Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(dollars in millions, except per share data)
Business Combinations
On June 23, 1999, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") consummated a merger with the issuance of 177
million shares of Albertson's common stock (the "Merger"). 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:
Albertson's ASC Combined
Net revenues $ 16,005 $ 19,867 $ 35,872
Net earnings 567 234 801
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, under which the Company was required to divest 145 stores to enable
the Merger to proceed under applicable antitrust, competition and trade
regulation law. The divested stores had sales of $2,300 in fiscal 1998.
Subsequent growth comparisons were 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.
1 Albertson's, Inc.
Results of Operations
Sales for 2000 were $36,762 compared to $37,478 in 1999 (a 53-week year) and
$35,872 in 1998. 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
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999
vs. 1999 vs. 1998
- ------------------------------------------------------------------------------------------------------------------------
Sales 100.00 100.00 100.00 (1.9) 4.5
Gross profit 28.36 27.52 27.08 1.1 6.2
Selling, general and administrative expenses 23.77 23.06 21.87 1.1 10.1
Merger-related and exit costs 0.07 1.06 0.54 n.m. n.m.
Litigation settlement 0.10 n.m. n.m.
Impairment - store closures 0.07 n.m.
Operating profit 4.52 3.31 4.60 34.0 (24.9)
Interest expense, net 1.05 0.94 0.94 9.2 4.6
Earnings before income taxes and
extraordinary item 3.46 2.40 3.73 41.6 (32.8)
Net earnings 2.08 1.08 2.23 89.2 (49.5)
n.m. - not meaningful
Sales for 2000 increased 3.8% 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 2000 the Company opened
or acquired 91 stores, remodeled 114 stores and closed or sold 71 stores. Net
retail square footage increased by 2.5% during 2000. During 1999, net retail
square footage decreased by 1.7%. The 1999 decrease includes the effect of
required divestitures, which reduced square footage by 6.1 million square feet
or 6.2% from 1998. Identical store sales, stores that have been in operation for
two full fiscal years, increased 0.3% in 2000 and 1.7% in 1999. Comparable store
sales, which include replacement stores, increased 0.6% in 2000 and 2.1% in
1999. Identical and comparable store sales continued to increase through higher
average ticket sales per customer. Management estimates that there was overall
deflation in products the Company sells of approximately 0.4% in 2000, overall
inflation of 0.2% in 1999 and overall deflation of 0.1% in 1998.
In addition to store development, the Company has increased sales through
its continued implementation of best practices across the Company and its
investment in programs designed to provide solutions to customer needs. These
programs include the Front End Manager program; the "Quick Fixin' Ideas" home
meal solutions process; 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
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, increased gross margin by $23 (0.06%) in 2000 and reduced gross margin by
$30 (0.08%) in 1999 and $16 (0.04%) in 1998. The increase in 2000 is due to
deflation and lower inventory levels.
Selling, general and administrative expenses as a percent to sales
increased in 2000, 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 larger
losses from asset impairment and disposition. The increase in 1999 over 1998 was
primarily due to integration costs associated with the Merger, including
activities associated with the banner change in California, Nevada and New
Mexico.
2 Albertson's, Inc.
Results of operations for year ended February 1, 2001, include $151 of
merger-related costs ($93 after tax) and the results of operations for year
ended February 3, 2000, included $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 Sheets:
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
Severance costs 11 7 18
Write-down of assets to net realizable value 13 23 36
Integration costs 97 97
- ---------------------------------------------------------------------------------------------------------------------
Total costs 24 127 151
Cash expenditures (30) (2) (107) (139)
Write-down of assets to net realizable value (13) (19) (32)
- ---------------------------------------------------------------------------------------------------------------------
Merger-related accruals at February 1, 2001 $ 7 $ 1 $ 5 $ 13
=====================================================================================================================
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. Total
merger-related terminations were 663 employees as of February 1, 2001, and no
further terminations are expected under this plan.
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. These include such costs as advertising,
labor associated with systems conversions and training and relocation costs.
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.
3 Albertson's, Inc.
In the first quarter of 1999, a market price adjustment of $29 was recorded
as a reduction of pre-tax 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 pre-tax 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.
The Company recorded a $20 pre-tax one-time charge to earnings during first
quarter of 2000 and included it in selling, general and administrative expenses
to reflect liabilities related to certain previously assigned leases and
subleases to tenants who are in bankruptcy.
The Company recorded a $37 pre-tax one-time charge to earnings during the
third quarter of 1999 resulting from an agreement reached to settle eight
multi-state cases combined in the United States District Court in Boise, Idaho,
which raised various issues including "off-the-clock" work allegations. Under
the 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.
The Company's effective income tax rate from continuing operations for 2000
was 40.0%, as compared to 52.5% for 1999 and 40.2% for 1998. 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:
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
February 1, 2001 February 3, 2000 January 28, 1999
- -------------------------------------------------------------------------------------------------------------------------
As Reported One-Time W/O One-Time W/O One-Time W/O One-Time
- -------------------------------------------------------------------------------------------------------------------------
Sales $36,762 $36,762 100.00% $37,478 100.00% $35,872 100.00%
Cost of sales 26,336 $ (37) 26,299 71.54 27,122 72.37 26,156 72.92
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 10,426 37 10,463 28.46 10,356 27.63 9,716 27.08
Selling, general and
administrative
expenses 8,740 (110) 8,630 23.47 8,427 22.49 7,845 21.87
Merger-related
and exit costs 24 (24)
- -------------------------------------------------------------------------------------------------------------------------
Operating profit 1,662 171 1,833 4.99 1,929 5.15 1,871 5.22
Interest expense, net (385) (385) (1.05) (352) (0.94) (337) (0.94)
Other (expense) income,
net (3) (3) (0.01) 12 0.03 24 0.07
- -------------------------------------------------------------------------------------------------------------------------
Earnings before
income taxes 1,274 171 1,445 3.93 1,589 4.24 1,558 4.34
Income taxes 509 66 575 1.56 634 1.69 609 1.70
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 765 $ 105 $ 870 2.37% $ 955 2.55% $ 949 2.65%
=========================================================================================================================
4 Albertson's, Inc.
The costs of integrating the two companies have resulted in significant
non-recurring charges and incremental expenses. These costs had a significant
effect on both 2000 and 1999 results of operations of the Company. Non-recurring
charges and expenses of implementing integration actions were originally
estimated to total $700 after income tax benefits. On an after-tax basis, and
subsequent to the first quarter 1999, the Company has incurred $638 of
merger-related costs and does not expect to exceed its original estimate.
Liquidity and Capital Resources
Cash provided by operating activities during 2000 was $1,780, compared to $1,418
in 1999 and $1,441 in 1998. Cash provided by operating activities in fiscal 2000
was primarily impacted by higher earnings when compared to fiscal 1999. Also,
driving the change is the decrease in inventories offset by the decrease in
other current liabilities, mostly tax related. 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. During
2000 the Company implemented several initiatives designed to enhance working
capital, which include reducing inventory levels and increasing accounts payable
leverage. The Company intends to continue these initiatives, which are expected
to reduce the cash requirements of the business.
The Company's financing activities for 2000 included net new borrowings of
$340 and dividend payments of $315 (which represents 36.3% of 2000 net earnings
without merger-related costs and one-time expenses). The Company also purchased
and retired 18.7 million shares of its common stock at a total cost of $451. The
Board of Directors at its March 2001 meeting maintained the regular quarterly
cash dividend of $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 $1,128
of commercial paper borrowings outstanding at February 1, 2001, as compared to
$1,628 outstanding as of February 3, 2000.
In support of the Company's commercial paper program, the Company had two
credit facilities totaling $1,900 during fiscal 2000. One agreement for $950
expired in March 2001 and was replaced by a $700 364-day credit agreement. A
second agreement for $950 expires in March 2005. 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 executed a
$200 forward underwriting agreement in December 2000 to support the commercial
paper program. This agreement expired in March 2001. The Company also has an
uncommitted bank line of credit totaling $25. The entire amount under the bank
line was outstanding as of February 1, 2001. No borrowings were outstanding
under the credit facilities (including the forward underwriting agreement) as of
February 1, 2001, and 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.
Albertson's filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective in February 2001 (the "2001
Registration Statement"), to authorize the issuance of up to $3,000 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes, including the potential purchase of outstanding shares of
Albertson's common stock.
5 Albertson's, Inc.
Albertson's filed a shelf registration statement with the SEC, which became
effective in February 1999 (the "1999 Registration Statement"), to authorize
issuance of up to $2,500 in debt securities.
In January 2001 the Company issued $700 of term notes under the 1999
Registration Statement. The notes consist of $700 of principal bearing interest
at 7.5% due February 15, 2011. Proceeds were used primarily to repay borrowings
under the Company's commercial paper program.
In May 2000 the Company issued $500 of term notes under the 1999
Registration Statement. The notes are composed of $275 of principal bearing
interest at 8.35% due May 1, 2010, and $225 of principal bearing interest at
8.7% due May 1, 2030. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program.
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.
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. Proceeds from
this issuance 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 Board of Directors adopted a program on April 25, 2000, authorizing,
but not requiring, the Company to purchase and retire up to $500 of the
Company's common stock. This program was increased by an additional $1,000 by
the Board of Directors on December 6, 2000, for a total of $1,500. The revised
program enables the Company to purchase stock from April 25, 2000, through
December 6, 2001. During fiscal 2000 the Company purchased and retired 18.7
million shares at a total cost of $451 or an average price of $24.15 per share.
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:
February 1, February 3,
2001 2000
- -----------------------------------------------------------------------------------------------------
Long-term debt and capitalized lease obligations to capital (1) 51.1% 46.7%
Long-term debt and capitalized lease obligations to total assets 37.0 31.7
(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 1, 2001, the Company held title to the land and buildings of 40% 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.
6 Albertson's, Inc.
The Company is committed to keeping its stores up to date. In the last
three years, the Company has opened or remodeled 727 stores representing 32% of
the Company's retail square footage as of February 1, 2001. 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:
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
New and acquired stores $1,066 $1,126 $1,146
Remodels 423 296 299
Retail replacement equipment, technology and other 170 248 289
Distribution facilities and equipment 174 198 139
- ----------------------------------------------------------------------------------------------------------
Total capital expenditures 1,833 1,868 1,873
Estimated fair value of property financed by operating leases 99 230 224
- ----------------------------------------------------------------------------------------------------------
$1,932 $2,098 $2,097
==========================================================================================================
The Company's strong financial position provides the flexibility for the
Company to grow through its store development program and future acquisitions.
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," which is effective for all fiscal years
beginning after June 15, 2000. This new standard as amended 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. The Company will adopt SFAS No. 133 effective February 2, 2001.
The Company has completed its evaluation of this standard and its impact on the
Company's accounting and reporting requirements and management does not expect
the adoption of this statement to have a significant impact on the financial
position, results of operations or cash flows of the Company.
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 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.
7 Albertson's, Inc.
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:
There- Fair
2001 2002 2003 2004 2005 after Total Value
- --------------------------------------------------------------------------------------------------------------
Debt obligations
(excluding commercial
paper and bank line):
Fixed rate $ 62 $ 104 $ 104 $ 504 $ 203 $3,647 $4,624 $4,470
Weighted average
interest rate 6.6% 10.4% 7.3% 6.6% 7.4% 7.5% 7.4%
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and groundwater 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 2000, 1999
or 1998.
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
operations of acquired or merged companies, 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 using 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 cost and stability of power
sources, the Company's ability to recruit and develop employees, 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 acquired or merged companies.
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.
8 Albertson's, Inc.
CONSOLIDATED EARNINGS
52 weeks 53 weeks 52 weeks
February 1, February 3, January 28,
(in millions, except per share data) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Sales $36,762 $37,478 $35,872
Cost of sales 26,336 27,164 26,156
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 10,426 10,314 9,716
Selling, general and administrative expenses 8,740 8,641 7,846
Merger-related and exit costs 24 396 195
Litigation settlement 37
Impairment - store closures 24
- ----------------------------------------------------------------------------------------------------------------------------
Operating profit 1,662 1,240 1,651
Other (expense) income:
Interest, net (385) (353) (337)
Other, net (3) 12 24
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item 1,274 899 1,338
Income taxes 509 472 537
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 765 427 801
Extraordinary loss on extinguishment of debt, net of tax benefit of $7 (23)
- ----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 765 $ 404 $ 801
============================================================================================================================
Basic Earnings Per Share:
Earnings before extraordinary item $ 1.83 $ 1.01 $ 1.91
Extraordinary item (.05)
- ----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.83 $ 0.96 $ 1.91
============================================================================================================================
Diluted Earnings Per Share:
Earnings before extraordinary item $ 1.83 $ 1.00 $ 1.90
Extraordinary item (.05)
- ----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.83 $ 0.95 $ 1.90
============================================================================================================================
Weighted Average Common Shares Outstanding:
Basic 418 422 419
Diluted 418 423 422
See Notes to Consolidated Financial Statements
9 Albertson's, Inc.
CONSOLIDATED BALANCE SHEETS
February 1, February 3,
(in millions, except per share data) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 57 $ 245
Accounts and notes receivable, net 547 581
Inventories 3,364 3,481
Prepaid expenses 155 155
Property held for sale 71 100
Refundable income taxes 36
Deferred income taxes 70 29
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 4,300 4,591
Land, Buildings and Equipment, net 9,622 8,911
Goodwill and Intangibles, net 1,705 1,761
Other Assets 451 456
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $16,078 $15,719
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,163 $ 2,176
Salaries and related liabilities 561 555
Taxes other than income taxes 141 172
Income taxes 82
Self-insurance 218 187
Unearned income 112 110
Merger-related reserves 13 33
Current portion of capitalized lease obligations 20 19
Current maturities of long-term debt 62 620
Other 105 115
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 3,395 4,069
Long-Term Debt 5,715 4,803
Capitalized Lease Obligations 227 187
Self-Insurance 216 222
Deferred Income Taxes 116 52
Other Long-Term Liabilities and Deferred Credits 715 684
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 - 405 shares and 424 shares, respectively 405 424
Capital in excess of par 48 145
Retained earnings 5,241 5,133
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 5,694 5,702
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $16,078 $15,719
=====================================================================================================================
See Notes to Consolidated Financial Statements
10 Albertson's, Inc.
CONSOLIDATED CASH FLOWS
52 weeks 53 weeks 52 weeks
February 1, February 3, January 28,
(in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 765 $ 404 $ 801
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 944 853 803
Goodwill amortization 57 58 58
Noncash merger-related charges 21 272 195
Impairment - store closures 24
Net gain on asset sales (4) (2) (14)
Net deferred income taxes 11 (53) (72)
Decrease (increase) in cash surrender value of Company-owned life insurance 4 (12) (23)
Changes in operating assets and liabilities, net of business acquisitions:
Receivables and prepaid expenses (4) 46 (86)
Inventories 118 (233) (156)
Accounts payable (12) (9) 7
Other current liabilities (175) 108 54
Self-insurance 25 (79) (134)
Unearned income 19 76 (16)
Other long-term liabilities 11 (11)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,780 1,418 1,441
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (1,771) (1,837) (1,627)
Proceeds from disposal of land, buildings and equipment 189 83 162
Proceeds from divestitures and duplicate assets 393
Business acquisitions, net of cash acquired (260)
Decrease (increase) in other assets 33 (122) (90)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,549) (1,483) (1,815)
- --------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 1,232 1,841 462
Payments on long-term borrowings (417) (970) (213)
Net commercial paper activity and bank borrowings (475) (430) 300
Proceeds from stock options exercised 7 32 66
Cash dividends paid (315) (265) (263)
Tax payments for options exercised (14)
Stock purchases and retirements (451) (18)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (419) 194 334
- --------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (188) 129 (40)
==========================================================================================================================
Cash and Cash Equivalents at Beginning of Year 245 116 156
==========================================================================================================================
Cash and Cash Equivalents at End of Year $ 57 $ 245 $ 116
==========================================================================================================================
See Notes to Consolidated Financial Statements
11 Albertson's, Inc.
CONSOLIDATED STOCKHOLDERS' EQUITY
Common Stock Capital In Excess Retained Treasury
(dollars in millions) $1.00 Par Value of Par Value Earnings Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
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
Employee Stock Purchase Plan (ESPP) (11) 63 52
Merger-related stock option charge 195 195
Exercise of stock options, including tax benefits 13 13
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, including tax benefits 1 30 31
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
Net earnings 765 765
Deferred tax adjustment related to stock options (12) (12)
Exercise of stock options, including tax benefits 6 6
Stock purchases and retirements - 18,659,200 shares (19) (92) (340) (451)
Deferred stock unit plan 1 1
Dividends (317) (317)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 2001 $ 405 $ 48 $ 5,241 $ 5,694
==================================================================================================================================
See Notes to Consolidated Financial Statements
12 Albertson's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
Basis of Presentation
On June 23, 1999, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") consummated a merger, with the issuance of 177
million shares of Albertson's common stock (the "Merger"). 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 one of the largest retail food and drug chains in the United States.
As of February 1, 2001, the Company operated 2,512 stores in 36 Western,
Midwestern, Eastern and Southern states. Retail operations are supported by 19
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
year 1998). 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; software-3 to 5 years; leasehold improvements-10 to 25 years;
intangibles-3 to 10 years; and capitalized leases-20 to 30 years.
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. Assets under 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.
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 and lease liabilities are amortized over the
lease term using the straight-line 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
$660 and $603 in 2000 and 1999, respectively.
13 Albertson's, Inc.
IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews and evaluates long-lived
assets for impairment when events or circumstances indicate costs may not be
recoverable. The net book value of long-lived assets is compared to expected
undiscounted future cash flows. An impairment loss would be recorded for the
excess of net book value over the fair value of the asset impaired. The fair
value is estimated based on expected discounted future cash flows.
SELF-INSURANCE The Company is partially self-insured for property loss,
workers' compensation and general liability costs. For ASC, beginning in fiscal
1998 through first quarter 2000, insurance was purchased for workers'
compensation, general liability and automotive liability coverage.
Self-insurance liabilities are determined actuarially based on claims filed and
estimates for claims incurred but not reported. The majority of these
liabilities are not discounted.
REVENUE RECOGNITION Revenue is recognized at the point of sale for retail
sales. Vendor allowances and credits that relate to the Company's buying and
merchandising activity are recognized as earned.
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 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 $550, $654 and $631,
excluding cooperative advertising income from vendors, were included with cost
of sales in the Company's Consolidated Earnings for 2000, 1999 and 1998,
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,
key employees 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.
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 primarily
of outstanding options under the Company's stock option plans. Outstanding
options excluded in 2000 and 1999 (option price exceeded the average market
price during the period) amounted to 16.6 million shares and 3.5 million shares,
respectively. There were no outstanding options excluded from the computation of
potential common shares in 1998. 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. For purposes of the EPS calculation, all
shares and potential common shares of ASC were converted at the 0.63 to 1
exchange ratio.
COMPREHENSIVE INCOME The Company has no items of other comprehensive income in
any period presented. Therefore, net earnings as presented in the Company's
Consolidated Earnings equals comprehensive income.
14 Albertson's, Inc.
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.
RECLASSIFICATIONS Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the current year.
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:
Albertson's ASC Combined
Net revenues $ 16,005 $ 19,867 $ 35,872
Net earnings 567 234 801
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. Under these agreements, the Company was required to divest 145
stores to enable the Merger to proceed under applicable antitrust, competition
and trade regulation law. The stores divested had sales of $2,300 in fiscal
1998.
Results of operations for year ended February 1, 2001, included $151 of
merger-related costs ($93 after tax) and the results of operations for year
ended February 3, 2000, included $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 Sheets:
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
- ---------------------------------------------------------------------------------------------------------------------
Severance costs 11 7 18
Write-down of assets to net realizable value 13 23 36
Integration costs 97 97
- ---------------------------------------------------------------------------------------------------------------------
Total costs 24 127 151
Cash expenditures (30) (2) (107) (139)
Write-down of assets to net realizable value (13) (19) (32)
- ---------------------------------------------------------------------------------------------------------------------
Merger-related accruals at February 1, 2001 $ 7 $ 1 $ 5 $ 13
=====================================================================================================================
15 Albertson's, Inc.
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. Total
merger-related terminations were 663 employees as of February 1, 2001, and no
further terminations are expected under this plan.
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. These include such costs as advertising,
labor associated with systems conversions and training and relocation costs.
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 resulted in significant
non-recurring charges and incremental expenses. These costs had a significant
effect on both 2000 and 1999 results of operations of the Company. Non-recurring
charges and expenses of implementing integration actions were originally
estimated to total $700 after income tax benefits. On an after-tax basis, and
subsequent to first quarter 1999, the Company has incurred $638 of
merger-related costs and does not expect to exceed its original estimate.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Cash payments for income taxes $ 549 $ 520 $ 589
Cash payments for interest, net of amounts capitalized 373 413 331
Noncash investing and financing activities:
Tax benefits related to stock options 1 11 10
Capitalized lease obligations incurred 62 24 25
Capitalized lease obligations terminated 6 14 6
Liabilities assumed in connection with asset acquisitions 7 2
Deferred tax adjustment - related to stock options 12
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.
16 Albertson's, Inc.
Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Trade and other accounts receivable $ 578 $ 597
Current portion of notes receivable 7 15
Allowance for doubtful accounts (38) (31)
- ------------------------------------------------------------------------------------------------------------
$ 547 $ 581
============================================================================================================
Inventories
Approximately 97% 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 $591 and $614 higher at the end of 2000 and 1999,
respectively. Net earnings (basic and diluted earnings per share) would have
been lower by $14 ($0.03) in 2000, higher by $18 ($0.04) in 1999, and higher by
$10 ($0.02) in 1998. The replacement cost of inventories valued at LIFO
approximates FIFO cost.
During 2000, inventory quantities were reduced. This reduction resulted in
a liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the cost of 2000 purchases, the effect of which
decreased cost of goods sold by approximately $26 and increased net income by
approximately $15 or $0.04 per share.
Land, Buildings and Equipment, net
Land, buildings and equipment, net, consist of the following:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Land $ 2,224 $ 1,999
Buildings 5,504 4,908
Fixtures and equipment 5,558 5,309
Leasehold improvements 1,648 1,504
Capitalized leases 314 275
- ------------------------------------------------------------------------------------------------------------
15,248 13,995
Accumulated depreciation and amortization (5,626) (5,084)
- ------------------------------------------------------------------------------------------------------------
$ 9,622 $ 8,911
============================================================================================================
17 Albertson's, Inc.
Indebtedness
Long-term debt consists of the following (borrowings are unsecured unless
indicated):
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Commercial paper and bank lines of credit $ 1,153 $ 1,628
7.5% Notes due February 15, 2011 700
8.35% Notes due May 1, 2010 275
8.7% Debentures due May 1, 2030 225
7.45% Debentures due August 1, 2029 650 650
6.95% Notes due August 1, 2009 350 350
6.55% Notes due August 1, 2004 300 300
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
Medium-term notes due 2000, average interest rate of 6.1% 90
7.5% Debentures due 2037 200 200
8.0% Debentures due 2026 272 272
7.9% Debentures due 2017 95 95
7.4% Notes due 2005 200 200
Medium-term notes, due 2000 through 2028, average interest rate of 7.0% 245 295
9.125% Notes due 2002 80 80
Notes due 2004, average interest rate of 6.5% 200 200
Industrial revenue bonds, average interest rate of 6.1% 11 14
Secured mortgage notes and other notes payable, average interest rates of
9.4% and 8.3%, respectively 104 132
- ------------------------------------------------------------------------------------------------------------
5,777 5,423
Current maturities (62) (620)
- ------------------------------------------------------------------------------------------------------------
$ 5,715 $ 4,803
============================================================================================================
Interest rates on the outstanding commercial paper borrowings as of
February 1, 2001, ranged from 6.2% to 8.0% with an effective weighted average
rate of 7.3%. 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. 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 during 1999:
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
18 Albertson's, Inc.
In July 1999 the Company issued $500 million of floating rate notes under
the commercial paper program with interest based on LIBOR commercial paper rates
that reset monthly. These notes were paid in full during July 2000.
Effective March 2000 the Company entered into two new revolving credit
agreements for $1,900. One agreement for $950 expired in March 2001 and was
replaced by a $700 364-day credit agreement. A second agreement for $950 expires
in March 2005. 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. In
addition, the Company executed a $200 forward underwriting agreement in December
2000 to support the commercial paper program. This agreement expired in March
2001. No borrowings were outstanding under the credit facilities (including the
forward underwriting agreement) as of February 1, 2001.
During fiscal 2000 the Company had an uncommitted bank line of credit
totaling $25. The entire amount under the bank line was outstanding as of
February 1, 2001.
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.
In January 2001 the Company issued the remaining $700 of term notes under
the 1999 Registration Statement. The $700 principal bears interest at 7.5% and
matures February 15, 2011. Proceeds were used primarily to reduce borrowings
under the Company's commercial paper program.
In May 2000 the Company issued $500 of term notes under the 1999
Registration Statement. The notes are composed of $275 of principal bearing
interest at 8.35% due May 1, 2010, and $225 of principal bearing interest at
8.7% due May 1, 2030. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program.
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.
In July 1999 the Company negotiated an amendment to a $200 term loan
agreement between ASC and a group of commercial banks. The amended 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. Proceeds were used to reduce
borrowings under the Company'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 $161 as collateral for
mortgage notes which are payable on various schedules, including interest at
rates ranging from 6.8% to 16.5%. The notes mature from 2001 to 2019.
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.
Albertson's filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective on February 13, 2001 ("2001
Registration Statement") to authorize the issuance of up to $3,000 in debt
securities. The Company will use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes including the potential purchase of outstanding shares of
Albertson's common stock. No amounts have been issued pursuant to this
registration statement.
19 Albertson's, Inc.
Net interest expense was as follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Debt $ 366 $ 350 $ 322
Capitalized leases 27 27 25
Capitalized interest (21) (26) (17)
- ------------------------------------------------------------------------------------------------------------
Interest expense 372 351 330
Bank service charges, net of interest income 13 2 7
- ------------------------------------------------------------------------------------------------------------
$ 385 $ 353 $ 337
============================================================================================================
The scheduled aggregate maturities of debt outstanding at February 1, 2001,
are summarized as follows: $62 in 2001, $104 in 2002, $104 in 2003, $504 in
2004, $203 in 2005 and $4,800 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.
The Board of Directors adopted a program on April 25, 2000, authorizing,
but not requiring, the Company to purchase and retire up to $500 of the
Company's common stock. This program was increased by an additional $1,000 by
the Board of Directors on December 6, 2000, for a total of $1,500. The revised
program enables the Company to purchase stock from April 25, 2000 through
December 6, 2001. During fiscal 2000 the Company purchased and retired 18.7
million shares at a total cost of $451 or an average price of $24.15 per share.
20 Albertson's, Inc.
Income Taxes
Deferred tax assets and liabilities consist of the following:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets (no valuation allowance considered necessary):
Basis in fixed assets $ 157 $ 123
Self-insurance 162 174
Compensation and benefits 238 181
Unearned income 22 36
Other, net 128 140
- ------------------------------------------------------------------------------------------------------------
Total deferred tax assets 707 654
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Basis in fixed assets and capitalized leases (584) (515)
Inventories (104) (105)
Compensation and benefits (36) (33)
Other, net (29) (24)
- ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (753) (677)
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (46) $ (23)
============================================================================================================
The change in the net deferred tax liability includes an adjustment related
to stock options of $12.
The Company has federal and state net operating loss carryforwards of $10
and $34, respectively, that will expire in years 2006 through 2021. 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:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Current:
Federal $458 $476 $537
State 40 48 72
- ------------------------------------------------------------------------------------------------------------
498 524 609
Deferred:
Federal 10 (47) (63)
State 1 (5) (9)
- ------------------------------------------------------------------------------------------------------------
11 (52) (72)
- ------------------------------------------------------------------------------------------------------------
$509 $472 $537
============================================================================================================
21 Albertson's, Inc.
The reconciliations between the federal statutory tax rate and the
Company's effective tax rates are as follows:
2000 Percent 1999 Percent 1998 Percent
- ------------------------------------------------------------------------------------------------------------
Taxes computed at statutory rate $446 35.0 $315 35.0 $468 35.0
State income taxes net of federal
income tax benefit 41 3.3 28 3.2 51 3.8
Goodwill amortization 21 1.6 22 2.4 22 1.6
Merger-related charges 2 0.2 115 12.8 15 1.1
Other (1) (0.1) (8) (0.9) (19) (1.3)
- ------------------------------------------------------------------------------------------------------------
$509 40.0 $472 52.5 $537 40.2
============================================================================================================
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 1, 2001, 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.
DEFERRED STOCK UNITS PLAN The Board of Directors adopted a program effective
December 6, 2000, which authorized the award of 1,081,300 deferred stock units
with dividend equivalents paid in cash quarterly under Albertson's, Inc. 1995
Amended and Restated Stock-Based Incentive Plan to key officers of the Company.
Under this program, three-quarters of the units will be distributed in stock on
December 5, 2003, if the officer is still employed by the Company on that date
as an officer of the Company and one-quarter will be distributed in stock on
December 5, 2003, if the preceding condition is met and the closing price of the
Company's stock is at least $28.84 for at least 20 consecutive trading days at
any time from December 6, 2000, through December 5, 2003. The Company is
recognizing this expense over the three-year service period.
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 pre-tax 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.
22 Albertson's, Inc.
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 pre-tax 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.
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 1, 2001 February 3, 2000 January 28, 1999
-------------------- ------------------- --------------------
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 18,015 $38.34 9,989 $35.01 16,527 $32.74
Granted 8,683 21.78 12,536 39.76 159 40.39
Exercised (287) 21.54 (3,907) 33.00 (5,858) 29.16
Forfeited (1,121) 39.58 (603) 39.43 (839) 32.11
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 25,290 $32.79 18,015 $38.34 9,989 $35.01
===================================================================================================================
As of February 1, 2001, there were 5.5 million shares of Company common
stock reserved for the granting of additional options and deferred stock units.
The following table summarizes options outstanding and options exercisable
as of February 1, 2001, 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
- ------------------------------------------------------------------------------------------------------------------
$16.87 to $22.63 8,849 9.6 $ 21.61 228 $ 18.50
24.31 to 33.25 8,067 7.9 30.27 2,792 29.83
34.87 to 45.94 3,130 5.8 40.14 3,130 40.14
47.00 to 51.19 5,244 8.4 51.15 1,101 51.01
- ------------------------------------------------------------------------------------------------------------------
$16.87 to $51.19 25,290 8.4 $ 32.79 7,251 $ 37.14
==================================================================================================================
The weighted average fair value at date of grant for Albertson's options
granted during 2000 and 1999 was $7.30 and $10.42 per option, respectively.
Pre-merger Albertson's grants per option were $17.14 for 1998. Pre-merger ASC
grants per option were $11.86 for 1998. The fair value of options at date of
grant was estimated using the Black-Scholes model with the following weighted
average assumptions:
2000 1999 1998
------------------
ABS ASC
- ------------------------------------------------------------------------------------------------------------
Expected life (years) 3.0 3.0 8.0 6.5
Risk-free interest rate 5.46% 5.96% 5.74% 4.70%
Volatility 54.83 37.03 26.70 21.20
Dividend yield 3.49 1.81 1.48 1.80
23 Albertson's, Inc.
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:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net earnings:
As reported $ 765 $ 404 $ 801
Pro forma 738 375 914
Basic earnings per share:
As reported 1.83 0.96 1.91
Pro forma 1.77 0.89 2.16
Diluted earnings per share:
As reported 1.83 0.95 1.90
Pro forma 1.76 0.89 2.14
The 2000 pro forma net income of $738 resulted from reported net income of
$765, less the 2000 pro forma after-tax compensation expense of $27. 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.
24 Albertson's, Inc.
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 (income) expense for defined benefit plans is
determined using assumptions as of the beginning of each year. The projected
benefit obligation and related funded status are 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:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Weighted-average discount rate 7.15% 7.50% 6.25%
Annual salary increases 3.70-4.50 4.35-4.50 4.50-4.95
Expected long-term rate of return on assets 9.50 9.50 9.50
Net periodic benefit (income) expense for Company-sponsored defined benefit
pension plans was as follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 14 $ 45 $ 42
Interest cost on projected benefit obligations 32 34 30
Expected return on assets (55) (49) (42)
Amortization of prior service cost 5 1
Recognized net actuarial (gain) loss (4) 1 2
- ------------------------------------------------------------------------------------------------------------
$ (8) $ 31 $ 33
============================================================================================================
25 Albertson's, Inc.
The following table sets forth the funded status of the Company-sponsored
defined benefit pension plans:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Change in projected benefit obligation:
Beginning of year benefit obligation $ 423 $ 547
Service cost 14 45
Interest cost 32 34
Actuarial loss (gain) 29 (105)
Amendments 11 (88)
Benefits paid (14) (10)
- ------------------------------------------------------------------------------------------------------------
End of year benefit obligation 495 423
- ------------------------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value at beginning of year 582 549
Actual return on plan assets (32) 89
Employer contributions (return) 1 (46)
Benefit payments (14) (10)
- ------------------------------------------------------------------------------------------------------------
Plan assets at fair value at end of year 537 582
- ------------------------------------------------------------------------------------------------------------
Funded status 42 159
Unrecognized net loss (gain) 19 (100)
Unrecognized prior service cost (79) (85)
Additional minimum liability (1)
- ------------------------------------------------------------------------------------------------------------
Net accrued pension cost $ (19) $ (26)
============================================================================================================
Prepaid pension cost included with other assets $ 16 $ 8
Accrued pension cost included with other long-term liabilities (35) (34)
- ------------------------------------------------------------------------------------------------------------
Net accrued pension cost $ (19) $ (26)
============================================================================================================
The following table summarizes the projected benefit obligation and the
accumulated benefit obligation of the unfunded Executive Pension Makeup Plan:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 18 $ 15
Accumulated benefit obligation 16 13
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 $52 and $33 of the Company's common stock at February 1, 2001 and
February 3, 2000, respectively), U.S. government obligations, corporate bonds,
international equity funds, real estate and money market funds.
26 Albertson's, Inc.
The Company also contributes to various plans under industrywide collective
bargaining agreements, primarily for defined benefit pension plans. Total
contributions to these plans were $58 for 2000, $98 for 1999 and $100 for 1998.
Retirement plans expense was as follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Defined benefit pension plans $ (8) $ 31 $ 33
ASRE defined contribution plan 167 110 93
Multi-employer plans 58 98 100
- ------------------------------------------------------------------------------------------------------------
$217 $ 239 $ 226
============================================================================================================
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:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Service cost $ 3 $ 3 $ 3
Interest cost 4 4 5
Amortization of unrecognized gain (1) (1) (1)
- ------------------------------------------------------------------------------------------------------------
$ 6 $ 6 $ 7
============================================================================================================
The following table sets forth the funded status of the Company-sponsored
postretirement health and life insurance benefit plans:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Change in accumulated benefit obligation:
Beginning of year benefit obligation $ 62 $ 69
Service cost 3 3
Interest cost 4 4
Plan participants' contributions 10 9
Actuarial loss (gain) 2 (12)
Benefits paid (15) (11)
- ------------------------------------------------------------------------------------------------------------
End of year benefit obligation 66 62
- ------------------------------------------------------------------------------------------------------------
Plan assets activity:
Employer contributions 5 2
Plan participants' contributions 10 9
Benefit payments (15) (11)
- ------------------------------------------------------------------------------------------------------------
Funded status (66) (62)
Unrecognized net gain (16) (21)
- ------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligations included with other
long-term liabilities $ (82) $ (83)
- ------------------------------------------------------------------------------------------------------------
Discount rates as of end of year 7.15% 7.50%
============================================================================================================
27 Albertson's, Inc.
For measurement purposes, a 6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for plans covering ASC retirees
for 2000 and is expected to 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 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Included with salaries and related liabilities $ 12 $ 11
Included with other long-term liabilities 74 53
- ------------------------------------------------------------------------------------------------------------
$ 86 $ 64
============================================================================================================
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 $286 for 2000,
$316 for 1999, and $270 for 1998.
Employment Contract
In December 2000 the Company entered into a severance agreement with the current
Chairman of the Board and Chief Executive Officer, under which he will receive a
severance payment of $3 upon his retirement from the Company (expected to occur
in June 2001). He has agreed not to become employed by a competitor of the
Company during the two-year period following his retirement and to cooperate
with the Company in connection with certain routine matters.
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 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Real estate and equipment $314 $275
Accumulated amortization (132) (132)
- ------------------------------------------------------------------------------------------------------------
$182 $143
============================================================================================================
28 Albertson's, Inc.
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 1, 2001, were as follows:
Operating Capital
Leases Subleases Leases
- ------------------------------------------------------------------------------------------------------------
2001 $ 318 $ (34) $ 46
2002 312 (33) 37
2003 295 (22) 34
2004 280 (15) 33
2005 254 (10) 31
Remainder 2,138 (43) 386
- ------------------------------------------------------------------------------------------------------------
Total minimum obligations (receivables) $3,597 $(157) 567
===============================================================================================
Interest (320)
- ------------------------------------------------------------------------------------------------------------
Present value of net minimum obligations 247
Current portion (20)
- ------------------------------------------------------------------------------------------------------------
Long-term obligations at February 1, 2001 $ 227
============================================================================================================
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 2000, 1999 and 1998, was as
follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Minimum rent $ 369 $ 330 $ 309
Contingent rent 30 29 25
- ------------------------------------------------------------------------------------------------------------
399 359 334
Sublease rent (97) (58) (60)
- ------------------------------------------------------------------------------------------------------------
$ 302 $ 301 $ 274
============================================================================================================
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, commercial paper and bank line
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 and bank line
borrowings) were as follows:
February 1, February 3,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Fair value $4,470 $3,718
Carrying amount 4,624 3,800
29 Albertson's, Inc.
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 2000, 1999
or 1998.
Legal Proceedings
On August 23, 2000, a class action complaint was filed against Jewel Food
Stores, Inc., an indirect wholly-owned subsidiary of the Company, in the Circuit
Court of Cook County, Illinois (Maureen Baker, et al., v. Jewel Food Stores,
Inc. and Dominick's Supermarkets, Inc., Case No. 00L 009664) alleging milk price
fixing. The Company has strong defenses against this lawsuit, and is vigorously
defending it. Although this lawsuit is subject to the uncertainties inherent in
the litigation process, based on the information presently available to the
Company, management does not expect the ultimate resolution of this action to
have a material adverse effect on the Company's financial condition.
An agreement has been reached, and court approval granted, 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. Under the settlement agreement, current and former employees who
meet eligibility criteria are in the process of presenting their claims to a
settlement administrator. While the Company cannot specify 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
standard and has determined that its operations are within a single operating
segment. All of the Company's operations are within the United States.
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," which is effective for all fiscal years
beginning after June 15, 2000. This new standard as amended 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. The Company will adopt SFAS No. 133 effective February 2, 2001.
The Company has completed its evaluation of this standard and its impact on the
Company's accounting and reporting requirements and management does not expect
the adoption of this statement to have a significant impact on the financial
position, results of operations or cash flows of the Company.
30 Albertson's, Inc.
Independent Auditors' Report
Deloitte
& Touche
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 1, 2001 and February 3, 2000, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended February 1, 2001. 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
statements of earnings, stockholders' equity, and cash flows of American Stores
Company for the year ended January 28, 1999, which statements reflect net
earnings of approximately $234 million for the year ended January 28, 1999.
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, 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 1, 2001 and February 3, 2000, and the results of their operations
and their cash flows for each of the three years in the period ended February 1,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
--------------------------
Deloitte & Touche LLP
Boise, Idaho
March 19, 2001
31 Albertson's, Inc.
Independent Auditors' Report
Ernst & Young
Shareholders and Board of Directors of American Stores Company:
We have audited the accompanying consolidated statements of earnings,
shareholders' equity and cash flows of American Stores Company and subsidiaries
for the year ended January 30, 1999 (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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of American Stores Company and subsidiaries for the year ended January 30, 1999,
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
32 Albertson's, Inc.
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 at least 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
33 Albertson's, Inc.
Five-Year Summary of Selected Financial Data
52 weeks 53 weeks 52 weeks 52 weeks 52 weeks
February 1, February 3, January 28, January 29, January 30,
(dollars in millions, except per share data) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Operating Results:
Sales $36,762 $37,478 $35,872 $33,828 $32,455
Earnings before extraordinary item 765 427 801 797 781
Extraordinary item (23)
Net earnings 765 404 801 797 781
Net earnings as a percent to sales 2.08% 1.08% 2.23% 2.36% 2.41%
Common Stock Data:
Earnings per share before extraordinary item:
Basic $1.83 $1.01 $1.91 $1.89 $1.79
Diluted 1.83 1.00 1.90 1.88 1.79
Extraordinary item:
Basic (0.05)
Diluted (0.05)
Earnings per share:
Basic 1.83 0.96 1.91 1.89 1.79
Diluted 1.83 0.95 1.90 1.88 1.79
Cash dividends per share:
Albertson's, Inc. 0.76 0.72 0.68 0.64 0.60
American Stores Company Equivalent 0.14 0.57 0.56 0.51
Financial Position:
Total assets $16,078 $15,719 $15,131 $13,767 $12,608
Long-term debt and capitalized
lease obligations 5,942 4,990 5,108 4,333 3,665
Other Year End Statistics:
Number of stores 2,512 2,492 2,564 2,435 2,355
All fiscal years consist of 52 weeks, except for 1999 which is a 53-week
year.
2000 operating results included pre-tax merger-related costs of $151 ($93
after tax or $0.22 per share), and a pre-tax charge of $20 ($12 after tax or
$0.03 per share) for an impairment - lease contingency. Merger-related costs
included severance, the write-down of assets to net realizable value and
integration costs.
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.
34 Albertson's, Inc.
Quarterly Financial Data
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------
2000
Sales $9,013 $9,214 $8,991 $9,544 $36,762
Gross profit 2,509 2,642 2,553 2,722 10,426
Operating profit 376 421 384 481 1,662
Net earnings 179 194 172 220 765
Earnings per share:
Basic 0.42 0.46 0.41 0.54 1.83
Diluted 0.42 0.46 0.41 0.54 1.83
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
Fourth quarter of 1999 includes 14 weeks of operations. All other quarters
include 13 weeks of operations.
During 2000 and 1999 all four quarters' operating results were affected by
pre-tax merger-related costs totaling $151 ($93 after tax) and $683 ($529 after
tax), respectively. Merger-related costs included severance, the write-down of
assets to net realizable value and integration costs. In addition, 1999
merger-related costs included transaction and financing costs and stock option
charges. First quarter 2000 included a pre-tax one-time charge of $20 ($12 after
tax) for an impairment - lease contingency. Third quarter 1999 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.
First Second Third Fourth Annual
Net EPS Net EPS Net EPS Net EPS Net EPS
Earnings (Loss) Effect Loss Effect Loss Effect Loss Effect Loss Effect
- ----------------------------------------------------------------------------------------------------------------------------------
2000
Merger-related costs $(35) $(0.08) $ (17) $(0.04) $(16) $(0.04) $(25) $(0.06) $ (93) $(0.22)
Impairment -
Lease contingency (12) (0.03) (12) (0.03)
- ----------------------------------------------------------------------------------------------------------------------------------
1999
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)
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:
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------
2000
Net earnings $ (3) $ (3) $ (5) $ 25 $ 14
Basic and diluted EPS (0.01) (0.01) (0.01) 0.06 0.03
- ------------------------------------------------------------------------------------------------------------
1999
Net earnings $ (5) $ (5) $ (5) $ (3) $ (18)
Basic and diluted EPS (0.01) (0.01) (0.01) (0.01) (0.04)
Due to rounding and different periods used to compute weighted average
outstanding shares, the sum of the quarterly EPS may not equal the annual EPS.
35 Albertson's, Inc.
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
- ---------------------------------------------------------------------------------------------------------------------
2000 $34.94 $23.06 $39.25 $30.00 $31.50 $20.06 $28.88 $21.00 $39.25 $20.06
1999 61.94 49.06 56.94 48.56 52.25 37.00 38.31 29.00 61.94 29.00
1998 54.94 46.31 53.69 44.00 58.13 44.50 67.13 53.38 67.13 44.00
Cash dividends declared per share were:
First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------------------
2000 $0.19 $0.19 $0.19 $0.19 $0.76
1999 0.18 0.18 0.18 0.18 0.72
1998 0.17 0.17 0.17 0.17 0.68
In March 2001 the Board of Directors maintained the regular quarterly cash
dividend of $0.19 per share, for an annual rate of $0.76 per share. The
quarterly rate will be paid on May 10, 2001, to stockholders of record on
April 16, 2001.
ALBERTSON'S FAMILY OF STORES
Albertsons Acme Jewel
Super Saver Food Seessel's Jewel-Osco
Sav-on drugs Max Foods Osco Drug
36 Albertson's, Inc.