Related Transactions
During 1992, Mr. Lund, the four other executives in the Summary Compensation
Table and certain other executive officers received full-recourse, interest
bearing loans for the entire purchase price of Common Stock of the Company they
purchased pursuant to the terms of the Key Executive Plan, which is described in
the Company's 1997 proxy statement. The loans have eight-year terms and accrue
interest at the "applicable federal rate" for eight-year loans with interest
compounded annually, as determined under Section 1274(d) of the Internal Revenue
Code of 1986, as amended, in effect on the date they purchased their stock.
Interest is payable prior to maturity to the extent of dividends paid on the
shares purchased under the Key Executive Plan, with the balance due at the
maturity of the loan. The proceeds of the deferred cash incentives awarded
during the five-year performance cycle(s) under the Key Executive Plan must also
be applied to prepay the loans. The balance of the loans after taking into
account any such prepayment together with accrued and unpaid interest thereon,
is payable in three equal installments (plus interest) on the sixth, seventh and
eighth anniversaries of the purchase date. During fiscal 1997, the performance
cycle for Mr. Lund and three of the named executive officers ended and each
received a deferred award, which was applied toward repayment of their loans.
Mr. McManus was not a participant in the Key Executive Plan. During fiscal 1998,
Messrs. Lund, Maher, and Scholtens paid their loans in full on the indicated
dates and for the indicated amounts: Mr. Lund - $5,396,519 on July 3, 1998; Mr.
Maher - $2,964,350 on June 29, 1998; and Mr. Scholtens - $811,224 on July 16,
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1998. As of January 30, 1999, the outstanding balance of Ms. Beck's loan
(including accrued and unpaid interest) was $523,320. As of January 30, 1999,
the aggregate outstanding balances of the loans (including accrued and unpaid
interest) made pursuant to the Key Executive Plan was $879,137. The largest
aggregate amount outstanding during the fiscal year was $5,367,227.
In connection with the KEEP program described in the Notes to Consolidated
Financial Statements, the Company made loans to 18 participants to assist them
in meeting the minimum stock ownership requirement under such program. The
participants were required to sign full recourse promissory notes, which are for
a term of five years and accrue interest at an initial rate of 8.5%, reset
annually at the then current prime rate. During the term of the loans, 20% of
the gross amount of any cash bonuses to which the participants become entitled
will be withheld and applied first to accrued and unpaid interest and second to
the reduction of principal. During fiscal year 1997, Mr. McManus received a loan
of $209,484. As of January 30, 1999, Mr. McManus' loan balance was $221,970,
which includes accrued interest.
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 are included in Item 8:
Consolidated Statements of Earnings for the fiscal years 1998, 1997 and 1996;
Consolidated Balance Sheets as of the end of fiscal years 1998, 1997 and 1996;
Consolidated Statements of Cash Flows for the fiscal years 1998, 1997 and 1996;
Consolidated Statements of Shareholders' Equity for the fiscal years 1998, 1997
and 1996;
Notes to Consolidated Financial Statements.
Item 14(a)(2) - Supplementary Data and Financial Statement Schedules
The supplementary data entitled "Quarterly Results (unaudited)," is included 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
The following exhibits are filed with this report:
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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
on April 14, 1996, and to Exhibit 1 of the Company's Form 8-K as filed
on July 10, 1997.
3.2 The By-Laws of American Stores Company as amended on September 17, 1997
are incorporated herein by reference to Exhibit 3.2 of the Company's
Form 10-K for the fiscal year ended January 31, 1998 as filed on April
20, 1998.
4.1 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 filed on June 12, 1995.
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 is incorporated
herein by reference to Exhibit 10.1 of Form 10-K filed on April 14,
1997.
10.2 Non-Employee Directors' Deferred Fee Plan is incorporated herein by
reference to Exhibit 10.3 of Form 8 as filed on July 12, 1991. *
10.3 1997 Stock Plan for Non-Employee Directors is incorporated herein by
reference to Exhibit C of the Company's 1997 Proxy Statement filed on
May 2, 1997.
10.4 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 on April 26, 1995. *
10.5 American Stores Company Supplemental Executive Retirement Plan 1998
Restatement is incorporated herein by reference to Exhibit 4.1 of Form
S-8 as filed on July 13, 1998. *
10.6 Amendment to American Stores Company Supplemental Executive Retirement
Plan 1998 Restatement, dated as of September 15, 1998 is incorporated
herein by reference to Exhibit 10.4 of Form 10-Q as filed on December
11, 1998. *
10.7 1997 Key Management Annual Incentive Plan is incorporated herein by
reference to Exhibit A of the Company's 1997 Proxy Statement filed on
May 2, 1997. *
10.8 Description of 1999 Key Management Incentive Plan. *
10.9 1997 Stock Option and Stock Award Plan is incorporated herein by
reference to Exhibit B of the Company's 1997 Proxy Statement filed on
May 2, 1997. *
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10.10 Amendment to American Stores Company 1997 Stock Option and Stock Award
Plan, dated as of October 8, 1998 is incorporated herein by reference
to Exhibit 10.1 of Form 10-Q as filed on December 11, 1998. *
10.11 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 on November 16, 1989. *
10.12 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 filed on December 17, 1996. *
10.13 Amendment to the 1989 Stock Option and Stock Award Plan, dated April 7,
1997 is incorporated herein by reference to Exhibit 10.9 of Form 10-K
filed on April 14, 1997. *
10.14 Amendment to the 1989 Stock Option and Stock Award Pla n dated as of
July 28, 1998 is incorporated herein by reference to Exhibit 10.6 of
Form 10-Q as filed on September 1, 1998. *
10.15 Amendment to American Stores Company 1989 Stock Option and Stock Award
Plan, dated as of October 8, 1998 is incorporated herein by reference
to Exhibit 10.2 of Form 10-Q as filed on December 11, 1998. *
10.16 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 on September 22, 1986. *
10.17 Amendmen 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 on December 17, 1996. *
10.18 Amendment to the 1985 Stock Option and Stock Award Plan dated as of
July 28, 1998 is incorporated herein by reference to Exhibit 10.7 of
Form 10-Q as filed on September 1, 1998. *
10.19 Amendment to American Stores Company 1985 Stock Option and Stock Award
Plan, dated as of October 8, 1998 is incorporated herein by reference
to Exhibit 10.3 of Form 10-Q as filed on December 11, 1998. *
10.20 American Stores Company Key Executive Stock Purchase Incentive Plan is
incorporated herein by reference to Exhibit A of the Registrant's 1992
Proxy Statement filed on May 7, 1992. *
10.21 Amendment dated as of June 16, 1998 to American Stores Company Key
Executive Stock Purchase Incentive Plan is incorporated herein by
reference to Exhibit 10.5 of Form 10-Q as filed on September 1, 1998. *
10.22 Consulting Agreement between the Company and L.S. Skaggs dated as of
August 1, 1995 is incorporated herein by reference to Exhibit 10.1 of
Form 10-Q as filed on December 11, 1995. *
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10.23 Form of Employment Agreement dated as of November 1, 1994 together with
Schedule of eighteen officers who entered into such Employment
Agreement with the Company are incorporated herein by reference to
Exhibit 10.14 of Form 10-K filed on April 26, 1995. *
10.24 Form of Employment Agreement dated as of July 25, 1996 together with
Schedule of two executive officers who entered into Employment
Agreements with the Company are incorporated herein by reference to
Exhibit 10.7 of Form 10-Q filed on September 17, 1996. *
10.25 Form of Amendment to Employment Agreement dated as of July 25, 1996
together with Schedule of fifteen officers who entered into such
Amendment to Employment Agreement is incorporated herein by reference
to Exhibit 10.4 of Form 10-Q filed on September 17, 1996. *
10.26 Second Amendment to Employment Agreement dated as of December 9, 1997,
together with schedule of 12 senior officers who entered into such
Amendment is incorporated herein by reference to Exhibit 10.23 of Form
10-K as filed on April 20, 1998. *
10.27 Third Amendment to Employment Agreement between the Company and Martin
A. Scholtens dated as of March 17, 1998 is incorporated herein by
reference to Exhibit 10.1 of Form 10-Q as filed on June 11, 1998. *
10.28 Form of Employment Agreement (Change of Control) dated as of July 25,
1996 together with Schedule of eleven officers who entered into such
Employment Agreement with the Company are incorporated herein by
reference to Exhibit 10.5 of Form 10-Q filed on September 17, 1996. *
10.29 Employment Agreement (Change of Control) with Edward J. McManus dated
as of December 9, 1997 is incorporated herein by reference to Exhibit
10.25 of Form 10-K as filed on April 20, 1998. *
10.30 Amendment to Employment Agreement (Change of Control) dated as of
December 9, 1997 together with schedule of 12 senior officers who
entered into such Amendment is incorporated herein by reference to
Exhibit 10.24 of Form 10-K as filed on April 20, 1998. *
10.31 Amendment to the Employment Agreement (Change of Control)with Victor L.
Lund dated as of December 9, 1997 is incorporated herein by reference
to Exhibit 10.22 of Form 10-K as filed on April 20, 1998. *
10.32 Amended and Restated Employment Agreement of Victor L. Lund dated as of
December 9, 1997 is incorporated herein by referenc to Exhibit 10.21
of Form 10-K as filed on April 20, 1998. *
10.33 Termination and Consulting Agreement, dated as of August 2, 1998, by
and among American Stores Company, Albertson's, Inc. and Victor L. Lund
is incorporated herein by reference to Exhibit 10.8 of Form 10-Q as
filed on September 1, 1998. *
10.34 Agreement and Plan of Merger, dated as of August 2, 1998, among
Albertson's, Abacus Holdings, Inc. and American Stores Company is
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incorporated by reference to Exhibit 1 to the Schedule 13D filed by
American Stores Company on August 12, 1998.
10.35 Stock Option Agreement, dated as of August 2, 1998, between
Albertson's, Inc., as Issuer, and American Stores Company, as Grantee
is incorporated by reference to Exhibit 2 to the Schedule 13D filed by
American Stores Company on August 12, 1998 with respect to the Common
Stock of Albertson's, Inc.
10.36 Stock Option Agreement, dated as of August 2, 1998, between American
Stores Company, as Issuer, and Albertson's, Inc., as Grantee is
incorporated herein by reference to Exhibit 3 to the Schedule 13D filed
by American Stores Company on August 12, 1998 with respect to the
Common Stock of American Stores Company.
12. Computation of ratio of earnings to fixed charges.
21. Subsidiaries of the Registrant.
23. Consent of Ernst & Young LLP.
27.1 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
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, filed November 12, 1998.
- ------------------------------------------------
* Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item
14(a)(3) of Form 10-K.
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AMERICAN STORES COMPANY
FORM 10-K
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant): American Stores Company
By (Signature and Title): /s/Kathleen E. McDermott April 13, 1999
Kathleen E. McDermott,
Chief Legal Officer and
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Victor L. Lund Chairman of the Board and April 13, 1999
Victor L. Lund Chief Executive Officer
(Principal Executive Officer)
/s/Neal J. Rider Chief Financial Officer April 13, 1999
Neal J. Rider (Principal Financial Officer)
/s/Bradley M. Vierig Senior Vice President and April 13, 1999
Bradley M. Vierig Controller
(Principal Accounting Officer)
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AMERICAN STORES COMPANY
FORM 10-K
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Victor L. Lund Director, Chairman of April 13, 1999
Victor L. Lund the Board and Chief
Executive Officer
/s/ David L. Maher Director, Vice April 13, 1999
David L. Maher Chairman of the Board
and Chief Operating
Officer
/s/ Pamela G. Bailey Director April 13, 1999
Pamela G. Bailey
/s/ Henry I. Bryant Director April 13, 1999
Henry I. Bryant
/s/ Arden B. Engebretsen Director April 13, 1999
Arden B. Engebretsen
/s/ James B. Fisher Director April 13, 1999
James B. Fisher
/s/ Fernando R. Gumucio Director April 13, 1999
Fernando R. Gumucio
/s/ Leon G. Harmon Director April 13, 1999
Leon G. Harmon
/s/ John E. Masline Director April 13, 1999
John E. Masline
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AMERICAN STORES COMPANY
FORM 10-K
Signatures (Continued)
/s/ Barbara S. Preiskel Director April 13, 1999
Barbara S. Preiskel
/s/ J. L. Scott Director April 13, 1999
J. L. Scott
/s/ Arthur K. Smith Director April 13, 1999
Arthur K. Smith
62
EXHIBIT 10.8
AMERICAN STORES COMPANY
1999
Incentive Plan
<PAGE>
AMERICAN STORES COMPANY
1999 INCENTIVE PLAN
PLAN PURPOSE
The 1999 Incentive Plan is designed to result in competitive total compensation
levels and assist in retaining executives.
KEY FEATURES
Your participation level in the 1999 Plan will be 20% of your 1999
base salary at target. The maximum award is 70% of base salary.
The plan will pay out cash based on the Award Schedule.
ELIGIBILITY
Participation in the American Stores Company 1999 Incentive Plan is limited to
key executives who were participants in the 1998 Performance Incentive Plan.
PERFORMANCE PERIOD
The performance period will be Fiscal Year 1999.
PERFORMANCE MEASURE
The performance measure for this plan will be basic Earnings Per Share (E.P.S.)
for Fiscal Year 1999 as adjusted for certain non-recurring events.
TARGETED AWARDS
Target awards are 20% of the participant's base salary paid during the Fiscal
Year 1999. The award schedule will be used to determine individual awards. The
maximum award attainable is 70% of the participant's base salary paid during the
Fiscal Year 1999.
CALCULATION OF INDIVIDUAL AWARD
The award will be calculated using the award schedule. Assuming Fiscal Year 1999
basic E.P.S. is _____ and your Fiscal Year 1999 base salary is $100,000, the
amount of your award in this example would be calculated as follows:
TARGET = $100,000 x 20% = $20,000
AWARD FACTOR FROM THE AWARD SCHEDULE TIMES YOUR TARGET = 125% x $20,000 =$25,000
VALUE of AWARD = $25,000
FORFEITURES
If you voluntarily terminate employment and are under age 57 or you are
terminated for cause, you will forfeit any award under the 1999 Incentive Plan.
If you are terminated without cause, or you are terminated and are over age 57
and the termination was not for cause, the award will be paid but pro-rated
through the date of your termination.
TAXES
Normal withholding of social security taxes, federal, state and local income
taxes will be made from the award.
ADMINISTRATION OF PLAN
The following are administrative guidelines for the American Stores Company
Incentive Plan:
The Compensation and Stock Option Committee of the Board of
Directors has final approval of the Plan. Determination of attainment
of the performance measure (if applicable) will be made by the
Compensation and Stock Option Committee.
If a participant dies or becomes disabled (as determined under the
American Stores Long-Term Disability Plan) before the end of Fiscal
Year 1999, the participant will receive a pro-rata award, based upon
the participant's salary earned during Fiscal Year 1999 before the
death or disability.
Being included as a participant in this Plan for Fiscal Year 1999
should not be construed as entitling an associate to continued
employment with the Company, nor to participate in plans for future
years. The Company reserves the right to promote, demote, discipline,
terminate, make compensation decisions, and otherwise manage its
employees as it deems fit.
The Compensation and Stock Option Committee has authority to
interpret the Plan and make all determinations required to administer
the Plan.
The Compensation and Stock Option Committee reserves the right to
amend or terminate the Plan at any time with respect to benefits not
yet accrued under the Plan.
CHANGE OF CONTROL
Notwithstanding all of the provisions above, in the event there is a Change of
Control as defined in the 1997 Stock Option and Stock Award Plan during Fiscal
Year 1999, the plan will pay out as described below and will terminate.
All participants will receive their target awards, pro-rated based on the ratio
between the number of days completed in Fiscal Year 1999 through the date the
Change Of Control transaction closes and 364 (the total days in Fiscal Year
1999). The awards will be paid as soon as practicable, but no later than 30
calendar days after the date the transaction closes. If in the example given
above, a Change of Control transaction closing date occurred 182 days after the
beginning of Fiscal Year 1999, this would mean using the same formula but with
an award factor of 100% rather than a value from the Award Schedule, and
multiplying the resulting award by one-half, for an award of $10,000.
No other payments will be made under the plan after a Change of Control.
Exhibit 12
AMERICAN STORES COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
In the computation of the ratio of earnings to fixed charges for the Company,
earnings consist of pre-tax income from continuing operations, plus fixed
charges (adjusted for capitalized interest). Fixed charges consist of interest,
whether expensed or capitalized (including the amortization of debt expense),
plus the amount of rental expense which is representative of the interest factor
in the particular case.
<TABLE>
<S> <C> <C> <C>
(In thousands of dollars) 1998 1997 1996
---- ---- ----
Earnings before income taxes $443,455 $523,665 $504,552
Fixed charges (detail below) 354,459 343,500 282,355
Adjusted for:
Capitalized interest (6,189) (16,248) (10,567)
Previously capitalized interest
amortized during the period 2,633 2,028 1,612
-------- -------- --------
Earnings $794,358 $852,945 $777,952
======== ======== ========
Interest expense $232,652 $216,710 $171,558
Capitalized interest 6,189 16,248 10,567
Interest factor for rental expense
of operating leases 115,618 110,542 100,230
-------- -------- --------
Fixed charges $354,459 $343,500 $282,355
======== ======== ========
Ratio of earnings to fixed charges 2.2 to 1 2.5 to 1 2.8 to 1
</TABLE>
Exhibit 21
AMERICAN STORES COMPANY
PRINCIPAL SUBSIDIARIES
YEAR-END 1998
State of
Subsidiary Incorporation
- ---------- -------------
Jewel Companies, Inc. DE
Acme Markets, Inc. DE
Jewel Food Stores, Inc. NY
American Drug Stores, Inc., dba IL
Osco Drug
Sav-on
Health `n' Home Corporation DE
American Food and Drug, Inc. DE
Jewel Osco Southwest, Inc. IL
Lucky Stores, Inc. DE
American Stores Properties, Inc. DE
American Stores Realty Corp. PA
American Procurement and Logistics Company DE
ASC Services, Inc. DE
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-25613; 2-94235; 33-48203; 33-48204; 33-08801; 33-32150;
33-63869; 333-27617; 333-27615; 333-58983 and S-3 Nos. 33-52331; 333-22701 and
333-43251) of our report dated March 17, 1999, with respect to the consolidated
financial statements of American Stores Company included in the Annual Report
(Form 10-K) for the year ended January 30, 1999.
ERNST & YOUNG LLP
Salt Lake City, Utah
April 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and income statements for the 52 week period ended January 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 35,493
<SECURITIES> 0
<RECEIVABLES> 427,911
<ALLOWANCES> 0
<INVENTORY> 1,726,015
<CURRENT-ASSETS> 2,340,403
<PP&E> 7,182,840
<DEPRECIATION> 2,604,547
<TOTAL-ASSETS> 8,885,299
<CURRENT-LIABILITIES> 1,984,955
<BONDS> 3,423,029
0
0
<COMMON> 299,778
<OTHER-SE> 2,399,418
<TOTAL-LIABILITY-AND-EQUITY> 8,885,299
<SALES> 19,866,725
<TOTAL-REVENUES> 19,866,725
<CGS> 14,560,899
<TOTAL-COSTS> 14,560,899
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232,652
<INCOME-PRETAX> 443,455
<INCOME-TAX> 209,711
<INCOME-CONTINUING> 233,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,744
<EPS-PRIMARY> .85<F1>
<EPS-DILUTED> .84<F1>
<FN>
<F1> EPS are not in (000's)
</FN>
</TABLE>
