EXHIBIT 99
AUDITED FINAINCIAL STATEMENTS OF AMERICAN STORES COMPANY
INDEX TO AUDITED FINAINCIAL STATEMENTS OF AMERICAN STORES COMPANY
The following audited financial statements of American Stores Company
have been taken from Item 8 of American Stores Company Form 10-K as filed by
American Stores Company with the Securities and Exchange Commission on April 13,
1999, Commission File No. 1-5392.
Report of Independent Auditors 8
Consolidated Statements of Earnings 9
Consolidated Balance Sheets 10
Consolidated Statements of Cash Flows 11
Consolidated Statements of Shareholders' Equity 12
Notes to Consolidated Financial Statements 13
Page 7
Shareholders and Board of Directors
American Stores Company
We have audited the accompanying consolidated balance sheets of American Stores
Company and subsidiaries as of January 30, 1999, January 31, 1998 and February
1, 1997, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Stores
Company and subsidiaries at January 30, 1999, January 31, 1998 and February 1,
1997, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
March 17, 1999
Salt Lake City, Utah
Page 8
Consolidated Statements of Earnings
(In thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------- ------------------ ----------------- ------------------
Sales $19,866,725 $19,138,880 $18,678,129
Cost of merchandise sold, including
warehousing and transportation
expenses 14,560,899 14,039,263 13,713,151
------------------ ----------------- ------------------
Gross profit 5,305,826 5,099,617 4,964,978
Operating and administrative expenses 4,437,804 4,317,576 4,220,187
Merger related stock options 195,252
Restructuring and impairment 13,400 77,151
------------------ ----------------- ------------------
Operating profit 672,770 768,641 667,640
Other income (expense):
Interest income 3,337 5,647 8,470
Interest expense (232,652) (216,710) (171,558)
Shareholder related expense (33,913)
------------------ ----------------- ------------------
Total other income (expense) (229,315) (244,976) (163,088)
------------------ ----------------- ------------------
Earnings before income taxes 443,455 523,665 504,552
Federal and state income taxes (209,711) (243,045) (217,331)
------------------ ----------------- ------------------
Net earnings $ 233,744 $ 280,620 $ 287,221
================== ================= ==================
Basic earnings per share $.85 $1.02 $.98
Diluted earnings per share $.84 $1.01 $.98
Average number of common shares
outstanding used for basic earnings
per share 274,790 276,409 291,776
Dilutive common stock options 2,772 1,360 875
------------------ ----------------- ------------------
Average number of common shares
Outstanding used for dilutive
earnings per share 277,562 277,769 292,651
================== ================= ==================
Outstanding employee stock options
having no dilutive effect 4,350
See notes to consolidated financial statements
Page 9
Consolidated Balance Sheets
Year-End
------------------ ------------------------- -----------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------- ------------------ ------------------ ------------------
ASSETS
Current Assets
Cash and cash equivalents $ 35,493 $ 47,794 $ 37,467
Receivables 427,911 399,319 318,878
Inventories 1,726,015 1,714,229 1,725,542
Prepaid expenses 67,929 71,855 66,510
Deferred income tax benefits 83,055 28,583 18,099
------------------ ------------------ ------------------
Total Current Assets 2,340,403 2,261,780 2,166,496
Property, Plant and Equipment and
Property Under Capital Leases,at cost
Land 927,021 856,967 734,726
Buildings 2,452,509 2,325,388 1,980,660
Fixtures and equipment 3,000,732 2,877,019 2,616,786
Leasehold improvements 927,441 831,364 781,454
------------------ ------------------ ------------------
7,307,703 6,890,738 6,113,626
Less accumulated depreciation and
amortization (2,683,628) (2,552,723) (2,361,255)
------------------ ------------------ ------------------
Net Property, Plant and Equipment 4,624,075 4,338,015 3,752,371
Goodwill, net of accumulated amortization 1,589,614 1,611,812 1,665,242
Other Assets 331,207 324,408 297,296
================== ================== ==================
Total Assets $8,885,299 $8,536,015 $7,881,405
================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,147,510 $1,186,845 $ 851,285
Accrued payroll and benefits 333,917 301,656 325,806
Current portion of self-insurance reserves 99,643 108,263 121,144
Income taxes payable 15,392 11,293 21,290
Other current liabilities 338,842 412,342 416,153
Current maturities of long-term debt
and obligations under capital leases 49,651 100,935 66,003
------------------ ------------------ ------------------
Total Current Liabilities 1,984,955 2,121,334 1,801,681
Self-insurance Reserves, less current
portion 266,661 390,661 403,981
Deferred Income Taxes 361,566 349,041 348,846
Other Liabilities 149,892 163,927 178,326
Long-term Debt and Obligations Under
Capital Leases, less current
maturities 3,423,029 3,201,970 2,613,144
Shareholders' Equity
Common stock of $1.00 par value,
authorized 700,000 shares; issued
299,778 shares 299,778 299,778 299,778
Additional paid-in capital 463,246 269,205 212,672
Retained earnings 2,455,223 2,320,322 2,136,744
Less cost of treasury stock; 23,103
shares in 1998, 26,172 shares in
1997 and 7,949 shares in 1996 (519,051) (580,223) (113,767)
------------------ ------------------ ------------------
Total Shareholders' Equity 2,699,196 2,309,082 2,535,427
================== ================== ==================
Total Liabilities and Shareholders' Equity $8,885,299 $8,536,015 $7,881,405
================== ================== ==================
See notes to consolidated financial statements
Page 10
Consolidated Statements of Cash Flows
(In thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------- ------------------ ---------------- -----------------
Cash Flows from Operating Activities:
Net earnings $233,744 $280,620 $287,221
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 487,304 468,869 440,445
Merger related stock option charge 195,252
Net (gain) loss on asset sales (15,818) (772) 265
Self-insurance reserve decrease (132,620) (26,201) (62,367)
Other 5,865 (78,004) 120,070
(Increase) decrease in current assets:
Receivables (28,592) (80,441) 810
Inventories (11,786) 11,313 (152,920)
Prepaid expenses (50,546) (15,829) 5,006
(Decrease) increase in current liabilities:
Accounts payable (39,335) 335,560 (145,069)
Other current liabilities (52,256) 16,137 66,759
Accrued payroll and benefits 32,261 (24,150) (6,037)
Income taxes payable 4,099 (9,997) 3,998
------------------ ---------------- -----------------
Total adjustments 393,828 596,485 270,960
------------------ ---------------- -----------------
Net cash provided by operating activities 627,572 877,105 558,181
------------------ ---------------- -----------------
Cash Flows from Investing Activities:
Expended for property, plant and equipment (830,376) (974,724) (943,080)
Proceeds from sale of assets 115,450 39,447 47,670
Increases in other assets (56,813) (43,638) (60,416)
------------------ ---------------- -----------------
Net cash used in investing activities (771,739) (978,915) (955,826)
------------------ ---------------- -----------------
Cash Flows from Financing Activities:
Proceeds from long-term borrowing 145,000 500,000 350,000
Payment of long-term borrowing (50,000) (160,000) (100,000)
Net addition to debt and obligations under
capital leases 75,748 279,101 188,979
Proceeds from exercise of stock options, other 59,961 44,164 24,860
Repurchase of common stock (37,798)
Repurchase of common stock from major
Shareholder (550,000)
Issuance of common stock for over-allotments 95,914
Cash dividends (98,843) (97,042) (93,351)
------------------ ---------------- -----------------
Net cash provided by financing activities 131,866 112,137 332,690
------------------ ---------------- -----------------
Net (decrease) increase in cash and cash
Equivalents (12,301) 10,327 (64,955)
Cash and Cash Equivalents:
Beginning of Year 47,794 37,467 102,422
------------------ ---------------- -----------------
End of Year $ 35,493 $ 47,794 $ 37,467
================== ================ =================
See notes to consolidated financial statements
Page 11
Consolidated Statements of Shareholders' Equity
Additional
(In thousands, Common Paid-In Retained Treasury
except per share data) Stock Capital Earnings Stock Total
- ---------------------------------------------- ------------- ----------------- ------------------ ---------------- -----------------
Balance at beginning of 1996 $299,778 $195,229 $1,942,874 $(83,385) $2,354,496
============= ================= ================== ================ =================
Net earnings - 1996 287,221 287,221
Issuance of 1,127 shares of
stock for stock options,
awards and Employee Stock
Purchase Plan (ESPP) 7,891 7,497 15,388
Dividends ($.32 per share) (93,351) (93,351)
Stock Purchase Incentive Plans 8,856 8,856
Purchase of 13 shares for
treasury, including ESPP
buybacks (103) (78) (181)
Stock Repurchase Program 2,180
Shares (37,798) (37,798)
Other 799 (3) 796
============= ================= ================== ================ =================
Balances at year-end 1996 $299,778 $212,672 $2,136,744 $(113,767) $2,535,427
============= ================= ================== ================ =================
Net earnings - 1997 280,620 280,620
Issuance of 1,652 shares of
stock for stock options,
awards and Employee Stock
Purchase Plan (ESPP) 5,983 24,704 30,687
Shares related to directors'
Stock compensation plan - 193
Shares 3,931 86 4,017
Dividends ($.35 per share) (97,042) (97,042)
Stock Purchase Incentive Plans 10,425 10,425
Purchase of 59 shares for
treasury, including ESPP
buybacks (967) (967)
Stock Repurchase from major
shareholder - 24,444 shares (550,000) (550,000)
Stock issuance for over-
allotments - 4,622 shares 36,194 59,721 95,915
------------- ----------------- ------------------ ---------------- -----------------
Balances at year-end 1997 $299,778 $269,205 $2,320,322 $(580,223) $2,309,082
============= ================= ================== ================ =================
Net earnings - 1998 233,744 233,744
Issuance of 3,158 shares of
stock for stock options and (11,367) 62,816 51,449
awards
Merger related stock options 195,252 195,252
Dividends ($.36 per share) (98,843) (98,843)
Stock Purchase Incentive Plans 1,358 1,358
Purchase of 101 shares for
treasury, including ESPP
buybacks (1,824) (1,824)
Shares related to directors'
stock compensation plan - 20
shares 3,174 180 3,354
Other 5,624 5,624
------------- ----------------- ------------------ ---------------- -----------------
Balances at year-end 1998 $299,778 $463,246 $2,455,223 $(519,051) $2,699,196
============= ================= ================== ================ =================
See notes to consolidated financial statements
Page 12
Notes to Consolidated Financial Statements
Nature of Operations
American Stores Company is one of the nation's leading food and drug retailers,
operating 1,580 stores in 26 states. The Company operates in a single industry
segment and its principal formats include supermarkets, stand-alone drug stores
and combination food/drug stores. Principal markets, where products are sold
primarily to retail customers, include California, Illinois, New Jersey,
Pennsylvania, Nevada, Indiana, Massachusetts and Arizona.
Significant Accounting Policies
Fiscal Year. The fiscal year of the Company ends on the Saturday nearest to
January 31. All references herein to "1998", "1997" and "1996" represent the
52-week fiscal years ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively.
Basis of Consolidation. The consolidated financial statements include the
accounts of American Stores Company and all subsidiaries. Accordingly, all
references herein to "American Stores Company" include the consolidated results
of its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair value.
Depreciation and Amortization. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements and leased properties under capital leases are amortized over the
estimated useful life of the property or over the term of the lease, whichever
is shorter. The depreciable lives are primarily 20 to 25 years for buildings, 3
to 10 years for fixtures and equipment and 20 to 25 years for leasehold
improvements and property under capital lease, depending on the life of the
lease. Depreciation expense related to property, plant and equipment amounted to
$407.5 million, $390.4 million and $359.9 million in fiscal 1998, 1997 and 1996,
respectively. Amortization expense related to property under capital leases
amounted to $7.6 million, $8.5 million and $9.2 million in fiscal 1998, 1997 and
1996, respectively.
Goodwill. Goodwill, principally from the acquisition of Lucky Stores, Inc. in
1988, represents the excess of cost over fair value of net assets acquired and
is being amortized over 40 years using the straight-line method. Accumulated
amortization amounted to $579.1 million, $524.6 million and $471.2 million in
1998, 1997 and 1996, respectively.
Costs of Opening and Closing Stores. The costs of opening new stores are charged
against earnings as incurred. When operations are discontinued and a store is
closed, the remaining investment, net of salvage value, is charged against
earnings and, for leased stores, a provision is made for the remaining lease
liability, net of expected sublease income.
Derivative Financial Instruments. The Company enters into interest rate swaps
and similar agreements to modify the interest rate characteristics of its
outstanding debt or on anticipated public debt financing of the Company and
holds them strictly for purposes other than trading. The objective of these
derivative transactions is to reduce the Company's exposure to changes in
interest rates, and each transaction is evaluated periodically by the Company
for changes in market value and counterparty credit exposure.
Page 13
The agreements are usually in notional amounts less than the total amount of the
anticipated debt issue and are generally in effect for a period estimated to
expire concurrent with the anticipated debt issue. They involve the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement without an exchange of the notional amount
upon which the payments are based. The difference to be paid or received as
interest rates change is recognized quarterly in the case of the LIBOR basket
swap. The fair value of any treasury rate locks is being amortized over the term
of debt issued as an addition to interest expense. In the event of the early
extinguishment of an obligation, any realized or unrealized gain or loss from
the swap would be recognized in income coincident with the extinguishment of the
obligation.
Income Taxes. The Company provides for deferred income taxes or credits as
temporary differences arise in recording income and expenses between financial
reporting and tax reporting. Amortization of goodwill is not deductible for
purposes of calculating income tax provisions.
Environmental Remediation Costs. Costs incurred to investigate and remediate
contaminated sites are accrued when identified and estimable. The related costs
are expensed unless the remediation extends the economic useful life of the
assets employed at the site.
Insurance Programs. The Company is self-insured for property loss, workers'
compensation, general liability and automotive liability, for claims occurring
through the 1997 fiscal year end, subject to specific retention levels. Claims
for workers' compensation, general liability and automotive liability are
insured for fiscal 1998. The Company is required in certain cases to obtain
letters of credit to support its self-insured status. At year-end 1998, the
Company's self-insured liabilities were supported by approximately $150.0
million of undrawn letters of credit. The Company is also self-insured for
health care claims for eligible active and retired associates. Self-insured
liabilities, with the exception of postretirement health care benefits, are not
discounted.
The basis for the amount of the Company's accrual for self insurance claims is
determined by an independent actuary who arrives at the ultimate costs of claims
that have occurred by analyzing amounts already paid to claimants, open case
reserves and an estimate of incurred but not reported losses, including both
claims that are unreported as of the valuation date and the future growth in
claim value that will occur as more information about each claim becomes known.
Impairment. Impairment is recognized on long-lived assets when indicators of
impairment are present and the undiscounted cash flows are less than the related
assets' carrying value.
Stock-based Compensation. The Company continues to account for stock-based
compensation using the intrinsic value method and provides pro forma footnote
disclosure of the impact of the fair value method.
Employees
The largest collective bargaining agreement, which covers approximately 17% of
the Company's labor force, expires in October 2002.
Advertising Expense
The Company includes advertising expenses in cost of goods sold when the
advertisement occurs. Total gross advertising expense amounted to $337.6
million, $336.0 million and $325.7 million in 1998, 1997 and 1996, respectively.
Capitalized advertising costs were $1.7 million, $2.5 million and $4.0 million
in 1998, 1997 and 1996, respectively.
Reclassification
The 1997 and 1996 financial statements have been reclassified to conform to the
current year presentation.
Page 14
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". The statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has
determined that this statement will not have a material impact on the financial
results of the Company.
Merger Agreement
On August 2, 1998 the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) among the Company, Albertson's, Inc. (Albertson's) and Abacus
Holdings, Inc., a wholly-owned subsidiary of Albertson's (Merger Sub), pursuant
to which Merger Sub would be merged with and into the Company with the Company
surviving the merger as a wholly-owned subsidiary of Albertson's. Each share of
the Company's Common Stock would be converted into the right to receive 0.63
shares of Albertson's Common Stock, with cash paid in lieu of any fractional
shares. The transaction is intended to qualify as a pooling of interests for
accounting purposes and as a tax-free reorganization for U.S. federal income tax
purposes. On November 12, 1998, the stockholders of the Company and Albertson's
approved the Merger Agreement. The merger is subject to certain conditions,
including, among others, regulatory approvals and other customary closing
conditions.
In connection with the Merger Agreement, the Company and Albertson's entered
into reciprocal stock option agreements pursuant to which (a) the Company
granted Albertson's an option to purchase up to 54.5 million shares of Company
Common Stock (but in no event more than 19.9% of the outstanding shares of
Company Common Stock at the time of exercise) under certain circumstances and
upon the terms and conditions set forth in the stock option agreement, at an
exercise price of $30.24 per share and (b) Albertson's granted the Company an
option to purchase up to 48.8 million shares of Albertson's Common Stock (but in
no event more than 19.9% of the outstanding shares of Albertson's Common Stock
at the time of exercise) under certain circumstances and upon the terms and
conditions set forth in the stock option agreement at an exercise price of
$48.00 per share.
Inventories
Approximately 94% of inventories are accounted for using the LIFO (last-in,
first-out) method for inventory valuation. If the FIFO (first-in, first-out) and
average cost methods had been used, inventories would have been $334.3 million,
$327.0 million and $324.5 million higher at year-end 1998, 1997 and 1996,
respectively. The LIFO charge to earnings was $7.4 million in 1998, $2.4 million
in 1997 and $11.4 million in 1996. Under this method, the cost of merchandise
sold that is reported in the financial statements approximates current costs and
thus reduces the distortion in reported earnings due to inflation or deflation.
Debt
The Company has a $1.0 billion universal shelf registration statement of which
$500 million has been designated for the Company's Series B Medium Term Note
Program. On March 19, 1998, the Company issued $45 million of 6.5% notes due
March 20, 2008, under the outstanding Series B Medium Term Note Program. On
March 30, 1998, the Company issued an additional $100 million of 7.1% notes due
March 20, 2028, under the same program. Proceeds were used to refinance
short-term debt and for general corporate purposes. At year-end 1998, the
Company had $855 million available under the universal shelf registration
statement.
During the first quarter of 1998, the Company repaid $50 million of its
outstanding Series A Medium Term Notes which had an average interest rate of
8.4%.
Page 15
The Company has a $1.0 billion commercial paper program supported by a $1.5
billion revolving credit facility, and $230 million of uncommitted bank lines,
which are used for overnight and short-term bank borrowings. On September 22,
1998, the Company entered into a $300 million revolving credit agreement with
five financial institutions which also supports the commercial paper program.
Interest rates for borrowings under the agreement are established at the time of
borrowing through three different pricing options. The agreement terminates on
the earlier of i) effective date of consummation of the Merger, ii) the date
which is 30 days after the date the Merger Agreement is terminated, or iii) July
1, 1999. At year-end 1998, the Company had $325 million of debt outstanding
under the $1.5 billion credit facility, $993 million outstanding under the
commercial paper program, and $226 million outstanding under uncommitted bank
lines, leaving unused committed borrowing capacity of $256 million.
The Company capitalized interest costs associated with construction projects of
$6.2 million, $16.2 million and $10.6 million in 1998, 1997 and 1996,
respectively. The Company made cash payments for interest (net of amounts
capitalized) of $235.7 million, $204.3 million and $160.8 million in 1998, 1997
and 1996, respectively.
The aggregate amounts of debt maturing in each of the next five fiscal years are
listed below:
(In thousands of dollars)
- ---------------------------------------------------------------------------------------- --------------------
1999 $ 42,880
2000 164,747
2001 35,426
2002 1,832,723
2003 117,856
Thereafter 1,227,208
Total debt 3,420,840
Capital lease obligations 51,840
Total debt and obligations under capital leases $3,472,680
The Company's various loans secured by real estate are collateralized by
properties with a net book value of $225.6 million at year-end 1998.
Page 16
A summary of debt is as follows:
(In thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------- ----------------- ----------------- -----------------
Public Debt (unsecured):
7.5% Debentures due 2037, put option 2009 $ 200,000 $ 200,000
8.0% Debentures due 2026 350,000 350,000 $ 350,000
7.9% Debentures due 2017 100,000 100,000
7.4% Notes due 2005 200,000 200,000 200,000
Medium Term Notes--fixed interest rates
due 1999 through 2028--average interest
rate 7.3% in 1998 and 7.9% in 1997 and
1996 295,000 200,000 250,000
9-1/8% Notes due 2002 249,461 249,320 249,191
Bank Borrowings (unsecured):
Revolving credit facilities--variable
interest rates, effectively due 2002--
average interest rates 5.8% in 1998,
5.9% in 1997 and 5.7% in 1996 325,000 512,000 957,000
Lines of credit and commercial paper--
variable interest rates, effectively
due 2002 -- average Interest rates 5.7%
in 1998, 5.9% in 1997 and 5.6% in 1996 1,218,966 945,899 183,000
Notes due 2004--average interest rate
6.3% 200,000 200,000
Other borrowings--due 2000--average
interest rates 6.6% in 1998, 1997 and
1996 75,000 75,000 75,000
Other Unsecured Debt:
9.8% due in 1999 160,000
10.6% due in 2004 93,337 108,893 108,893
Other--due through 2001 50,343 31,505 2,988
Debt Secured by Real Estate:
Fixed interest rates--due through 2014--
average interest rate 13.4% in 1998,
13.4% in 1997 and 13.3% in 1996 63,733 69,548 77,365
----------------- ----------------- -----------------
Outstanding debt 3,420,840 3,242,165 2,613,437
Capital lease obligations 51,840 60,740 65,710
----------------- ----------------- -----------------
Total debt and obligations under capital
leases 3,472,680 3,302,905 2,679,147
Less current maturities:
Debt 42,880 92,407 56,703
Capital lease obligations 6,771 8,528 9,300
----------------- ----------------- -----------------
Long-term debt and obligations under
capital leases 3,423,029 3,201,970 2,613,144
Long-term capital lease obligations 45,069 52,212 56,410
----------------- ----------------- -----------------
Long-term debt $3,377,960 $3,149,758 $2,556,734
================= ================= =================
During 1997 the Company entered into a $300 million five-year LIBOR basket swap.
The agreement diversifies the indices used to determine the interest rate on a
portion of the Company's variable rate debt by providing for payments based on
foreign LIBOR indices which are reset every three months and also provides for a
maximum interest rate of 8.0%. The Company recognized no income or expense in
1998 related to this swap. As of year-end 1998, the estimated fair value of the
agreement based on market quotes was a loss of $5.3 million.
Page 17
On December 15, 1997, a $100 million treasury rate lock agreement was entered
into for the purpose of hedging the interest rate on a portion of the debt the
Company issued in 1998 under a universal shelf registration statement. In March
1998 the treasury lock was terminated in connection with the issuance of $100
million of notes under the registration statement. The Company realized a net
loss of $1.0 million, which is being amortized over the term of the debt as an
addition to interest expense.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its swap agreement. Such counterparties are highly-rated
financial institutions and the Company anticipates they will be able to satisfy
their obligations under the contract.
The carrying amounts of the Company's bank borrowings with variable interest
rates approximate fair value. The fair value of the Company's borrowings with
fixed interest rates is estimated using current market quotes, or discounted
cash flow analyses, or on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The fair value of outstanding debt as
of year-end 1998 was $3.7 billion compared to the carrying value of $3.4
billion.
Leases
The Company leases retail stores, offices and warehouse and distribution
facilities. Initial lease terms average approximately 20 years, plus renewal
options, and may provide for contingent rent based on sales volume in excess of
specified levels.
The summary below shows the aggregate future minimum rent commitments at
year-end 1998 for both capital and operating leases. Operating leases are shown
net of an aggregate $115.1 million of minimum rent income receivable under
non-cancelable subleases. Operating leases also exclude the amortization of
acquisition-related fair value adjustments.
Operating Capital
(In thousands of dollars) Leases Leases
- --------------------------------------------------------------- ------------------------ -------------------------
1999 $ 181,980 $ 12,430
2000 169,962 10,604
2001 158,306 9,177
2002 146,916 8,246
2003 138,193 7,564
Thereafter 1,254,516 44,355
-------------------------
========================
Total minimum rent commitments $2,049,873 92,376
========================
Less executory costs (such as taxes,
insurance and maintenance) included
in capital leases 512
-------------------------
Net minimum lease payments 91,864
Less amount representing interest 40,024
=========================
Obligations under capital leases,
including $6,771 due within one year $51,840
=========================
There were no additions to obligations under capital leases in 1998. Rent
expense, excluding the amortization of acquisition-related fair value
adjustments of $13.5 million in 1998, $13.9 million in 1997 and $14.2 million in
1996, was as follows:
Minimum Sublease Contingent Total
(In thousands of dollars) Rent Rent Net Rent Rent
- ------------------------------------------ --------------- -------------- ------------- ----------------- -------------
1998 $215,880 $20,296 $195,584 $21,342 $216,926
1997 $206,749 $17,591 $189,158 $22,729 $211,887
1996 $189,105 $15,663 $173,442 $24,305 $197,747
Page 18
Income Taxes
Federal and state income taxes charged to earnings are summarized below:
(In thousands of dollars) 1998 1997 1996
- ----------------------------------------------------- ------------------ ------------------ -----------------
Current:
Federal $228,621 $214,005 $206,313
State 24,852 23,572 25,731
Deferred:
Federal (38,821) 4,847 (12,948)
State (4,941) 621 (1,765)
================== ================== =================
Federal and state income taxes $209,711 $243,045 $217,331
================== ================== =================
Cash payments of income taxes were $247.6 million, $263.3 million and $226.8
million in 1998, 1997 and 1996, respectively.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows:
(Percent of earnings before income taxes) 1998 1997 1996
- ---------------------------------------------------------------- --------------- -------------- --------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax rate, net of federal 4.9 4.9 4.8
income tax effect
Goodwill amortization 4.7 4.0 4.2
Merger related stock option charge 3.3
Expenses for repurchase of major
shareholders' common stock 2.3
Tax credits (0.3) (0.1) (0.1)
Other (0.3) 0.3 (0.8)
=============== ============== ==============
Effective income tax rate 47.3% 46.4% 43.1%
=============== ============== ==============
Deferred tax benefits and liabilities as of year-end 1998 related to the
following temporary differences:
(In thousands of dollars) Benefits Liabilities Total
- -------------------------------------------------------------- --------------------- ------------------- -------------------
Basis in fixed assets $ 33,808 $(267,107) $(233,299)
Self-insurance reserves 122,887 122,887
Purchase accounting valuation 16,299 (253,483) (237,184)
Compensation and benefits 127,698 (30,250) 97,448
Other, net 97,221 (125,584) (28,363)
===================== =================== ===================
Deferred tax benefits and liabilities $397,913 $(676,424) $(278,511)
===================== =================== ===================
No valuation allowances have been considered necessary in the calculation of
deferred tax benefits.
Page 19
Stock Compensation Plans
Variable Accounting Treatment for Option Plans
Stock options and certain shares of restricted stock granted under the Company's
stock option and stock award plans automatically vest upon a change of control,
which is defined in plans adopted prior to June 1997 (Pre-1997 Plans) as
stockholder approval of the Merger or, for options granted under the Company's
1997 Stock Option and Stock Award Plan and the 1997 Stock Plan for Non-Employee
Directors (1997 Plans), upon the later of stockholder approval or regulatory
approval of the Merger. All options outstanding on the consummation of the
merger will be converted into options to acquire shares of Albertson's Common
Stock. In addition, option holders have the right (limited stock appreciation
right or LSAR), during an exercise period of up to 60 days after the occurrence
of a change of control (but prior to consummation of the Merger), to elect to
surrender all or part of their options in exchange for shares of Albertson's
Common Stock having a value equal to the excess of the change of control price
over the exercise price (which shares will be deliverable upon the Merger). The
change of control price is defined as the higher of (i) the highest reported
sales price during the 60-day period ending prior to the respective dates of the
"change of control", or (ii) the price paid to stockholders in the Merger,
subject to adjustment in both cases if the exercise period is less than 60 days.
Approval of the Merger Agreement on November 12, 1998 by the Company's
stockholders accelerated the vesting of 10.2 million stock options granted under
Pre-1997 Plans (approximately 60% of the outstanding stock options) and
permitted the holders of these options to exercise LSARs. The exercisability of
10.2 million LSARs resulted in the Company recognizing a $195.3 million merger
related stock option charge during the fourth fiscal quarter of 1998. This
charge was recorded based on the difference between the average option exercise
price of $19.15 and the average market price at measurement dates of $38.29. Of
the 10.2 million options, 6.3 million were exercised using the LSAR feature, 1.7
million were exercised without using the LSAR, and 2.2 million shares reverted
back to fixed price options due to the expiration of the LSAR on January 10,
1999.
The actual change of control price used to measure the value of the 6.3 million
LSARs will not be determinable until the date the Merger is consummated or the
Merger Agreement is terminated. Additional charges or income would be recognized
in each quarter until the Merger is consummated if the change of control price
is higher or lower than the amounts assumed for purposes of the foregoing
estimates. If the Merger is consummated, the foregoing charges will be non-cash.
LSARs relating to the approximately 6.5 million remaining stock options issued
under the 1997 Plans will become exercisable upon regulatory approval of the
Merger, which would result in recognition of an additional charge estimated at
$100 million based upon an average exercise price of $23.72 and assuming an
estimated change of control price of $39.19. The actual change of control price
used to measure the value of the LSARs will not be determinable until the date
the Merger is consummated or the Merger Agreement is terminated. If the Merger
is consummated, the foregoing charges will be non-cash.
Fixed Stock Option Plans
The Company's Stock Option and Stock Award Plans (Plans) provide for the grant
of options to purchase shares of common stock and the issuance of restricted
stock awards, subject to certain antidilution adjustments. At year-end 1998,
there were 7.1 million shares reserved for future grants or awards under the
Company's Plans.
Page 20
A summary of the Company's stock option activity and related information for
1998, 1997 and 1996 follows:
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Price Exercise Price
Price
(Options in thousands) Options Options Options
- ------------------------------------------ --------------- ------------- ------------- --------------- ------------ ---------------
Outstanding at beginning 18,268 $20.67 6,030 $14.36 3,840 $11.37
of year
Granted 214 $24.82 13,210 $23.14 2,712 $17.91
Exercised
Cash (2,374) $15.91 (436) $11.34 (269) $ 8.70
LSARs (6,337) $20.03
Forfeited / Expired (1,128) $20.19 (536) $18.21 (253) $13.00
=============== ============= ============
Outstanding at end of year 8,643 $22.61 18,268 $20.67 6,030 $14.36
=============== ============= ============
Exercisable at end of year 2,833 $20.36 1,056 $15.13 424 $ 8.70
Reserved for future grants 7,071 6,368 3,596
Exercise prices for outstanding options as of year-end 1998 ranged from $8.72 to
$24.88 and the weighted-average remaining contractual life of those options is
6.8 years.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (ESPP), which began January 1, 1996
enables eligible employees of the Company to subscribe for shares of common
stock on quarterly offering dates at a purchase price which is the lesser of 85%
of the fair market value of the shares on the first day or the last day of the
quarterly offering period. For financial reporting purposes, the discount of 15%
is treated as equivalent to the cost of issuing stock. During 1998 employees
contributed $15.2 million to the ESPP program and 0.8 million shares were
issued. Since the ESPP's inception, employees have contributed $45.9 million and
2.6 million shares have been issued. Purchases of stock through ESPP were
suspended following the third quarter 1998 purchases pursuant to the Merger
Agreement with Albertson's.
Long Term Incentive Plans
During 1997 the Company modified the Long Term Incentive Plan for 1996-1998 to
provide participants with the option to receive shares of restricted stock in
lieu of cash as originally provided. The number of shares issued to participants
electing to receive shares of stock was based on the projected value of the Plan
pay-out. The 184,701 shares issued under the 1996-1998 Plan will vest on April
1, 1999.
Performance Incentive Program
The 1998 Performance Incentive Program provides certain of the Company's key
executives an incentive award of shares of two-year restricted stock if certain
Company performance objectives are attained for the 1998 fiscal year. The
Company exceeded its annual performance goal for 1998 and awards under this
program amount to approximately 209,000 shares which will be issued in March
1999.
Key Executive Equity Program
In 1997 the Company established the Key Executive Equity Program (KEEP), a
stock-based management incentive program. A total of approximately 13.4 million
stock options were granted to 169 of the Company's officers in connection with
the KEEP with an exercise price of $22.50 to $24.88 per share. The KEEP involves
the grant of market-priced stock options that would ordinarily begin to vest on
the fifth anniversary of the grant date but which will vest on an accelerated
basis with respect to one-half of the grant if minimum stock ownership
requirements are satisfied, and with respect to the other half of the grant if
the ownership requirements are met and the Company achieves annual performance
goals. The KEEP options will vest and the minimum stock ownership requirements
will expire upon regulatory approval of the merger.
Page 21
To assist the KEEP participants in meeting the stock ownership requirement, the
Company issued full recourse interest bearing stock purchase loans to 18
participants to acquire additional shares of the Company's stock. The stock
purchased by the participants was purchased on the open market. The purchase
loans have a maturity date of April 1, 2002 and accrue interest at 8.5%, reset
annually at the then current prime rate. Outstanding loan balances at year-end
1998 totaled $1.9 million.
Stock Plan for Non-Employee Directors
During 1997 the shareholders approved the 1997 Stock Plan for Non-Employee
Directors (Directors' Plan), which provides for: 1) the grant of 2,000 shares
annually of the Company's Common Stock (Retainer Stock), 2) the grant on an
annual basis of stock options to acquire 1,200 shares of common stock to each
participant who satisfies the Minimum Stock Ownership Requirement, and 3) the
one time issuance of common stock (173,000 shares in total) to compensate such
directors for their respective interests in the Non-Employee Directors'
Retirement Plan (Retirement Stock), which was terminated concurrently with the
adoption of the Directors' Plan.
Retirement Stock (and dividends thereon which are reinvested in stock) will be
delivered to a participant on the earlier of: 1) death of Participant, 2) change
of control or, 3) the later of the date the Participant attains age 65 or the
date the Participant ceases to serve as a Director. Compensation expense related
to the Retirement Stock and Retainer Stock decreased pre-tax earnings by $3.4
million in 1998 and $4.0 million in 1997. The options vest upon regulatory
approval of the Merger.
Fair Value Disclosures
The Company's pro forma compensation expense under the fair value method,
utilizing the Black-Scholes option valuation model, for fixed stock options
granted and for the ESPP in 1998, 1997 and 1996, after income taxes, was $15.1
million for 1998, $12.9 million for 1997 and $4.8 million for 1996. Pro forma
net income would have been $351.3 million in 1998, $267.7 million in 1997 and
$282.5 million in 1996. Diluted earnings per share would have been $1.26 for
1998, $.97 for 1997 and $.97 for 1996.
The 1998 pro forma net income of $351.3 million resulted from reported net
income of $233.7 million, less the 1998 pro forma compensation expense after
income taxes of $15.1 million, and the elimination of the merger related stock
option charge of $132.7 million ($195.3 million pretax less $62.6 million tax
impact).
The fair value of options estimated at the date of grant assumes an average
expected volatility of 21.2% and dividend yield of 1.8%. Other assumptions for
1998, 1997 and 1996 are as follows:
1998 1997 1996
----------------------- ---------------------- ------------------------
Options ESPP Options ESPP Options ESPP
- ---------------------------------------------------- ------------ ---------- ------------- -------- ------------- ----------
Average risk-free interest rate 4.7% 5.1% 6.6% 5.0% 6.1% 5.1%
Average life of options (years) 6.5 .25 7.0 .25 4.0 .25
Average vesting date (years) 3.9 2.0 5.0 2.0 3.0 2.0
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of fair value of its employee stock options.
Because the fair value method of accounting for stock-based compensation has not
been applied to options granted prior to January 1, 1995, the preceding pro
forma compensation cost may not be representative of expected costs in future
years.
Page 22
Stock Purchase Incentive Plans
In 1992 the Company's shareholders approved both the American Stores Company Key
Executive Stock Purchase Incentive Plan and the American Stores Company Board of
Directors Stock Purchase Incentive Plan (Plans). The Company awarded to certain
directors and key executive officers the right to purchase a specified number of
shares of the Company's stock and extended to such directors and officers full
recourse interest bearing, 8-year loans to acquire the stock.
During fiscal 1997 and 1998 the performance cycle for participants in the Plans
ended and each received a deferred award, which was applied toward repayment of
their loans. The balance of the loans, together with accrued and unpaid interest
thereon, is payable in three equal installments on the sixth, seventh and eighth
anniversaries of the purchase date. The aggregate principal of these loans
outstanding is recorded as Other Assets in the balance sheet and as of January
30, 1999, the aggregate outstanding balance (including accrued and unpaid
interest) was $1.9 million.
Repurchase of Common Stock
In June 1996 the Company authorized a stock repurchase program of up to four
million shares of common stock (not including the repurchase of shares from the
Selling Stockholders). During 1996 0.1 million shares were repurchased. There
were no repurchases of common stock under the repurchase program during 1998 and
1997. On August 2, 1998, the Company terminated the stock repurchase program.
Postretirement Health Care Benefits
The Company provides certain health care benefits to eligible retirees of
certain defined employee groups under two unfunded plans, a defined dollar and a
full coverage plan.
Change in Benefit Obligation
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- --------------
Benefit obligation at beginning of year $54,029 $52,883 $51,671
Service cost (with interest) 670 917 671
Interest cost 3,471 3,816 3,896
Plan amendments 496
Actuarial (gain)/loss (6,880) 431 632
Benefits paid (4,069) (4,018) (3,987)
================ ================= ==============
Benefit obligation at end of year $47,717 $54,029 $52,883
================ ================= ==============
Change in Plan Assets
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Fair value of plan assets at
beginning of year $ 0 $ 0 $ 0
Employer contribution 4,069 4,018 3,987
Benefits paid (4,069) (4,018) (3,987)
================ ================= ================
Fair value of plan assets at
end of year $ 0 $ 0 $ 0
================ ================= ================
Funded status $(47,717) $(54,029) $(52,883)
Unrecognized net actuarial (gain) (18,098) (12,058) (12,969)
Unrecognized prior service cost 446
================ ================= ================
Accrued postretirement benefit
obligation (APBO) $(65,369) $(66,087) $(65,852)
================ ================= ================
Discount rate as of end of year 7.0% 7.5% 7.5%
For measurement purposes, a 7% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease to 6% for 2000 and remain at that level thereafter. For the defined
dollar plan, no future increases in the Company's subsidy level was assumed.
Page 23
Components of Net Periodic Benefit Cost
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Service cost (with interest) $ 670 $ 917 $ 671
Interest cost 3,471 3,816 3,896
Amortization of prior service cost 50
Recognized net actuarial (gain) (840) (480) (789)
---------------- ----------------- ----------------
Net periodic benefit cost $3,351 $4,253 $3,778
================ ================= ================
A prior service cost is caused by plan changes. The Company amended the plan to
reduce the first eligibility age for retirement from age 57 (with 10 years of
full-time service or 20 years of part-time service) to age 54 (with 10 years of
full-time service or 20 years of part-time service). The cumulative effect of
this plan change results in an APBO increase of $496,000.
The Company has multiple nonpension postretirement benefit plans. With the
exception of the plans for grandfathered retirees, the health care plans are
contributory, with participants' contributions adjusted annually. The accounting
for the health care plans anticipates that the Company will not increase its
contribution for health care benefits for non-grandfathered retirees in future
years.
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-Percentage-Point
(In thousands of dollars) Increase Decrease
Effect on total of service and interest
cost components $139 $(123)
Effect on postretirement benefit obligation $1,992 $(1,763)
Since the subsidy level for the defined dollar plan is fixed, a trend increase
or decrease has no impact on that portion of the obligation.
Retirement Plans
The Company sponsors and contributes to a defined contribution retirement plan,
American Stores Retirement Estates (ASRE). This plan was authorized by the Board
of Directors for the purpose of providing retirement benefits for associates of
American Stores Company and its subsidiaries. The plan covers associates meeting
age and service eligibility requirements, except those represented by a labor
union, unless the collective bargaining agreement provides for participation.
Contributions to ASRE are made at the discretion of the Board of Directors.
The Company also contributes to multi-employer defined benefit retirement plans
in accordance with the provisions of the various labor contracts that govern the
plans. The multi-employer plan contributions are generally based on the number
of hours worked. Information about these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
Page 24
Retirement plans expense was as follows:
(In thousands of dollars) 1998 1997 1996
- --------------------------------------------------------- --------------------- ---------------- --------------------
Company sponsored plans $ 92,966 $ 93,342 $ 88,106
Multi-employer plans 76,202 71,938 95,822
===================== ================ ====================
Retirement plans expense $169,168 $165,280 $183,928
===================== ================ ====================
Restructuring and Impairment
In 1996 the Company recorded special charges aggregating approximately $100.0
million before taxes, or $.21 per diluted share, related primarily to its
re-engineering initiatives. The special charges are included in cost of
merchandise sold ($10.0 million), operating and administrative expense ($12.9
million) and restructuring and impairment ($77.1 million). The components of the
charge include: warehouse consolidation costs, administrative office
consolidation costs, asset impairment costs, closed store costs and other
miscellaneous charges. The remaining reserve as of the 1998 fiscal year end of
$11.2 million relates primarily to the remaining lease commitments for the
administrative office consolidation costs.
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and ground water contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). The Company conducts
an on-going program for the inspection and evaluation of new sites proposed to
be acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition or results of operations of
the Company. Charges against earnings for environmental remediation were not
material in 1998, 1997 or 1996.
Legal Proceedings
On September 13, 1996, a class action lawsuit captioned McCampbell et al. v.
Ralphs Grocery Company, et al. was filed in the San Diego Superior Court of the
State of California against the Company and two other grocery chains operating
in southern California. The complaint alleges, among other things, that the
Company and others conspired to fix the retail price of eggs in southern
California. The Company believes it has meritorious defenses to plaintiffs
claims and plans to vigorously defend the lawsuit.
The Company is also involved in various other claims, administrative proceedings
and other legal proceedings which arise from time to time in connection with the
conduct of the Company's business. In the opinion of management, such
proceedings will not have a material adverse effect on the Company's financial
condition or results of operations.
Employment Contracts
During 1994 and 1995 the Company entered into Employment Agreements (Agreements)
with 17 of the Company's key executive officers. The Agreements, as amended,
expire on October 31, 2001 and are automatically renewed for subsequent one-year
terms, unless they are individually terminated by the Company at least two years
prior to the end of the term. Each Agreement contains usual and customary terms
of employment agreements and provides the officers with a special long-range
payout. The executives are entitled to receive an annual payment for a period of
20 years beginning at age 57 or upon termination of employment, whichever occurs
later. The payout is calculated as a percentage of the executive's average
target compensation objective during the last two years of his or her employment
under the Agreement. The payout ranges from 9% to 40% based on years of service
with the Company. The payout will be forfeited if the executive enters into
competition with the Company.
Page 25
The Company also entered into an employment agreement with the Company's
Chairman and Chief Executive Officer in 1994 which, as amended, expires on
October 31, 2002, and is automatically renewed for subsequent two-year terms
unless terminated by the Company at least three years prior to the end of the
term. The agreement provides for an annual payout that vests over an eight-year
period which, if fully vested, would equal approximately $710,000 adjusted for
inflation. Payments will be made over the life of the executive and his spouse.
The payout will be forfeited if the executive enters into competition with the
Company. In the event the Merger closes, the foregoing agreement will be
superseded by a Termination and Consulting agreement (the Consulting Agreement)
between the executive, the Company and Albertson's, Inc. The Consulting
Agreement provides, among other things, for a lump sum payment of the present
value of the payout, which is currently estimated at $11.0 million based upon an
assumed discount rate of 7.75%, and which will have vested in full upon
consummation of the Merger.
Page 26
Quarterly Results (unaudited)
In the opinion of management, all adjustments necessary for a fair presentation
have been included:
(In thousands of dollars, First Second Third Fourth Fiscal
except per share data) Quarter Quarter Quarter Quarter Year
(4)
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------- -----------------
1998 (1)
Sales $4,872,686 $4,950,016 $4,847,756 $5,196,267 $19,866,725
Gross profit 1,266,542 1,318,970 1,299,751 1,420,563 5,305,826
Operating profit 174,515 212,492 197,723 88,040 672,770
Net earnings 65,861 88,160 80,745 (1,022) 233,744
Basic earnings per share $.24 $.32 $.29 $.00 $.85
Diluted earnings per share .24 .32 .29 .00 .84
1997 (2)
Sales $4,747,644 $4,763,174 $4,647,465 $4,980,597 $19,138,880
Gross profit 1,250,805 1,286,449 1,234,699 1,327,664 5,099,617
Operating profit 167,531 212,420 161,468 227,222 768,641
Net earnings 34,225 89,957 60,275 96,163 280,620
Basic earnings per share $.12 $.33 $.22 $.35 $1.02
Diluted earnings per share .12 .33 .22 .35 1.01
1996 (3)
Sales $4,580,028 $4,625,066 $4,563,362 $4,909,673 $18,678,129
Gross profit 1,195,176 1,226,328 1,216,966 1,326,508 4,964,978
Operating profit 149,376 185,195 173,985 159,084 667,640
Net earnings 64,240 83,129 75,757 64,095 287,221
Basic earnings per share $.22 $.28 $.26 $.22 $.98
Diluted earnings per share .22 .28 .26 .22 .98
(1) Fourth quarter 1998 "Operating profit" included a merger related stock
option charge of $195.3 million ($.47 per share after tax) related to the
exercisibility of 10.2 million limited stock appreciation rights due to
the approval by the Company's stockholders of the Merger Agreement.
(2) First quarter 1997 "Other" included charges of $33.9 million related to
the sale of stock by a major shareholder and operating profit included
charges of $13.4 million related to the sale of a division of the
Company's communications subsidiary (total of $.14 per share).
(3) Fourth quarter 1996 included special charges totaling $100.0 million
pre-tax ($.21 per share, after tax) in operating profit, including $10.0
million in gross profit.
(4) Operating profit, before special charges and merger related stock option
charge, in the fourth quarter has exceeded the prior three quarters in
each of the three years presented due to the seasonality of the food and
drug retail business and LIFO inventory adjustments. The holiday and the
cold and flu season in the fourth quarter benefits the food and drug
retail business.
Page 27