EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in millions, except per share data)
Business Combinations
On August 2, 1998, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") entered into a definitive merger agreement
("Merger Agreement") whereby Albertson's would acquire ASC by exchanging 0.63
share of Albertson's common stock for each outstanding share of ASC common
stock, with cash being paid in lieu of fractional shares (the "Merger") and ASC
would become a wholly owned subsidiary of Albertson's. In addition, outstanding
rights to receive ASC common stock under ASC stock option plans would be
converted into rights to receive equivalent Albertson's common stock.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. The Merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The pooling of
interests method of accounting is intended to present as a single interest, two
or more common stockholders' interests that were previously independent;
accordingly, these consolidated financial statements restate the historical
financial statements as though the companies had always been combined. The
restated consolidated financial statements are adjusted to conform accounting
policies and financial statement presentations.
The following table compares amounts previously reported by Albertson's and
ASC prior to the Merger transaction and the combined amounts for fiscal 1998 and
1997:
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Albertson's ASC Combined
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1998:
Net revenues $ 16,005 $ 19,867 $ 35,872
Net earnings 567 234 801
1997:
Net revenues 14,690 19,138 33,828
Net earnings 517 280 797
In connection with the Merger, the Company entered into agreements with the
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements required the Company to
divest a total of 117 stores in California, 19 stores in Nevada and 9 stores in
New Mexico. Of the stores required to be divested, 40 were ASC locations
operated primarily under the Lucky name, and 105 were Albertson's stores
operated primarily under the Albertson's name. In addition, the Company divested
four supermarket real estate sites as required by the agreements. The stores
identified for disposition had sales of $2,300 in fiscal 1998. The Company had
divested 144 of the required 145 stores as of February 3, 2000. Future growth
comparisons will be affected by these divestitures.
During 1998 the Company acquired the stock of three separate operating
companies representing 64 retail food and drug stores in transactions accounted
for using the purchase method of accounting. In accordance with an agreement
with the Federal Trade Commission, nine acquired stores and six previously owned
stores were divested. Reported results include these operations from the date of
consummation of the acquisition.
Page 1
Results of Operations
Sales for 1999 (a 53-week year) were $37,478 compared to $35,872 in 1998 and
$33,828 in 1997. During fiscal 1999, ASC's fiscal year was converted from a
Saturday year end to a Thursday year end. The following table sets forth certain
income statement components expressed as a percent to sales and the year-to-year
percentage changes in the amounts of such components:
Percent To Sales Percentage Change
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1999 1998
1999 1998 1997 vs. 1998 vs. 1997
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Sales 100.00 100.00 100.00 4.5 6.0
Gross profit 27.52 27.08 26.63 6.2 7.9
Selling, general and
administrative expenses 23.06 21.87 21.67 10.1 7.0
Merger-related and
exit costs 1.06 0.54 0.04 n.m. n.m.
Litigation settlement 0.10 n.m.
Impairment - store closures 0.07 n.m. n.m.
Operating profit 3.31 4.60 4.92 (24.9) (0.8)
Interest expense, net 0.94 0.94 0.87 4.6 14.6
Earnings before
income taxes and
extraordinary item 2.40 3.73 3.99 (35.1) (0.9)
Net earnings 1.08 2.23 2.36 (49.5) 0.4
n.m. - not meaningful
Sales for 1999 increased 5.4% when compared on a 52-week basis to the prior
year and excluding sales from divested stores from both years. Increases in
sales are primarily attributable to the continued development of new stores and
identical and comparable store sales increases. During 1999 the Company opened
or acquired 147 stores, remodeled 100 stores, and closed or sold 219 stores (144
of which were required divestitures). Net retail square footage decreased by
1.7%. This includes the effect of required divestitures, which reduced square
footage by 6.1 million square feet or 6.2% from the prior year. Net retail
square footage increased 7.8% in 1998. Identical store sales, stores that have
been in operation for two full fiscal years, increased 1.7% in 1999 and 0.5% in
1998. Comparable store sales, which include replacement stores, increased 2.1%
in 1999 and 1.2% in 1998. Identical and comparable store sales continued to
increase through higher average ticket sales per customer. Management estimates
that there was overall inflation in products the Company sells of approximately
0.2% in 1999 and overall deflation of 0.1% in 1998.
In addition to store development, the Company has increased sales through
implementation of best practices across the Company and its investment in
programs initiated in recent years which are designed to provide solutions to
customer needs. In 1999 and 1998, these programs included the Front End Manager
program; the home meal solutions process called "Quick Fixin' Ideas(R)"; special
destination categories; and increased emphasis on training programs utilizing
Computer Guided Training. To provide additional solutions to customer needs, in
1999 the Company added new gourmet-quality bakery products and organic grocery
and produce items. Other solutions include neighborhood marketing, targeted
advertising and exciting new and remodeled stores.
Gross profit, as a percent to sales, increased primarily as a result of
continued improvements made in retail stores, including improvements in
underperforming stores and improved sales mix of partially prepared, value-added
products. Gross profit improvements were also realized through the continued
utilization of Company distribution facilities and increased buying
efficiencies. The merger has created buying synergies and margin improvements
from the implementation of best practices across the Company. The pre-tax LIFO
adjustment, as a percent to sales, reduced gross margin by $30 (0.08%) in 1999,
$16 (0.04%) in 1998 and $12 (0.03%) in 1997.
Selling, general and administrative expenses, as a percent to sales,
increased in 1999 primarily due to integration costs associated with the Merger,
including activities associated with the banner change in California, Nevada and
New Mexico. The increase in 1998 over 1997 was primarily due to increased salary
and related benefit costs resulting from the Company's initiatives to increase
sales, increased depreciation expense associated with the Company's expansion
program and integration costs associated with the various 1998 acquisitions.
Page 2
Results of operations for year ended February 3, 2000, include $683 of
merger-related costs ($529 after tax). The following table presents the pre-tax
costs incurred by category of expenditure and merger-related accruals included
in the Company's Consolidated Balance Sheet:
Exit Merger Extraordinary Period
Costs Charge Loss Costs Total
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Severance costs $ 99 $ 8 $ 9 $ 116
Write-down of assets
to net realizable value 239 12 251
Transaction and financing costs $ 31 71 102
Integration costs 3 164 167
Stock option charge 47 47
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Total costs 338 58 31 256 683
Cash expenditures (75) (8) (31) (252) (366)
Write-down of assets
to net realizable value (237) (237)
Stock option charge (47) (47)
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Merger-related accruals
at February 3, 2000 $ 26 $ 3 $ 4 $ 33
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Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management.
Approximately 625 employees will be severed as a result of the Merger, of which
499 were terminated as of February 3, 2000.
The write-down of assets to net realizable value includes the expected loss
on disposal of stores required to be divested and duplicate and abandoned
facilities, including administrative offices, intangibles and information
technology equipment which were abandoned by the Company or are being held for
sale. The estimated fair value of assets held for sale has been determined using
negotiated sales prices or independent appraisals.
Transaction and financing costs consist primarily of professional fees paid
for investment banking, legal, accounting, printing and regulatory filing fees.
Financing costs also include the extraordinary loss on extinguishment of debt.
Integration costs consist primarily of incremental transition and integration
costs associated with integrating the operations of Albertson's and ASC and are
being expensed as incurred.
The Company's stock option award plans contain provisions for automatic
vesting upon a change of control. Under ASC plans, option holders had the right
(limited stock appreciation right or LSAR), during an exercise period of up to
60 days after the occurrence of a change of control (but prior to consummation
of the Merger), to elect to surrender all or part of their options in exchange
for shares of Albertson's common stock having a value equal to the excess of the
change of control price over the exercise price. Certain stock option plans of
ASC defined change of control as the date of stockholder approval of the Merger.
Approval of the Merger Agreement on November 12, 1998, by ASC's stockholders
accelerated the vesting of 6.4 million equivalent stock options granted under
pre-1997 ASC plans and permitted the holders of these options to exercise LSARs.
The exercisability of the 6.4 million LSARs resulted in the Company recognizing
a pre-tax $195 merger-related stock option charge during 1998.
In the first quarter of 1999, a market price adjustment of $29 was recorded
as a reduction of merger-related costs to reflect a decline in the relevant
stock price at the end of the first fiscal quarter relative to LSARs. The actual
change of control price used to measure the value of these exercised LSARs
became determinable at the date the Merger was consummated and resulted in no
further adjustments. Upon Merger consummation, the change of control price was
$53.77 per share, resulting in the issuance of approximately 1.7 million
Albertson's shares.
LSARs relating to approximately 4.0 million equivalent stock options became
exercisable upon regulatory approval of the Merger, which resulted in
recognition of an additional charge of $76 in the second quarter of fiscal 1999.
This charge was based upon a change of control price of $56.96 per share, which
included an adjustment factor for the early termination of the LSAR feature. A
total of 0.8 million Albertson's shares were issued in satisfaction of those
options for which the LSAR feature was elected and the remaining options were
converted into options to acquire approximately 1.2 million Albertson's shares.
Page 3
The Company recorded a $37 pre-tax one-time charge to earnings during the
third quarter of 1999 resulting from an agreement in principle reached to settle
eight purported multi-state cases combined in the United States District Court
in Boise, Idaho, which raised various issues including "off-the-clock" work
allegations. The proposed settlement is subject to court approval. Under the
proposed settlement agreement, current and former employees who meet eligibility
criteria may present their claims to a settlement administrator. While the
Company cannot specify the exact number of individuals who are likely to submit
claims and the exact amount of their claims, the one-time charge is the
Company's current estimate of the total monetary liability, including attorney
fees, for all eight cases.
The Company recorded an impairment charge to earnings during 1998 related to
management's decision to close 16 underperforming stores in eight states. The
$24 pre-tax charge included impaired real estate and equipment, as well as the
present value of remaining liabilities under leases, net of expected sublease
recoveries.
Results of operations for 1997 included a pre-tax charge of $34 related to
the sale of stock by a major stockholder and pre-tax charges of $13 related to
the sale of a division of ASC's communication subsidiary.
The Company's effective income tax rate from continuing operations for 1999
was 52.5%, as compared to 40.2% for 1998 and 41.0% for 1997. The increase for
1999 is primarily due to the non-deductible portion of merger-related costs.
Due to the significance of the merger-related costs and other one-time
expenses and their effect on operating results, the following table is presented
to assist in the comparison of income statement components without these costs
and expenses:
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53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
February 3, 2000 January 28, 1999 January 29, 1998
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As Reported One-Time W/O One-Time W/O One-Time W/O One-Time
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Sales $ 37,478 $ 37,478 100.00% $ 35,872 100.00% $ 33,828 100.00%
Cost of sales 27,164 $ (42) 27,122 72.37 26,156 72.92 24,821 73.37
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Gross profit 10,314 42 10,356 27.63 9,716 27.08 9,007 26.63
Selling,
general and
administrative
expense 8,641 (214) 8,427 22.49 7,845 21.87 7,330 21.67
Merger-related
and exit costs 396 (396)
Litigation
settlement 37 (37)
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Operating profit 1,240 689 1,929 5.15 1,871 5.22 1,677 4.96
Interest expense,
net (353) 1 (352) (0.94) (337) (0.94) (294) (0.87)
Other income, net 12 12 0.03 24 0.07 14 0.04
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Earnings before
income taxes and
extraordinary item 899 690 1,589 4.24 1,558 4.34 1,397 4.13
Income taxes 472 162 634 1.69 609 1.70 559 1.66
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Earnings before
extraordinary item 427 528 955 2.55 949 2.65 838 2.48
Extraordinary loss
on extinguishment
of debt, net of
tax benefit of $7 (23) 23
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Net earnings $ 404 $ 551 $ 955 2.55% $ 949 2.65% $ 838 2.48%
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Page 4
The costs of integrating the two companies have and will result in
significant non-recurring charges and incremental expenses. These costs had a
material effect on 1999 results of operations of the Company and may have a
significant effect on results of operations for the year 2000. The actual timing
of the costs is, in part, dependent upon the actual timing of certain
integration actions. Non-recurring charges and expenses of implementing
integration actions are estimated to total $700 after income tax benefits. The
cash portion of these charges is estimated at approximately $367. When reduced
by the cash received from the sale of the stores required to be divested and the
net proceeds from the sale of assets that will not be used in the combined
company, the net positive cash flow will be approximately $276.
The Company expects to incur additional after-tax merger-related costs of
approximately $157 in future periods, which consist primarily of expected
integration costs and costs associated with other consolidation activities for
which plans have not yet been finalized.
Liquidity and Capital Resources
Cash provided by operating activities during 1999 was $1,397, compared to $1,447
in 1998 and $1,815 in 1997. Cash provided by operating activities during 1999
was negatively impacted by $230 for merger-related after-tax expenditures (the
offsetting proceeds from divestitures is included with cash flow from investing
activities). These expenditures include severance, transaction financing and
integration costs. In addition, for fiscal 1999 a combination of increased
inventories and the reduction of accounts payable leverage negatively impacted
cash provided from operating activities. Fiscal 1998 cash provided from
operating activities decreased from 1997 primarily due to higher inventories and
the timing of cash payments related to insurance programs for workers'
compensation and general liability. The Company has implemented several
initiatives designed to enhance working capital which include reducing inventory
levels and increasing accounts payable leverage. These improvements are expected
to reduce the cash requirements of the business.
The Company's financing activities for 1999 included net new borrowings of
$441 and $265 for the payment of dividends (which represents 27.7% of 1999 net
earnings without merger-related costs and one-time expenses). The Board of
Directors at its March 2000 meeting increased the regular quarterly cash
dividend to $0.19 per share, for an annual rate of $0.76 per share.
The Company utilizes its commercial paper and bank line programs primarily to
supplement cash requirements for seasonal fluctuations in working capital and to
fund its capital expenditure program. Accordingly, commercial paper and bank
line borrowings will fluctuate between reporting periods. The Company had $1,628
of commercial paper borrowings outstanding at February 3, 2000.
Following the Merger, the Company consolidated several of the commercial
paper, bank lines and other financing arrangements. The consolidation of debt
included the repayment of ASC debt containing change of control provisions and
the tender for, or open market purchases of, certain higher coupon debt. At the
effective date of the Merger, approximately $900 of ASC's debt became due or
callable by the creditors due to change of control provisions, of which
approximately $700 was repaid, and a $200 term loan was amended to waive the
change of control provision.
In support of the Company's commercial paper program, the Company had two
credit facilities totaling $2,100 during fiscal 1999. Effective March 2000, the
Company entered into two new revolving credit agreements for $1,900. One
agreement expires in 364 days for $950 and the second agreement expires in 5
years for the remaining $950. At the expiration of the 364-day credit agreement
and upon due notice, the Company may extend the term for an additional 364-day
period if the lenders holding at least 75% of the commitments agree. The 364-day
agreement also contains an option which would allow the Company, upon due
notice, to convert any outstanding amounts at the expiration date to term loans.
The agreements contain certain covenants, the most restrictive of which requires
the Company to maintain consolidated tangible net worth, as defined, of at least
$2,100. In addition, the Company has uncommitted bank lines of credit totaling
$345 million. As of February 3, 2000, no amounts were outstanding under the
credit facilities or bank lines.
Albertson's filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective in February 1999 (the "1999
Registration Statement") to authorize the issuance of up to $2,500 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 1999 Registration Statement for retirement of debt and general
corporate purposes.
Page 5
In July 1999, the Company issued $1,300 of term notes under the 1999
Registration Statement. The notes are composed of $300 of principal bearing
interest at 6.55% due August 1, 2004; $350 of principal bearing interest at
6.95% due August 1, 2009; and $650 of principal bearing interest at 7.45% due
August 1, 2029. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program. Additional securities up to $1,200 remain
available for issuance under the Company's 1999 Registration Statement.
During 1998 Albertson's issued a total of $317 in medium-term notes under a
shelf registration statement filed with the SEC in December 1997. Under a shelf
registration statement filed with the SEC in May 1996, Albertson's issued $200
of medium-term notes in 1997. Proceeds from these issuances were used to reduce
borrowings under Albertson's commercial paper program.
On March 19, 1998, ASC issued $45 of 6.5% notes due March 20, 2008, under an
outstanding Series B Medium-Term Note Program. On March 30, 1998, ASC issued an
additional $100 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.
The Company's operating results continue to enhance its financial position
and ability to continue its planned expansion program. Cash flows from
operations and available borrowings are sufficient for the future operating and
capital needs of the Company.
The following leverage ratios demonstrate the Company's levels of long-term
financing as of the indicated year end:
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February 3, January 28,
2000 1999
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Long-term debt and capitalized lease obligations to capital (1) 46.7% 48.1%
Long-term debt and capitalized lease obligations to total assets 31.8 33.8
(1) Capital includes long-term debt, capitalized lease obligations and
stockholders' equity
The Company continues to retain ownership of real estate when possible. As of
February 3, 2000, the Company held title to the land and buildings of 39% of the
Company's stores and held title to the buildings on leased land of an additional
7% of the Company's stores. The Company also holds title to the land and
buildings of most of its administrative offices and distribution facilities.
The Company is committed to keeping its stores up to date. In the last three
years, the Company has opened or remodeled 796 stores representing 35% of the
Company's retail square footage as of February 3, 2000. The following summary of
historical capital expenditures includes capital leases, stores acquired in
business and asset acquisitions, assets acquired with related debt and the
estimated fair value of property financed by operating leases:
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1999 1998 1997
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New and acquired stores $ 1,126 $ 1,146 $ 948
Remodels 296 299 216
Retail replacement equipment and technological upgrades 151 239 280
Distribution facilities and equipment 198 139 110
Other 97 50 105
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Total capital expenditures 1,868 1,873 1,659
Estimated fair value of property financed by operating leases 230 224 205
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$ 2,098 $ 2,097 $ 1,864
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The Company's strong financial position provides the flexibility for the
Company to grow through its store development program and future acquisitions.
Page 6
Recent Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact on the Company's accounting and reporting requirements.
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to certain market risks that are inherent in the
Company's financial instruments which arise from transactions entered into in
the normal course of business. From time to time, the Company enters into
derivative transactions. The objective of these derivative transactions is to
reduce the Company's exposure to changes in interest rates, and each transaction
is evaluated periodically by the Company for changes in market value and
counterparty credit exposure.
The Company is subject to interest rate risk on its fixed interest rate debt
obligations. Commercial paper borrowings do not give rise to significant
interest rate risk because these borrowings have maturities of less than three
months. Generally, the fair value of debt with a fixed interest rate will
increase as interest rates fall, and the fair value will decrease as interest
rates rise. The Company manages its exposure to interest rate risk by utilizing
a combination of fixed rate borrowings and commercial paper borrowings.
During 1997 ASC entered into a $300 five-year LIBOR basket swap. The LIBOR
basket swap agreement diversified the indices used to determine the interest
rate on a portion of ASC's variable rate debt by providing for payments based on
an average of foreign LIBOR indices which are reset every three months and also
provided for a maximum interest rate of 8.0%. The Company recognized no income
or expense in 1998 or 1997 related to this swap. During 1999 ASC terminated the
LIBOR basket swap and recognized a loss of $1.
There have been no material changes in the primary risk exposures or
management of the risks since the prior year. The Company expects to continue to
manage risks in accordance with the current policy.
The table below provides information about the Company's debt obligations
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates:
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There- Fair
2000 2001 2002 2003 2004 after Total Value
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Debt obligations
(excluding
commercial paper):
Fixed rate $ 395 $ 43 $ 105 $ 104 $ 504 $ 2,649 $ 3,800 $ 3,718
Weighted average
interest rate 6.7% 5.3% 10.4% 7.3% 6.6% 7.3% 7.2%
Page 7
Environmental
The Company has identified environmental contamination sites related
primarily to underground petroleum storage tanks and ground water contamination
at various store, warehouse, office and manufacturing facilities (related to
current operations as well as previously disposed of businesses). The Company
conducts an ongoing program for the inspection and evaluation of new sites
proposed to be acquired by the Company and the remediation/monitoring of
contamination at existing and previously owned sites. Undiscounted reserves have
been established for each environmental contamination site unless an unfavorable
outcome is remote. Although the ultimate outcome and expense of environmental
remediation is uncertain, the Company believes that required remediation and
continuing compliance with environmental laws, in excess of current reserves,
will not have a material adverse effect on the financial condition of the
Company. Charges against earnings for environmental remediation were not
material in 1999, 1998 or 1997.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the
Private Securities Litigation Reform Act of 1995 From time to time, information
provided by the Company, including written or oral statements made by its
representatives, may contain forward-looking information as defined in the
Private Securities Litigation Reform Act of 1995. All statements, other than
statements of historical facts, which address activities, events or developments
that the Company expects or anticipates will or may occur in the future,
including such things as integration of the ASC operations, expansion and growth
of the Company's business, future capital expenditures and the Company's
business strategy, contain forward-looking information. In reviewing such
information it should be kept in mind that actual results may differ materially
from those projected or suggested in such forward-looking information. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. Many of these factors have previously been
identified in filings or statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in consumer
spending, competitive factors and other factors affecting the Company's business
in or beyond the Company's control. These factors include changes in the rate of
inflation, changes in state or federal legislation or regulation, adverse
determinations with respect to litigation or other claims (including
environmental matters), labor negotiations, the Company's ability to recruit and
develop associates, its ability to develop new stores or complete remodels as
rapidly as planned, its ability to implement new technology successfully,
stability of product costs and the Company's ability to integrate the operations
of ASC.
Other factors and assumptions not identified above could also cause the
actual results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Page 8
Consolidated Earnings
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53 Weeks 52 Weeks 52 Weeks
February 3, January 28, January 29,
(In millions, except per share data) 2000 1999 1998
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Sales $ 37,478 $ 35,872 $ 33,828
Cost of sales 27,164 26,156 24,821
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Gross profit 10,314 9,716 9,007
Selling, general and administrative expenses 8,641 7,846 7,330
Merger-related and exit costs 396 195 13
Litigation settlement 37
Impairment - store closures 24
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Operating profit 1,240 1,651 1,664
Other (expenses) income:
Interest, net (353) (337) (294)
Shareholder related expense (34)
Other, net 12 24 14
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Earnings before income taxes and extraordinary item 899 1,338 1,350
Income taxes 472 537 553
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Earnings before extraordinary item 427 801 797
Extraordinary loss on extinguishment of debt,
net of tax benefit of $7 (23)
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Net Earnings $ 404 $ 801 $ 797
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Basic Earnings Per Share:
Earnings before extraordinary item $ 1.01 $ 1.91 $ 1.89
Extraordinary item (.05)
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Net Earnings $ 0.96 $ 1.91 $ 1.89
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Diluted Earnings Per Share:
Earnings before extraordinary item $ 1.00 $ 1.90 $ 1.88
Extraordinary item (.05)
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Net Earnings $ 0.95 $ 1.90 $ 1.88
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Weighted Average Common Shares Outstanding:
Basic 422 419 422
Diluted 423 422 423
See Notes to Consolidated Financial Statements
Page 9
Consolidated Balance Sheets
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February 3, January 28,
(In millions, except per share data) 2000 1999
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Assets
Current Assets:
Cash and cash equivalents $ 231 $ 116
Accounts and notes receivable, net 587 612
Inventories 3,481 3,249
Prepaid expenses 154 98
Property held for resale 100
Deferred income taxes 29 133
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Total Current Assets 4,582 4,208
Land, Buildings and Equipment, net 8,913 8,545
Goodwill, net 1,582 1,738
Other Assets 624 640
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Total Assets $ 15,701 $ 15,131
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Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 2,132 $ 2,185
Salaries and related liabilities 555 512
Taxes other than income taxes 172 169
Income taxes 82 50
Self-insurance 184 173
Unearned income 110 101
Merger-related reserves 33
Current portion of capitalized lease obligations 19 18
Current maturities of long-term debt 623 50
Other 145 93
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Total Current Liabilities 4,055 3,351
Long-Term Debt 4,805 4,905
Capitalized Lease Obligations 187 202
Self-Insurance 219 315
Deferred Income Taxes 52 208
Other Long-Term Liabilities and Deferred Credits 681 628
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - $1.00 par value; authorized - 10 shares; designated - 3
shares of Series A Junior Participating; issued - none
Common stock - $1.00 par value; authorized - 1,200 shares;
issued - 424 shares and 435 shares, respectively 424 435
Capital in excess of par 145 579
Retained earnings 5,133 5,027
Treasury stock - 15 shares as of January 28, 1999 (519)
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Total Stockholders' Equity 5,702 5,522
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Total Liabilities and Stockholders' Equity $ 15,701 $ 15,131
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See Notes to Consolidated Financial Statements
Page 10
Consolidated Cash Flows
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53 Weeks 52 Weeks 52 Weeks
February 3, January 28, January 29,
(In millions) 2000 1999 1998
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Cash Flows From Operating Activities:
Net earnings $ 404 $ 801 $ 797
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 854 806 745
Goodwill amortization 58 57 53
Noncash merger-related charges 271 195
Impairment - store closures 24
Net (gain) loss on asset sales (2) (14) 6
Net deferred income taxes (52) (72) 4
Increase in cash surrender value of Company-owned life insurance (12) (23) (14)
Changes in operating assets and liabilities,
net of business acquisitions:
Receivables and prepaid expenses 45 (56) (105)
Inventories (233) (157) (96)
Accounts payable (53) 7 377
Other current liabilities 138 54 37
Self-insurance (85) (134) (14)
Unearned income 76 (12) 42
Other long-term liabilities (12) (29) (17)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,397 1,447 1,815
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (1,837) (1,626) (1,632)
Proceeds from divestitures and duplicate assets 393
Proceeds from disposals of land, buildings and equipment 83 162 70
Business acquisitions, net of cash acquired (260)
Increase in other assets (115) (97) (138)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,476) (1,821) (1,700)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 1,841 462 734
Payments on long-term borrowings (970) (213) (179)
Net commercial paper activity and bank borrowings (430) 300 210
Proceeds from stock options exercised 32 66 50
Cash dividends paid (265) (263) (253)
Tax payments for options exercised (14)
Treasury stock purchases and retirements (18) (745)
Issuance of common stock 96
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 194 334 (87)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 115 (40) 28
Cash and Cash Equivalents at Beginning of Year 116 156 128
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 231 $ 116 $ 156
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Page 11
Consolidated Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Common Capital
Stock In Excess
$1.00 Par of Par Retained Treasury
(Dollars in millions) Value Value Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1997 $ 439 $ 324 $ 4,145 $ (114) $ 4,794
Net earnings 797 797
Issuance of 1,041,010 shares of stock for
stock options, awards and Employee Stock
Purchase Plan (ESPP) 6 25 31
Exercise of stock options 3 3
Tax benefits related to stock options 4 4
Stock purchase incentive plan 10 10
Treasury stock purchases and retirements (4) (3) (185) (551) (743)
Shares related to directors' stock
compensation plan - 121,590 shares 4 4
Stock issuance - 2,912,094 shares 36 60 96
Dividends (255) (255)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 29, 1998 435 384 4,502 (580) 4,741
Net earnings 801 801
Issuance of 1,989,505 shares of stock for
stock options, awards and ESPP (11) 63 52
Merger-related stock option charge 195 195
Exercise of stock options 3 3
Tax benefits related to stock options 10 10
Treasury stock purchases and retirements (6) (10) (2) (18)
Stock purchase incentive plan 1 1
Shares related to directors' stock
compensation plan - 12,633 shares 3 3
Dividends (266) (266)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 1999 435 579 5,027 (519) 5,522
Net earnings 404 404
Issuance of 131,099 shares of stock for
stock options and awards (1) 4 3
Merger-related stock option charge 47 47
Exercise of stock options 1 19 20
Tax benefits related to stock options 11 11
Treasury and fractional share retirements (14) (496) 510
Shares issued for limited stock
appreciation rights 2 (16) (14)
Stock purchase incentive plan 2 5 7
Dividends (298) (298)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 3, 2000 $ 424 $ 145 $ 5,133 $ 5,702
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Page 12
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Basis of Presentation
On August 2, 1998, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") entered into a definitive merger agreement
("Merger Agreement") whereby Albertson's would acquire ASC by exchanging 0.63
share of Albertson's common stock for each outstanding share of ASC common
stock, with cash being paid in lieu of fractional shares (the "Merger") and ASC
would become a wholly owned subsidiary of Albertson's. In addition, outstanding
rights to receive ASC common stock under ASC stock option plans would be
converted into rights to receive equivalent Albertson's common stock.
The Merger was consummated on June 23, 1999, with the issuance of
approximately 177 million shares of Albertson's common stock. The Merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The pooling of
interests method of accounting is intended to present as a single interest, two
or more common stockholders' interests that were previously independent;
accordingly, these consolidated financial statements restate the historical
financial statements as though the companies had always been combined. The
restated consolidated financial statements are adjusted to conform accounting
policies and financial statement presentations. There were no material
conforming adjustments.
The Company
The Company is incorporated under the laws of the State of Delaware and is the
successor to a business founded by J. A. Albertson in 1939. Based on sales, the
Company is the second largest retail food and drug chain in the United States.
As of February 3, 2000, the Company operated 2,492 stores in 37 Western,
Midwestern, Eastern and Southern states. Retail operations are supported by 21
major Company distribution operations, strategically located in the Company's
operating markets.
Summary of Significant Accounting Policies
Fiscal Year End The Company's fiscal year is generally 52 weeks and periodically
consists of 53 weeks because the fiscal year ends on the Thursday nearest to
January 31 (the Saturday nearest to January 31 for ASC during fiscal years 1998
and 1997). During fiscal 1999, ASC's fiscal year was converted from a Saturday
year end to a Thursday year end. Unless the context otherwise indicates,
reference to a fiscal year of the Company refers to the calendar year in which
such fiscal year commences.
Consolidation The consolidated financial statements include the results of
operations, account balances and cash flows of the Company and its subsidiaries.
All material intercompany balances have been eliminated.
Cash and Cash Equivalents The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents. Investments, which consist of government-backed money market funds
and repurchase agreements backed by government securities, are recorded at cost
which approximates market value.
Inventories The Company values inventories at the lower of cost or market.
Cost of substantially all inventories is determined on a last-in, first-out
(LIFO) basis.
Capitalization, Depreciation and Amortization Land, buildings and equipment
are recorded at cost. Depreciation is provided on the straight-line method over
the estimated useful life of the asset. Estimated useful lives are generally as
follows: buildings and improvements--10 to 35 years; fixtures and equipment--3
to 10 years; leasehold improvements--10 to 25 years; and capitalized leases--20
to 30 years. Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate the carrying value of the assets may
not be recoverable.
The costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements are amortized on
the straight-line method over the shorter of the life of the applicable lease or
the useful life of the asset. Capital leases are recorded at the lower of the
fair market value of the asset or the present value of future minimum lease
payments. These leases are amortized on the straight-line method over their
primary term.
Page 13
Beneficial lease rights and lease liabilities are recorded on purchased
leases based on differences between contractual rents under the respective lease
agreements and prevailing market rents at the date of the acquisition of the
lease. Beneficial lease rights are amortized over the lease term using the
straight-line method. Lease liabilities are amortized over the lease term using
the interest method.
Goodwill Goodwill resulting from business acquisitions represents the excess
of cost over fair value of net assets acquired and is being amortized over 40
years using the straight-line method. Goodwill is principally from the
acquisition of Lucky Stores, Inc. in 1988. Accumulated amortization amounted to
$602 and $581 in 1999 and 1998, respectively. Periodically, the Company
re-evaluates goodwill and other intangibles based on undiscounted operating cash
flows whenever significant events or changes occur which might impair recovery
of recorded asset costs.
Self-Insurance The Company is partially self-insured for property loss,
workers' compensation and general liability costs. For ASC, beginning in fiscal
1998, insurance was purchased for workers' compensation, general liability and
automotive liability coverage. Self-insurance liabilities are based on claims
filed and estimates for claims incurred but not reported. These liabilities are
not discounted.
Unearned Income Unearned income consists primarily of buying and promotional
allowances received from vendors in connection with the Company's buying and
merchandising activities. These funds are recognized as revenue when earned by
purchasing amounts of product, promoting certain products or passage of time, as
specified in the related agreements.
Store Opening and Closing Costs Noncapital expenditures incurred in opening
new stores or remodeling existing stores are expensed in the year in which they
are incurred. When a store is closed, the remaining investment in land,
buildings and equipment, net of expected recovery value, is expensed. For
properties under operating lease agreements, the present value cost of any
remaining liability under the lease, net of expected sublease recovery, is also
expensed.
Advertising Advertising costs incurred to produce media advertising for major
new campaigns are expensed in the year in which the advertising first takes
place. Other advertising costs are expensed when incurred. Cooperative
advertising income from vendors is recorded in the period in which the related
expense is incurred. Gross advertising expenses of $583, $518 and $497 excluding
cooperative advertising income from vendors, were included with cost of sales in
the Company's Consolidated Earnings for 1999, 1998 and 1997, respectively.
Stock Options Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost of stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the option exercise price and is
charged to operations over the vesting period. Income tax benefits attributable
to stock options exercised are credited to capital in excess of par value.
Company-owned Life Insurance The Company has purchased life insurance
policies to cover its obligations under certain deferred compensation plans for
officers and directors. Cash surrender values of these policies are adjusted for
fluctuations in the market value of underlying investments. The cash surrender
value is adjusted each reporting period and any gain or loss is included with
other income (expense) in the Company's Consolidated Earnings Statement.
Income Taxes The Company provides for deferred income taxes resulting from
temporary differences in reporting certain income and expense items for income
tax and financial accounting purposes. The major temporary differences and their
net effect are shown in the "Income Taxes" note. Amortization of goodwill is
generally not deductible for purposes of calculating income tax provisions.
Earnings Per Share (EPS) Basic EPS is computed by dividing consolidated net
earnings by the weighted average number of common shares outstanding. Diluted
EPS is computed by dividing consolidated net earnings by the sum of the weighted
average number of common shares outstanding and the weighted average number of
potential common shares outstanding. Potential common shares consist solely of
outstanding options under the Company's stock option plans. Outstanding options
excluded in 1999 and 1997 (option price exceeded the average market price during
the period) amounted to 3.5 million shares and 4.3 million shares, respectively.
There were no outstanding options excluded from the computation of potential
common shares in 1998. For purposes of the EPS calculation, all shares and
potential
Page 14
common shares of ASC were converted at the 0.63 to 1 exchange ratio. In
connection with the Merger, certain options of ASC were exchanged for shares of
Albertson's based on the fair value of the options, including contractual
rights.
Reclassifications Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the current year.
Use of Estimates The preparation of the Company's consolidated financial
statements, in conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Merger, Divestitures and Related Costs
The following table compares amounts previously reported by Albertson's and ASC
prior to the Merger transaction and the combined amounts for fiscal 1998 and
1997:
- ------------------------------------------------------------------------------------------------------------------------------------
Albertson's ASC Combined
- ------------------------------------------------------------------------------------------------------------------------------------
1998:
Net revenues $ 16,005 $ 19,867 $ 35,872
Net earnings 567 234 801
1997:
Net revenues 14,690 19,138 33,828
Net earnings 517 280 797
In connection with the Merger, the Company entered into agreements with the
Attorneys General of California, Nevada and New Mexico and the Federal Trade
Commission to enable the Merger to proceed under applicable antitrust,
competition and trade regulation law. The agreements required the Company to
divest a total of 117 stores in California, 19 stores in Nevada and 9 stores in
New Mexico. Of the stores required to be divested, 40 were ASC locations
operated primarily under the Lucky name, and 105 were Albertson's stores
operated primarily under the Albertson's name. In addition, the Company divested
four supermarket real estate sites as required by the agreements. The stores
identified for disposition had sales of $2,300 in fiscal 1998. The Company had
divested 144 of the required 145 stores as of February 3, 2000.
Results of operations for year ended February 3, 2000, include $683 of
merger-related costs ($529 after tax). The following table presents the pre-tax
costs incurred by category of expenditure and merger-related accruals included
in the Company's Consolidated Balance Sheet:
- ------------------------------------------------------------------------------------------------------------------------------------
Exit Merger Extraordinary Period
Costs Charge Loss Costs Total
- ------------------------------------------------------------------------------------------------------------------------------------
Severance costs $ 99 $ 8 $ 9 $ 116
Write-down of assets to net
realizable value 239 12 251
Transaction and financing costs $ 31 71 102
Integration costs 3 164 167
Stock option charge 47 47
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs 338 58 31 256 683
Cash expenditures (75) (8) (31) (252) (366)
Write-down of assets to net
realizable value (237) (237)
Stock option charge (47) (47)
- ------------------------------------------------------------------------------------------------------------------------------------
Merger-related accruals at
February 3, 2000 $ 26 $ 3 $ 4 $ 33
- ------------------------------------------------------------------------------------------------------------------------------------
Page 15
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management.
Approximately 625 employees will be severed as a result of the Merger, of which
499 were terminated as of February 3, 2000.
The write-down of assets to net realizable value includes the expected loss
on disposal of stores required to be divested and duplicate and abandoned
facilities, including administrative offices, intangibles and information
technology equipment which were abandoned by the Company or are being held for
sale. The estimated fair value of assets held for sale has been determined using
negotiated sales prices or independent appraisals.
Transaction and financing costs consist primarily of professional fees paid
for investment banking, legal, accounting, printing and regulatory filing fees.
Financing costs also include the extraordinary loss on extinguishment of debt.
Integration costs consist primarily of incremental transition and integration
costs associated with integrating the operations of Albertson's and ASC and are
being expensed as incurred.
As discussed in the Stock Options and Stock Awards Note, the Company recorded
net pre-tax charges through the first two quarters of 1999 of $47 related to
limited stock appreciation rights (LSARs). The actual change of control price
used to measure the value of these exercised LSARs became determinable at the
date the Merger was consummated.
The costs of integrating the two companies have and will result in
significant non-recurring charges and incremental expenses. These costs have had
a material effect on 1999 results of operations of the Company and may have a
significant effect on results of operations for the year 2000. The actual timing
of the costs is, in part, dependent upon the actual timing of certain
integration actions. Non-recurring charges and expenses of implementing
integration actions are estimated to total $700 after income tax benefits. The
cash portion of these charges is estimated at approximately $367. When reduced
by the cash received from the sale of the stores required to be divested and the
net proceeds from the sale of assets that will not be used in the combined
company, the net positive cash flow will be approximately $276. The Company
expects to incur additional after-tax merger-related costs of approximately $157
in future periods, which consist primarily of expected integration costs and
costs associated with other consolidation activities for which plans have not
yet been finalized.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash payments for income taxes $ 520 $ 589 $ 547
Cash payments for interest, net of amounts capitalized 413 331 270
Noncash investing and financing activities:
Tax benefits related to stock options 11 10 4
Capitalized lease obligations incurred 24 25 27
Capitalized lease obligations terminated 14 6 2
Liabilities assumed in connection with asset acquisitions 7 2
Business Acquisitions
During 1998, the Company acquired 64 stores in three separate stock purchase
acquisitions and 15 stores in an asset acquisition transaction. In connection
with one of the stock purchase acquisitions, the Company agreed with the Federal
Trade Commission to divest nine of the acquired stores and six previously owned
stores. These four acquisition transactions had a combined purchase price of
$302.
The above acquisitions were accounted for using the purchase method of
accounting. The results of operations of the acquired businesses have been
included in the consolidated financial statements from their date of
acquisition. Pro forma results of operations have not been presented due to the
immaterial effects of these acquisitions on the Company's consolidated
operations. For these acquisitions, the excess of the purchase price over the
fair market value of net assets acquired, of $151, was allocated to goodwill
which is being amortized over 40 years.
Page 16
Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts receivable $ 603 $ 620
Current portion of notes receivable 15 11
Allowance for doubtful accounts (31) (19)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 587 $ 612
- ------------------------------------------------------------------------------------------------------------------------------------
Inventories
Approximately 96% of the Company's inventories are valued using the last-in,
first-out (LIFO) method. If the first-in, first-out (FIFO) method had been used,
inventories would have been $615 and $585 higher at the end of 1999 and 1998,
respectively. Net earnings (basic and diluted earnings per share) would have
been higher by $18 ($0.04) in 1999, $10 ($0.02) in 1998 and $7 ($0.02) in 1997.
The replacement cost of inventories valued at LIFO approximates FIFO cost.
Land, Buildings and Equipment, net
Land, buildings and equipment, net, consist of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 1,999 $ 1,878
Buildings 4,908 4,748
Fixtures and equipment 5,309 5,044
Leasehold improvements 1,456 1,301
Capitalized leases 328 350
- ------------------------------------------------------------------------------------------------------------------------------------
14,000 13,321
Accumulated depreciation and amortization (5,087) (4,776)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,913 $ 8,545
- ------------------------------------------------------------------------------------------------------------------------------------
Page 17
Indebtedness
Long-term debt consists of the following (borrowings are unsecured unless
indicated):
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial paper and bank lines of credit $ 1,628 $ 1,719
7.45% Debentures due August 1, 2029 650
6.95% Notes due August 1, 2009 350
6.55% Notes due August 1, 2004 300
Medium-term notes, due 2013 through 2028, average interest rate of 6.5% 317 317
Medium-term notes, due 2007 through 2027, average interest rate of 6.8% 200 200
7.75% Debentures due June 2026 200 200
6.375% Notes due June 2000 200 200
Medium-term notes due 2000, average interest rate of 6.1% 90 90
7.5% Debentures due 2037 200 200
8.0% Debentures due 2026 272 350
7.9% Debentures due 2017 95 100
7.4% Notes due 2005 200 200
Medium-term notes, due 2000 through 2028, average interest rate of 7.3% 295 295
9.125% Notes due 2002 80 249
Notes due 2004, average interest rates of 6.5% and 6.3%, respectively 200 200
Revolving credit facilities, effectively due 2002, average interest rate of 5.8% 325
Other bank borrowings due 2000, average interest rate of 6.6% 75
10.63% Notes, due 2004 93
Industrial revenue bonds, average interest rate of 6.1% 14 15
Secured mortgage notes and other notes payable,
average interest rates of 8.2% and 11.0%, respectively 137 127
- ------------------------------------------------------------------------------------------------------------------------------------
5,428 4,955
Current maturities (623) (50)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4,805 $ 4,905
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rates on the outstanding commercial paper borrowings as of February
3, 2000, ranged from 4.6% to 6.0% with an effective weighted average rate of
5.2%. The Company has established the necessary credit facilities, through its
revolving credit agreements, to refinance the commercial paper and bank line
borrowings on a long-term basis. The majority of these borrowings have been
classified as noncurrent because it is the Company's intent to refinance these
obligations on a long-term basis.
Following the Merger the Company consolidated several of the commercial
paper, bank lines and other financing arrangements. The consolidation of debt
included the repayment of outstanding amounts under ASC's revolving credit
facilities and other debt containing change of control provisions and the tender
for, or open market purchases of, certain higher coupon debt. As a result, the
following debt was extinguished:
- ------------------------------------------------------------------------------------------------------------------------------------
Triggering Factor Amount Extinguished
- ------------------------------------------------------------------------------------------------------------------------------------
Revolving Credit Facility Change of control $ 500
Bank borrowing due 2000 Change of control 75
10.63% Note due in 2004 Change of control 93
9.125% Notes due 2002 Tender offer 169
8.0% Debentures due 2026 Open market purchases 78
7.9% Debentures due 2017 Open market purchases 5
Page 18
In July 1999 the Company issued $500 million of floating rate notes. The
notes are due July 2000 and bear interest based on LIBOR commercial paper rates
that reset monthly. As of February 3, 2000, the interest rate was 5.8% on the
outstanding notes. These notes were issued under the Company's commercial paper
program.
The Company had two credit facilities totaling $2,100 during fiscal 1999. In
addition, the Company had uncommitted bank lines of credit totaling $345. No
borrowings were outstanding under either credit facility or bank lines as of
February 3, 2000.
Effective March 2000, the Company entered into two new revolving credit
agreements for $1,900. One agreement expires in 364 days for $950 and the second
agreement expires in 5 years for the remaining $950. At the expiration of the
364-day credit agreement and upon due notice, the Company may extend the term
for an additional 364-day period if lenders holding at least 75% of commitments
agree. The 364-day agreement also contains an option which would allow the
Company, upon due notice, to convert any outstanding amounts at the expiration
date to term loans. The agreements contain certain covenants, the most
restrictive of which requires the Company to maintain consolidated tangible net
worth, as defined, of at least $2,100.
Albertson's filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective in February 1999 (the "1999
Registration Statement") to authorize the issuance of up to $2,500 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 1999 Registration Statement for retirement of debt and general
corporate purposes.
In July 1999 the Company issued $1,300 of term notes under the 1999
Registration Statement. The notes are comprised of: $300 of principal bearing
interest at 6.55% due August 1, 2004; $350 of principal bearing interest at
6.95% due August 1, 2009; and $650 of principal bearing interest at 7.45% due
August 1, 2029. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program. Additional securities up to $1,200 remain
available for issuance under the Company's 1999 Registration Statement.
In July 1999 the Company negotiated an amendment to a $200 term loan
agreement between ASC and a group of commercial banks. The amended fixed rate
loans carry interest based upon a pricing schedule (which averages 6.45%)
dependent upon the Company's long-term debt rating, and mature July 3, 2004.
During 1998 Albertson's issued a total of $317 in medium-term notes under a
$500 shelf registration statement filed with the SEC in December 1997. The
remaining authorization of $183 under the 1997 shelf registration statement was
rolled into the 1999 Registration Statement. Under a shelf registration
statement filed with the SEC in May 1996, Albertson's issued $200 of medium-term
notes in 1997. Proceeds from these issuances were used to reduce borrowings
under Albertson's commercial paper program.
On March 19, 1998, ASC issued $45 of 6.5% notes due March 20, 2008, under an
outstanding Series B Medium-term Note Program. On March 30, 1998, ASC issued an
additional $100 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.
The Company has pledged real estate with a cost of $11 as collateral for a
mortgage note which is payable semiannually, including interest at a rate of
16.5%. The note matures from 2000 to 2013.
Medium-term notes of $30 due July 2027 contain a put option which would
require the Company to repay the notes in July 2007 if the holder of the note so
elects by giving the Company a 60-day notice. Medium-term notes of $50 due April
2028 contain a put option which would require the Company to repay the notes in
April 2008 if the holder of the note so elects by giving the Company a 60-day
notice.
The $200 of 7.5% debentures due 2037 contain a put option which will require
the Company to repay the note in 2009 if the holder of the notes so elects by
giving the Company a 60-day notice.
Page 19
Net interest expense was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Debt $ 350 $ 322 $ 288
Capitalized leases 27 25 22
Capitalized interest (26) (17) (25)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 351 330 285
Net bank service charges 2 7 9
- ------------------------------------------------------------------------------------------------------------------------------------
$ 353 $ 337 $ 294
- ------------------------------------------------------------------------------------------------------------------------------------
The scheduled aggregate maturities of long-term debt outstanding at February
3, 2000, are summarized as follows: $623 in 2000, $1,443 in 2001, $105 in 2002,
$104 in 2003, $504 in 2004 and $2,649 thereafter.
Capital Stock
On December 2, 1996, the Board of Directors adopted a stockholder rights plan,
which was amended on August 2, 1998, and March 16, 1999, under which all
stockholders receive one right for each share of common stock held. Each right
will entitle the holder to purchase, under certain circumstances, one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, of the Company (the "preferred stock") at a price of 160
dollars. Subject to certain exceptions, the rights will become exercisable for
shares of preferred stock 10 business days (or such later date as may be
determined by the Board of Directors) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the outstanding shares of common stock.
Under the plan, subject to certain exceptions, if any person or group as
defined by the plan, becomes the beneficial owner of 15% or more of the
outstanding common stock or takes certain other actions, each right will then
entitle its holder as defined by the plan, other than such person or group, upon
payment of the 160 dollars exercise price, to purchase common stock (or, in
certain circumstances, cash, property or other securities of the Company) with a
value equal to twice the exercise price. The rights may be redeemed by the Board
of Directors at a price of $0.001 per right under certain circumstances. The
rights, which do not vote and are not entitled to dividends, will expire at the
close of business on March 21, 2007, unless earlier redeemed or extended by the
Board of Directors of the Company. In connection with the Merger, no person or
group became the beneficial owner of 15% or more of the common stock.
The Board of Directors adopted a program on March 2, 1998 which authorized
the Company to purchase and retire up to 5 million shares of its common stock.
On August 2, 1998, the Board of Directors rescinded the remaining authorization
in connection with the Merger.
On April 8, 1997, ASC (i) repurchased 15 million equivalent common shares
from its former chairman, certain of his family members and charitable trusts
(the "Selling Stockholders") for an aggregate price of $550 and (ii) sold 3
million equivalent common shares for net proceeds of $96 pursuant to the
exercise of an over-allotment option by the underwriters in connection with a
public offering of shares by the Selling Stockholders.
Page 20
Income Taxes
Deferred tax assets and liabilities consist of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets (no valuation allowance considered necessary):
Basis in fixed assets $ 123 $ 76
Self-insurance 174 199
Compensation and benefits 181 204
Unearned income 36 31
Other, net 140 127
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 654 637
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Basis in fixed assets and capitalized leases (515) (564)
Inventories (105) (94)
Compensation and benefits (33) (30)
Other, net (24) (24)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (677) (712)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (23) $ (75)
- ------------------------------------------------------------------------------------------------------------------------------------
As a result of an acquisition that occurred during 1998, the Company acquired
federal and state net operating loss carryforwards with a remaining balance of
$13 and $14, respectively, that will expire in various years through 2010. Based
on management's assessment, it is more likely than not that all of the deferred
tax assets associated with the net operating loss carryforwards will be
realized; therefore, no valuation allowance is considered necessary.
Income tax expense on continuing operations consists of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 476 $ 537 $ 488
State 48 72 61
- ------------------------------------------------------------------------------------------------------------------------------------
524 609 549
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (47) (63) 4
State (5) (9)
- ------------------------------------------------------------------------------------------------------------------------------------
(52) (72) 4
- ------------------------------------------------------------------------------------------------------------------------------------
$ 472 $ 537 $ 553
- ------------------------------------------------------------------------------------------------------------------------------------
Page 21
The reconciliations between the federal statutory tax rate and the Company's
effective tax rates are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Percent 1998 Percent 1997 Percent
- ------------------------------------------------------------------------------------------------------------------------------------
Taxes computed at statutory rate $ 315 35.0 $ 468 35.0 $ 473 35.0
State income taxes net of federal
income tax benefit 28 3.2 51 3.8 53 3.9
Expenses for repurchase of
major stockholder's common stock 12 0.9
Goodwill amortization 22 2.4 22 1.6 21 1.6
Merger-related charges 115 12.8 15 1.1
Other (8) (0.9) (19) (1.3) (6) (0.4)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 472 52.5 $ 537 40.2 $ 553 41.0
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Options and Stock Awards
The Company's stock option plans provide for the grant of options to purchase
shares of common stock and stock awards. At February 3, 2000, Albertson's had
one stock option plan in effect under which grants could be made with respect to
30 million shares of the Company's common stock. Under this plan, approved by
the stockholders in 1998, options may be granted to officers and key employees
to purchase the Company's common stock. During 1999, the Company's stock option
plan was amended to, among other things, include the grant of options and other
awards to non-employee members of the Board of Directors. Generally, options are
granted with an exercise price at not less than 100% of the closing market price
on the date of the grant. The Company's options generally become exercisable in
installments of 20% per year on each of the first through fifth anniversaries of
the grant date and have a maximum term of 10 years. In connection with the
Merger, all outstanding options under prior Albertson's and ASC plans became
exercisable in accordance with the change of control provisions included in the
stock option plans and all outstanding ASC options were converted into a right
to acquire an equivalent number of Albertson's shares. No further options will
be granted under ASC plans. Additionally, all restrictions lapsed with respect
to all outstanding stock awards under the ASC stock award plans.
Variable Accounting Treatment for Option Plans
The Company's stock option award plans contain provisions for automatic vesting
upon a change of control. Under ASC plans, option holders had the right (limited
stock appreciation right or LSAR), during an exercise period of up to 60 days
after the occurrence of a change of control (but prior to consummation of the
Merger), to elect to surrender all or part of their options in exchange for
shares of Albertson's common stock having a value equal to the excess of the
change of control price over the exercise price. Certain stock option plans of
ASC defined change of control as the date of stockholder approval of the Merger.
Approval of the Merger Agreement on November 12, 1998, by ASC's stockholders
accelerated the vesting of 6.4 million equivalent stock options granted under
pre-1997 ASC plans and permitted the holders of these options to exercise LSARs.
The exercisability of the 6.4 million LSARs resulted in the Company recognizing
a pre-tax $195 merger-related stock option charge during 1998.
In the first quarter of 1999, a market price adjustment of $29 was recorded
as a reduction of merger-related costs to reflect a decline in the relevant
stock price at the end of the first fiscal quarter relative to LSARs. The actual
change of control price used to measure the value of these exercised LSARs
became determinable at the date the Merger was consummated and resulted in no
further adjustments. Upon Merger consummation, the change of control price was
$53.77 per share, resulting in the issuance of approximately 1.7 million
Albertson's shares.
LSARs relating to approximately 4.0 million equivalent stock options became
exercisable upon regulatory approval of the Merger, which resulted in
recognition of an additional charge of $76 in the second quarter of fiscal 1999.
This charge was based upon a change of control price of $56.96 per share, which
included an adjustment factor for the early termination of the LSAR feature. A
total of 0.8 million Albertson's shares were issued in satisfaction of those
options for which the LSAR feature was elected and the remaining options were
converted into options to acquire approximately 1.2 million Albertson's shares.
Page 22
Stock Options
A summary of shares reserved for outstanding options as of the fiscal year end,
changes during the year and related weighted average exercise price is presented
below (shares in thousands, all ASC amounts included based upon the conversion
ratio of 0.63 to 1):
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, 2000 January 28, 1999 January 29, 1998
---------------- ---------------- ----------------
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 9,989 $ 35.01 16,527 $ 32.74 7,856 $ 24.08
Granted 12,536 39.76 159 40.39 9,846 38.08
Exercised (3,907) 33.00 (5,858) 29.16 (782) 15.46
Forfeited (603) 39.43 (839) 32.11 (393) 28.09
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 18,015 $ 38.34 9,989 $ 35.01 16,527 $ 32.74
- ------------------------------------------------------------------------------------------------------------------------------------
As of February 3, 2000, there were 14.5 million shares of Company common stock
reserved for the granting of additional options. The following table summarizes
options outstanding and options exercisable as of February 3, 2000, and the
related weighted average remaining contractual life (years) and weighted average
exercise price (shares in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
. Options Outstanding .. Options Exercisable .
--------------------------------------------------------------------------------
Shares Remaining Shares
Option Price per Share Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------
$13.44 to $22.63 421 1.8 $ 18.03 421 $ 18.03
24.32 to 33.25 8,493 8.9 30.28 1,596 29.31
35.00 to 45.94 3,576 6.7 40.08 3,576 40.08
47.00 to 51.19 5,525 9.4 51.15 47 47.00
- ------------------------------------------------------------------------------------------------------------------------------------
$13.44 to $51.19 18,015 8.4 $ 38.34 5,640 $ 35.44
- ------------------------------------------------------------------------------------------------------------------------------------
The weighted average fair value at date of grant for Albertson's options
granted during 1999 was $10.42 per option. Pre-merger Albertson's grants per
option were $17.14 and $15.26 for 1998 and 1997, respectively. Pre-merger ASC
grants per option were $11.86 and $11.58 for 1998 and 1997, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 . 1998 .. 1997 .
-----------------------------------------------------------------
ABS ASC ABS ASC
- ------------------------------------------------------------------------------------------------------------------------------------
Expected life (years) 3.0 8.0 6.5 6.5 7.0
Risk-free interest rate 5.96% 5.74% 4.70% 5.92% 6.60%
Volatility 37.03 26.70 21.20 26.53 21.20
Dividend yield 1.81 1.48 1.80 1.41 1.80
Page 23
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost been determined based on the fair value at
the grant date consistent with the provisions of this statement, the Company's
pro forma net earnings and earnings per share would have been as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings:
As reported $ 404 $ 801 $ 797
Pro forma 375 914 782
Basic earnings per share:
As reported 0.96 1.91 1.89
Pro forma 0.89 2.16 1.85
Diluted earnings per share:
As reported 0.95 1.90 1.88
Pro forma 0.89 2.14 1.85
The 1999 pro forma income of $375 resulted from net income of $404, less the
1999 pro forma after-tax compensation expense of $67 ($49 of which related to an
adjustment for the acceleration of unamortized compensation expense for the
stock options granted prior to 1999 which vested in connection with the Merger)
and the elimination of net merger-related after-tax stock option charges of $38
included with as reported net earnings. The 1998 pro forma net income of $914
resulted from reported net income of $801, less the 1998 pro forma after-tax
compensation expense of $19 and the elimination of the merger-related after-tax
stock option charge of $132 included with as reported net earnings. The pro
forma effect on net earnings is not representative of the pro forma effect on
net earnings in future years.
Former ASC Plans
The following ASC Plans were terminated in connection with the Merger on June
23, 1999.
Performance Incentive Program The 1998 Performance Incentive Program provided
certain of the ASC key executives an incentive award of shares of two-year
restricted stock if certain ASC performance objectives were attained for the
1998 fiscal year. Employee Stock Purchase Plan The ASC Employee Stock Purchase
Plan, which began January 1, 1996, enabled eligible employees of the Company to
subscribe for shares of common stock on quarterly offering dates at a purchase
price which was the lesser of 85% of the fair market value of the shares on the
first day or the last day of the quarterly offering period.
Employee Benefit Plans
Substantially all employees working over 20 hours per week are covered by
retirement plans. Union employees participate in multi-employer retirement plans
under collective bargaining agreements. The Company sponsors both defined
benefit and defined contribution plans.
The Albertson's Salaried Employees Pension Plan and Albertson's Employees
Corporate Pension Plan are funded, qualified, defined benefit, noncontributory
plans for eligible Albertson's employees who are 21 years of age with one or
more years of service and (with certain exceptions) are not covered by
collective bargaining agreements. Benefits paid to retirees are based upon age
at retirement, years of credited service and average compensation. The Company's
funding policy for these plans is to contribute the larger of the amount
required to fully fund the Plan's current liability or the amount necessary to
meet the funding requirements as defined by the Internal Revenue Code.
The Company also sponsors the Albertson's Savings and Retirement Estates
(ASRE) Plan (formerly the American Stores Retirement Estates Plan) which is a
defined contribution retirement plan. ASRE was originally authorized by the ASC
Board of Directors for the purpose of providing retirement benefits for
employees of ASC and its subsidiaries. During 1999, ASRE was authorized by
Albertson's Board of Directors to provide retirement benefits for all qualified
employees of the Company and its subsidiaries. In conjunction with the
authorization of ASRE, the Company-sponsored defined benefit plans were amended
to close the plans to future new entrants. Future accruals for participants in
the defined benefit plans are offset by the value of Company profit sharing
contributions to the new defined contribution plan.
Page 24
The Company sponsors a tax-deferred savings plan which is a salary deferral
plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers
employees meeting age and service eligibility requirements, except those
represented by a labor union, unless the collective bargaining agreement
provides for participation. In addition, the Company provides a matching
contribution based on the amount of eligible compensation contributed by the
employee.
All Company contributions to ASRE and the Company sponsored 401(k) plan are
made at the discretion of the Board of Directors. The total amount contributed
by the Company is included with the ASRE defined contribution plan expense.
The Company also sponsors an unfunded Executive Pension Makeup Plan and an
Executive ASRE Makeup Plan. These plans are nonqualified and provide certain key
employees retirement benefits which supplement those provided by the Company's
other retirement plans.
Net periodic benefit cost for defined benefit plans is determined using
assumptions as of the beginning of each year. The projected benefit obligation
and related funded status is determined using assumptions as of the end of each
year. Assumptions used at the end of each year for the Company-sponsored defined
benefit pension plans were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average discount rate 7.50% 6.25% 6.60%
Annual salary increases 4.35-4.50 4.50-4.95 4.50-5.00
Expected long-term rate of return on assets 9.50 9.50 9.50
Net periodic benefit cost for Company-sponsored defined benefit pension plans
was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 45 $ 42 $ 27
Interest cost on projected benefit obligations 34 30 23
Expected return on assets (49) (42) (34)
Amortization of prior service cost 1 1
Recognized net actuarial loss 1 2
- ------------------------------------------------------------------------------------------------------------------------------------
$ 31 $ 33 $ 17
- ------------------------------------------------------------------------------------------------------------------------------------
Page 25
The following table sets forth the funded status of the Company-sponsored
defined benefit pension plans:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Change in projected benefit obligation:
Beginning of year benefit obligation $ 547 $ 412
Service cost 45 42
Interest cost 34 30
Actuarial (gain) loss (105) 72
Amendments (88)
Benefits paid (10) (9)
- ------------------------------------------------------------------------------------------------------------------------------------
End of year benefit obligation 423 547
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year 549 414
Actual return on plan assets 89 96
Employer contributions (return) (46) 48
Benefit payments (10) (9)
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value at end of year 582 549
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status 159 2
Unrecognized net (gain) loss (100) 46
Unrecognized prior service cost (85) 4
Additional minimum liability (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (accrued) prepaid pension cost $ (26) $ 48
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost included with other assets $ 8 $ 64
Accrued pension cost included with other long-term liabilities (34) (16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (accrued) prepaid pension cost $ (26) $ 48
- ------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the projected benefit obligation and the
accumulated benefit obligation of the unfunded Executive Pension Makeup Plan:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 15 $ 19
Accumulated benefit obligation 13 16
Assets of the two funded Company defined benefit pension plans are invested
in directed trusts. Assets in the directed trusts are invested in common stocks
(including $33 and $68 of the Company's common stock at February 3, 2000 and
January 28, 1999, respectively), U.S. government obligations, corporate bonds,
international equity funds, real estate and money market funds.
Page 26
The Company also contributes to various plans under industrywide collective
bargaining agreements, primarily for defined benefit pension plans. Total
contributions to these plans were $98 for 1999, $100 for 1998, and $94 for 1997.
Retirement plans expense was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Defined benefit pension plans $ 31 $ 33 $ 17
ASRE defined contribution plan 110 93 93
Multi-employer plans 98 100 94
- ------------------------------------------------------------------------------------------------------------------------------------
$ 239 $ 226 $ 204
- ------------------------------------------------------------------------------------------------------------------------------------
Most retired employees of the Company are eligible to remain in its health
and life insurance plans. Retirees who elect to remain in the
Albertson's-sponsored plans are charged a premium which is equal to the
difference between the estimated costs of the benefits for the retiree group and
a fixed contribution amount made by the Company. The Company also provides
certain health care benefits to eligible ASC retirees of certain defined
employee groups under two unfunded plans, a defined dollar and a full coverage
plan. The net periodic postretirement benefit cost was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 3 $ 3 $ 2
Interest cost 4 5 5
Amortization of unrecognized gain (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 6 $ 7 $ 7
- ------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status of the Company-sponsored
postretirement health and life insurance benefit plans:
- ------------------------------------------------------------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Change in accumulated benefit obligation:
Beginning of year benefit obligation $ 69 $ 71
Service cost 3 3
Interest cost 4 5
Plan participants' contributions 2 2
Actuarial gain (12) (6)
Benefits paid (4) (6)
- ------------------------------------------------------------------------------------------------------------------------------------
End of year benefit obligation 62 69
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets activity:
Employer contributions 2 4
Plan participants' contributions 2 2
Benefit payments (4) (6)
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status (62) (69)
Unrecognized net gain (21) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligations included with other
long-term liabilities $ (83) $ (84)
- ------------------------------------------------------------------------------------------------------------------------------------
Discount rates as of end of year 7.5% 6.25-7.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Page 27
For measurement purposes, a 7% annual rate of increase in the per capita cost
of covered health care benefits was assumed for plans covering ASC retirees for
1999. For the full coverage plan, the rate was assumed to decrease to 6% for
2000 and remain at that level thereafter. For the ASC defined dollar plan, no
future increases in the subsidy level were assumed. Annual rates of increases in
health care costs are not applicable in the calculation of the Albertson's
benefit obligation because Albertson's contribution is a fixed amount per
participant.
With the exception of the plans covering ASC grandfathered retirees, all
postretirement 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.
Since the subsidy levels for the Albertson's and the ASC defined dollar plans
are fixed and the proportion of grandfathered ASC retirees is small, a health
care cost trend increase or decrease has no material impact on the accumulated
postretirement benefit obligation or the postretirement benefit expense.
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" requires employers to recognize an obligation for
benefits provided to former or inactive employees after employment but before
retirement. The Company is self-insured for certain of its employees' short-term
and long-term disability plans which are the primary benefits paid to inactive
employees prior to retirement. Following is a summary of the obligation for
postemployment benefits included in the Company's Consolidated Balance Sheets:
- --------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- --------------------------------------------------------------------------------
Included with salaries and related liabilities $ 11 $ 7
Included with other long-term liabilities 53 64
- --------------------------------------------------------------------------------
$ 64 $ 71
- --------------------------------------------------------------------------------
The Company also contributes to various plans under industrywide collective
bargaining agreements which provide for health care benefits to both active
employees and retirees. Total contributions to these plans were $316 for 1999,
$270 for 1998, and $288 for 1997.
Employment Contracts
During 1994 and 1995 ASC entered into Key Executive Agreements with 17 of ASC's
key executive officers. Each agreement contained certain terms of employment and
provided the officers with a special long-range payout. Under change of control
provisions activated by the Merger, the executives became fully vested in the
benefits which have been fully accrued for as part of the severance costs as
discussed in the Merger, Divestitures and Related Costs Note.
Leases
The Company leases a portion of its real estate. The typical lease period is
20 to 30 years and most leases contain renewal options. Exercise of such options
is dependent on the level of business conducted at the location. In addition,
the Company leases certain equipment. Some leases contain contingent rental
provisions based on sales volume at retail stores or miles traveled for trucks.
Capitalized leases are calculated using interest rates appropriate at the
inception of each lease. Following is an analysis of the Company's assets under
capitalized leases:
- ------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- ------------------------------------------------------------------------------
Real estate and equipment $ 328 $ 350
Accumulated amortization (160) (170)
- ------------------------------------------------------------------------------
$ 168 $ 180
- ------------------------------------------------------------------------------
Page 28
Future minimum lease payments for noncancelable operating leases which
exclude the amortization of acquisition-related fair value adjustments, related
subleases and capital leases at February 3, 2000, were as follows:
- ------------------------------------------------------------------------------------------
Operating Capital
Leases Subleases Leases
- ------------------------------------------------------------------------------------------
2000 $ 307 $ (60) $ 42
2001 292 (66) 39
2002 272 (61) 30
2003 254 (36) 28
2004 243 (17) 27
Remainder 2,059 (122) 295
- ------------------------------------------------------------------------------------------
Total minimum obligations (receivables) $ 3,427 $ (362) 461
- ------------------------------------------------------------------------------------------
Interest (255)
- ------------------------------------------------------------------------------------------
Present value of net minimum obligations 206
Current portion (19)
- ------------------------------------------------------------------------------------------
Long-term obligations at February 3, 2000 $ 187
- ------------------------------------------------------------------------------------------
The Company is contingently liable as a guarantor of certain leases that were
assigned to third parties in connection with various store closures and
dispositions. The Company believes the likelihood of a significant loss from
these agreements is remote because of the wide dispersion among third parties
and remedies available to the Company should the primary party fail to perform
under the agreements.
Rent expense under operating leases, excluding the amortization of
acquisition-related fair value adjustments of $14 in 1999, 1998 and 1997, was as
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Minimum rent $ 330 $ 309 $ 288
Contingent rent 29 25 26
- --------------------------------------------------------------------------------
359 334 314
Sublease rent (58) (60) (48)
- --------------------------------------------------------------------------------
$ 301 $ 274 $ 266
- --------------------------------------------------------------------------------
Financial Instruments
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash equivalents and receivables. The Company
limits the amount of credit exposure to each individual financial institution
and places its temporary cash into investments of high credit quality.
Concentrations of credit risk with respect to receivables are limited due to
their dispersion across various companies and geographies.
The estimated fair values of cash and cash equivalents, accounts receivable,
accounts payable, short-term debt and commercial paper borrowings approximate
their carrying amounts. Substantially all of the fair values were estimated
using quoted market prices. The estimated fair values and carrying amounts of
outstanding debt (excluding commercial paper) were as follows:
- --------------------------------------------------------------------------------
February 3, January 28,
2000 1999
- --------------------------------------------------------------------------------
Fair value $ 3,718 $ 3,956
Carrying amount 3,800 3,628
Page 29
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and ground water contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). The Company conducts
an ongoing program for the inspection and evaluation of new sites proposed to be
acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition of the Company. Charges
against earnings for environmental remediation were not material in 1999, 1998
or 1997.
Legal Proceedings
An agreement in principle has been reached to settle eight purported multi-state
cases combined in the United States District Court in Boise, Idaho, which raise
various issues including "off the clock" work allegations. The proposed
settlement is subject to court approval. Under the proposed settlement
agreement, current and former employees who met eligibility criteria may present
their claims to a settlement administrator. While the Company cannot specify the
exact number of individuals who are likely to submit claims and the exact amount
of their claims, the $37 pre-tax ($22 after tax) one-time charge recorded by the
Company in 1999 is the Company's current estimate of the total monetary
liability, including attorney fees, for all eight cases.
The Company is also involved in routine litigation incidental to operations.
The Company utilizes various methods of alternative dispute resolution,
including settlement discussions, to manage the costs and uncertainties inherent
in the litigation process. In the opinion of management, the ultimate resolution
of these legal proceedings will not have a material adverse effect on the
Company's financial condition.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has analyzed the reporting requirements of the
new standard and has determined that its operations are within a single
operating segment.
Recent Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact on the Company's accounting and reporting requirements.
Page 30
Responsibility for Financial Reporting
The management of Albertson's, Inc., is responsible for the preparation and
integrity of the consolidated financial statements of the Company. The
accompanying consolidated financial statements have been prepared by the
management of the Company, in accordance with accounting principles generally
accepted in the United States of America, using management's best estimates and
judgment where necessary. Financial information appearing throughout this Annual
Report is consistent with that in the consolidated financial statements.
To help fulfill its responsibility, management maintains a system of internal
controls designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use and that transactions are executed in
accordance with management's authorizations and are reflected accurately in the
Company's records. The concept of reasonable assurance is based on the
recognition that the cost of maintaining a system of internal accounting
controls should not exceed benefits expected to be derived from the system. The
Company believes that its long-standing emphasis on the highest standards of
conduct and ethics, set forth in comprehensive written policies, serves to
reinforce its system of internal controls.
Deloitte & Touche LLP, independent auditors, audited the consolidated
financial statements in accordance with auditing standards generally accepted in
the United States of America to independently assess the fair presentation of
the Company's financial position, results of operations and cash flows.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, oversees the fulfillment by management of its responsibilities over
financial controls and the preparation of financial statements. The Audit
Committee meets with internal and external auditors four times per year to
review audit plans and audit results. This provides internal and external
auditors direct access to the Board of Directors.
Management recognizes its responsibility to conduct the business of
Albertson's, Inc., in accordance with high ethical standards. This
responsibility is reflected in key policy statements that, among other things,
address potentially conflicting outside business interests of Company employees
and specify proper conduct of business activities. Ongoing communications and
review programs are designed to help ensure compliance with these policies.
/s/ Gary G. Michael /s/ A. Craig Olson
------------------------- ----------------------------
Gary G. Michael A. Craig Olson
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Page 31
Independent Auditors' Report
The Board of Directors and Stockholders of Albertson's, Inc.:
We have audited the accompanying consolidated balance sheets of Albertson's,
Inc., and subsidiaries as of February 3, 2000 and January 28, 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended February 3, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
merger of Albertson's, Inc. and American Stores Company, which has been
accounted for as a pooling of interests as described in the Basis of
Presentation Note to the consolidated financial statements. We did not audit the
balance sheet of American Stores Company as of January 28, 1999, or the related
statements of earnings, stockholders' equity, and cash flows for each of the two
years in the period ended January 28, 1999, which statements reflect total
assets of approximately $8.9 billion as of January 28, 1999, and net earnings of
approximately $234 million and $280 million for the years ended January 28, 1999
and January 29, 1998, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for American Stores Company for 1998 and 1997,
is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Albertson's, Inc., and subsidiaries
at February 3, 2000 and January 28, 1999, and the results of their operations
and their cash flows for each of the three years in the period ended February 3,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Boise, Idaho
March 24, 2000
Page 32
Independent Auditors' Report
Shareholders and Board of Directors of American Stores Company
We have audited the accompanying consolidated balance sheet of American Stores
Company and subsidiaries as of January 30, 1999 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the years ended
January 30, 1999 and January 31, 1998 (not presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the consolidated results of
their operations and their cash flows for the years ended January 30, 1999 and
January 31, 1998 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Salt Lake City, Utah
March 17, 1999
Page 33
Five-Year Summary of Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except 53 weeks 52 weeks 52 weeks 52 weeks 52 weeks
per share data) February 3, January 28, January 29, January 30, February 1,
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results:
Sales $ 37,478 $ 35,872 $ 33,828 $ 32,455 $ 30,894
Earnings before extraordinary item 427 801 797 781 782
Extraordinary item (23)
Net earnings 404 801 797 781 782
Net earnings as a percent to sales 1.08% 2.23% 2.36% 2.41% 2.53%
Common Stock Data:
Earnings per share before extraordinary item:
Basic $ 1.01 $ 1.91 $ 1.89 $ 1.79 $ 1.78
Diluted 1.00 1.90 1.88 1.79 1.78
Extraordinary item:
Basic (0.05)
Diluted (0.05)
Earnings per share:
Basic 0.96 1.91 1.89 1.79 1.78
Diluted 0.95 1.90 1.88 1.79 1.78
Cash dividends per share:
Albertson's, Inc. 0.72 0.68 0.64 0.60 0.52
American Stores Company Equivalent 0.14 0.57 0.56 0.51 0.44
Financial Position:
Total assets $ 15,701 $ 15,131 $ 13,767 $ 12,608 $ 11,511
Long-term debt and capitalized
lease obligations 4,992 5,108 4,333 3,665 2,837
Other Year End Statistics:
Number of stores 2,492 2,564 2,435 2,355 2,261
All fiscal years consist of 52 weeks, except for 1999 which is a 53-week
year, and fiscal 1995 which included 52 weeks of operations for Albertson's and
53 weeks of operations for ASC.
1999 operating results included pre-tax merger-related costs of $683 ($529
after tax or $1.25 per share), and a pre-tax charge of $37 ($22 after tax or
$0.05 per share) for a litigation settlement. Merger-related costs included
severance, the write-down of assets to net realizable value, transaction and
financing costs, integration costs and stock option charges.
During 1999 American Stores Company paid only one quarterly dividend due to
the consummation of the Merger.
1998 operating results included a pre-tax merger-related stock option charge
of $195 ($132 after tax or $0.31 per share) related to the exercisability of 6
million equivalent limited stock appreciation rights due to the approval by
ASC's stockholders of the Merger Agreement and a $24 pre-tax charge ($16 after
tax or $0.04 per share) related to management's decision to close 16
underperforming stores.
1997 operating results included pre-tax charges of $34 related to the sale of
stock by a major stockholder and pre-tax charges of $13 related to the sale of a
division of ASC's communications subsidiary (total of $41 after tax or $0.10 per
share).
1996 operating results included pre-tax charges of $100 ($60 after tax or
$0.14 per share) primarily related to ASC's re-engineering activities.
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Quarterly Financial Data
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(Dollars in millions,
except per share data - unaudited) First Second Third Fourth Year
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1999
Sales $ 9,215 $ 9,381 $ 8,983 $ 9,899 $ 37,478
Gross profit 2,503 2,555 2,465 2,791 10,314
Operating profit (loss) 473 (75) 301 541 1,240
Net earnings (loss) 238 (228) 130 264 404
Earnings (loss) per share:
Basic 0.57 (0.54) 0.31 0.62 0.96
Diluted 0.56 (0.54) 0.31 0.62 0.95
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1998
Sales $ 8,721 $ 8,945 $ 8,838 $ 9,368 $ 35,872
Gross profit 2,298 2,395 2,412 2,611 9,716
Operating profit 365 443 448 395 1,651
Net earnings 176 217 219 189 801
Earnings per share:
Basic 0.42 0.52 0.52 0.45 1.91
Diluted 0.42 0.52 0.52 0.45 1.90
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During 1999 all four quarters` operating results were affected by pre-tax
merger-related costs totaling $683 ($529 after tax). Merger-related costs
included severance, the write-down of assets to net realizable value,
transaction and financing costs, integration costs and stock option charges. The
third quarter included a pre-tax one-time charge of $37 ($22 after tax) for a
litigation settlement. The following table reflects the net earnings (loss) and
earnings per share (EPS) effect of these items.
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First Second Third Fourth Annual
Net EPS Net EPS Net EPS Net EPS Net EPS
Earnings Effect Loss Effect Loss Effect Loss Effect Loss Effect
- ------------------------------------------------------------------------------------------------------------------------------------
Merger-
related costs $ 15 $ 0.03 $ (464) $ (1.10) $ (34) $ (0.08) $ (46) $ (0.11) $ (529) $ (1.25)
Litigation
settlement (22) (0.05) (22) (0.05)
Fourth quarter 1998 operating results included a pre-tax merger-related stock
option charge of $195 ($132 after tax or $0.31 per share) related to the
exercisability of 6 million equivalent limited stock appreciation rights due to
the approval by ASC's stockholders of the Merger Agreement. A $24 pre-tax charge
($16 after tax or $0.04 per share) was recorded in fiscal 1998 related to
management's decision to close 16 underperforming stores. An initial pre-tax
charge of $29 ($18 after tax or $0.04 per share) was recorded in the first
quarter and a pre-tax adjustment of $5 ($3 after tax or $0.01 per share) of
income was recorded in the fourth quarter.
The Company estimates the quarterly LIFO reserves, which cannot be accurately
determined until year end. The LIFO method of valuing inventories (decreased)
increased net earnings and EPS as follows:
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(Dollars in thousands
except per share data -Unaudited) First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Net earnings $ (5,400) $ (5,400) $ (5,400) $ (1,772) $ (17,972)
Basic and diluted EPS (0.01) (0.01) (0.01) (0.01) (0.04)
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1998
Net earnings $ (7,846) $ (4,935) $ (6,159) $ 9,185 $ (9,755)
Basic and diluted EPS (0.02) (0.01) (0.01) 0.02 (0.02)
Due to rounding and different periods used to compute weighted average
outstanding shares, the sum of the quarterly EPS does not equal the annual EPS.
Page 35
Company Stock Information
The Company's stock is traded on the New York and Pacific stock exchanges under
the symbol ABS. The high and low stock prices by quarter were as follows:
First Second Third Fourth Year
High Low High Low High Low High Low High Low
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1999 61 15/16 49 1/16 56 15/16 48 9/16 52 1/4 37 38 5/16 29 61 15/16 29
1998 54 15/16 46 5/16 53 11/16 44 58 1/8 44 1/2 67 1/8 53 3/8 67 1/8 44
1997 37 30 1/2 38 11/16 31 7/8 37 3/4 32 3/4 48 5/8 36 5/16 48 5/8 30 1/2
Cash dividends declared per share were:
First Second Third Fourth Year
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1999 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.72
1998 0.17 0.17 0.17 0.17 0.68
1997 0.16 0.16 0.16 0.16 0.64
In March 2000 the Board of Directors increased the regular quarterly cash
dividend 5.6% to $0.19 per share from $0.18 per share, for an annual rate of
$0.76 per share. The new quarterly rate will be paid on May 10, 2000, to
stockholders of record on April 14, 2000.
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