Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-K
-------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2004 Commission file number
1-6187
ALBERTSON'S, INC.
------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 82-0184434
- ----------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
- ----------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(208) 395-6200
----------------------------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
Title of each class Name of each exchange on which registered
- ----------------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 CFR section 405) is not contained herein and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (x)
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No
----- -----
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of July 31, 2003 (the last business day of the Registrant's
most recently completed second fiscal quarter) was approximately $6.4 billion.
The number of shares of the registrant's common stock, $1.00 par value,
outstanding as of March 22, 2004 was 367.8 million.
Documents Incorporated by Reference
Listed hereunder are the documents, any portions of which are incorporated
by reference and the Parts of this Form 10-K into which such portions are
incorporated:
1. The Registrant's definitive proxy statement for use in connection with the
Annual Meeting of Shareholders to be held on June 10, 2004 to be filed
within 120 days after the Registrant's year ended January 29, 2004,
portions of which are incorporated by reference into Part III of this Form
10-K.
1
ALBERTSON'S, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
- ---------- ------------------------------------------------------------------------------------- ----------------
Cautionary Statement 3
1. Business 3
2. Properties 7
3. Legal Proceedings 9
3A. Executive Officers of the Registrant 11
4. Submission of Matters to a Vote of Security Holders 12
- ---------- ------------------------------------------------------------------------------------- ----------------
PART II
- ---------- ------------------------------------------------------------------------------------- ----------------
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 13
Purchases of Equity Securities
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 29
8. Financial Statements and Supplementary Data 30
9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure 60
9A. Controls and Procedures 60
- ---------- ------------------------------------------------------------------------------------- ----------------
PART III
- ---------- ------------------------------------------------------------------------------------- ----------------
10. Directors and Executive Officers of the Registrant 61
11. Executive Compensation 61
12. Security Ownership of Certain Beneficial Owners and Management and Related 61
Stockholder Matters
13. Certain Relationships and Related Transactions 61
14. Principal Accountant Fees and Services 61
PART IV
- ---------- ------------------------------------------------------------------------------------- ----------------
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
SIGNATURES
2
PART I
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
All statements other than statements of historical fact contained in this and
other documents disseminated by the Company, including statements regarding the
Company's expected financial performance, are forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. In reviewing
such information about the future performance of the Company, it should be kept
in mind that actual results may differ materially from those projected or
suggested in such forward-looking information since predictions regarding future
results of operations and other future events are subject to inherent
uncertainties. These statements may relate to, among other things: statements of
expectation regarding the results of operations had the labor dispute in
southern California not occurred; investing to increase sales; changes in cash
flow; increases in general liability costs, workers' compensation costs and
employee benefit costs; attainment of cost reduction goals; impacts of the
southern California labor dispute; impacts of the completion of the acquisition
of JS USA Holdings Inc.; achieving sales increases and increases in comparable
and identical sales; opening and remodeling stores; and the Company's five
strategic imperatives. These statements are indicated by words or phrases such
as "expects," "plans," "believes," "estimate," and "goal." In reviewing such
information about the future performance of the Company, it should be kept in
mind that actual results may differ materially from those projected or suggested
in such forward-looking information.
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 consumer spending; actions taken by new or
existing competitors (including nontraditional competitors), particularly those
intended to improve their market share (such as pricing and promotional
activities); labor negotiations; adverse determinations with respect to
litigation or other claims (including environmental matters); employee benefit
costs; continued solvency of third parties on leases the Company has guaranteed;
the Company's ability to recruit, retain and develop employees; the Company's
ability to develop new stores or complete remodels as rapidly as planned; the
Company's ability to implement new technology successfully; stability of product
costs; the Company's ability to integrate the operations of acquired or merged
companies, including JS USA Holding Inc.; the Company's ability to execute its
restructuring plans; the Company's ability to achieve its five strategic
imperatives; and other factors affecting the Company's business in or beyond the
Company's control. These other factors include changes in the rate of inflation;
changes in state or federal legislation or regulation; the cost and stability of
energy sources; changes in the general economy; and changes in interest rates.
Other factors and assumptions not identified above could also cause the actual
results to differ materially from those projected or suggested 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 predictions, assumptions, estimates or changes in other
factors affecting such forward-looking information.
Item 1. Business.
General
Albertson's, Inc. ("Albertsons" or 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. The Company's general offices are located at 250
Parkcenter Boulevard, Boise, Idaho 83706 and its telephone number is (208)
395-6200. Information about the Company is available on the internet at
www.albertsons.com.
Based on sales, the Company is one of the largest retail food and drug
chains in the world. As of January 29, 2004, the Company operated 2,305 retail
stores in 31 states. These retail stores consist of 1,351 combination food-drug
stores, 707 stand-alone drugstores and 247 conventional and warehouse stores.
The Company also operated 228 fuel centers near existing stores. Retail
operations are supported by 17 major Company distribution centers. These
distribution centers provide product exclusively to the Company's retail stores.
The Company's operations are within a single operating segment, the retail
sale of food and drug merchandise. All the Company's operations are within the
United States. As of January 29, 2004, the Company's stores operated under the
banners Albertsons, Albertsons Express, Albertsons-Osco, Albertsons-Sav-on,
Jewel, Jewel-Osco, Acme, Sav-on Drugs, Osco Drug, Max Foods and Super Saver
Foods. The Company has invested in these brands, their development and
protection and considers them important assets.
The Company's fiscal year ends on the Thursday nearest to January 31. As a
result, the Company's fiscal year includes a 53rd week every 5 to 6 years.
Fiscal years 2003, 2002 and 2001 each contained 52 weeks and ended on January
29, 2004, January 30, 2003 and January 31, 2002. The Company's fiscal year 2004
contains 53 weeks and ends on February 3, 2005.
3
The Company continues to be focused on its five strategic imperatives that
serve as a guide and a filter for the Company's initiatives and actions. These
five imperatives are: 1) Aggressive cost and process control, 2) Maximize return
on invested capital, 3) Customer-focused approach to growth, 4) Company-wide
focus on technology and 5) Energized associates. With these imperatives in mind,
the Company announced on July 18, 2001 the initial restructuring plan of
divesting 165 underperforming retail stores and consolidation and elimination of
four division offices. The Company announced on March 13, 2002 the second phase
of restructuring which included exiting four underperforming markets: Memphis,
Tennessee; Nashville, Tennessee; Houston, Texas; and San Antonio, Texas. This
restructuring phase involved divesting 95 stores and two distribution centers
and included the reduction of division offices from 15 to 11. On January 30,
2004, the Company announced a new organizational structure in its Dallas/Fort
Worth division intended to eliminate layers of management and streamline
operations. On February 20, 2004, the Company announced plans to further
consolidate its 11 divisions to seven and to create a new eighth division to
develop new formats, including price impact stores.
All dollar amounts in this report are in millions, except per share data.
Retail Formats
As of January 29, 2004, the Company's retail operations were organized into
11 divisions, based primarily on geographic boundaries. The division staff is
responsible for day-to-day operations and for executing marketing and
merchandising programs. This structure allows the division level employees, who
are closest to the customer, to implement strategies tailored to each of the
neighborhoods that the Company serves. In February 2004, the Company announced
its plans to further consolidate its 11 divisions to eight.
The Company's combination food-drug stores are super grocery and drug
stores under one roof and range in size from 31,000 to 107,000 square feet. Most
of these stores offer prescription drugs and an expanded section of cosmetics
and general merchandise in addition to specialty departments such as service
seafood and meat, bakery, lobby/video, service delicatessen, liquor and floral.
Many also offer meal centers, party supply centers, coffee bars, in-store banks,
dry cleaning, photo processing and destination categories for beverages, snacks,
pet care products, paper products and baby care merchandise. All shopping areas
are served by a common set of checkstands.
Albertsons strategic advantage in today's marketplace comes from the
Company's unique heritage in two market formats - food stores and drugstores.
Albertsons has decades of experience in serving customers in both market
formats. This unique position in the marketplace has enabled the Company to
bring together separate retail brands, creating the dual brand combination
stores that leverage the Company's separate food and drug experience and brand
equity. The Company began expanding the dual brand combo concept in 2001 and has
continued to roll-out the dual brand concept through 2003.
The Company's stand-alone drugstores offer convenient shopping and
prescription pickup as well as a wide assortment of general merchandise, health
and beauty care products, over-the-counter medication, greeting cards and photo
processing. The Company's drugstores are typically located on corners and many
offer a drive-thru pharmacy. The Company's stand-alone drugstores average 18,500
square feet.
The Company's other store formats include conventional supermarkets and
warehouse stores. These stores offer a full selection in the basic departments
of grocery, meat, produce, dairy and limited general merchandise. Many locations
have a pharmacy, in-store bakery and service delicatessen.
As of January 29, 2004, the Company operated 228 fuel centers in 22 states.
Fuel centers are generally located in the parking lots of the Company's stores.
These centers feature three to six fuel pumps and a small building, ranging in
size from a pay-only kiosk to a convenience store.
In November 1999 Albertsons introduced its own grocery delivery Web site
when Albertsons.com entered the Seattle, Washington market. Since the launch of
Albertsons.com, the Company has continued to introduce this service to more
areas. As of January 29, 2004, Albertsons.com operated in and around San Diego,
Los Angeles, San Francisco, San Jose and Oakland, California; Boise, Idaho; Las
Vegas, Nevada; Portland, Oregon; Dallas/Fort Worth, Texas; and Seattle and
Vancouver, Washington. By using its brick-and-mortar stores, Albertsons has
evolved its online model to take advantage of its retail grocery expertise,
brand recognition and existing infrastructure. With more than four years of
experience, Albertsons.com offers a reliable and proven online grocery service
that delivers products direct from the store to the customers' location.
4
Savon.com, Albertsons online drugstore, serves the Company's customers
nationwide. Savon.com has a nationwide online pharmacy service that offers
sundry items, new and refill prescriptions and consumer health information. The
Web site allows customers across the country the freedom to have new or refilled
prescriptions ready for pickup at any local Albertsons food or drug store or
mailed to their location of preference.
Marketing and Merchandising
The Company's brand promise is to "Make Life Easier for our Customers".
This is reinforced to customers through associate education and print and media
advertising. With this brand promise in mind, the Company strives to merchandise
stores to cater to the neighborhoods served. For example, some stores offer a
variety of products in categories such as Asian, Hispanic and kosher foods.
The Company supplies its stores with merchandise through its distribution
centers and outside suppliers, or directly from manufacturers, in an effort to
obtain merchandise at the lowest possible cost. The Company believes that it is
not dependent on any one supplier and considers its relations with its suppliers
to be satisfactory.
Management believes that retail stores offering a broad array of products
and time-saving services are perceived by customers as part of a solution to
today's lifestyle demands. Accordingly, a principal component of the Company's
merchandising strategy is to design stores that offer these solutions. In the
Company's prototype stores, pharmacies, in-store bakeries and delicatessens,
prepared foods sections and gourmet coffee service are available. These stores
also feature a selection of prepared foods and many of these stores offer daily
selections of home meal replacement items, such as rotisserie chicken, chicken
cordon blue, tamales, meat loaf and other dinner entrees, sandwiches,
pre-packaged salads and prepared fresh vegetables. The bakery in these stores
offers an expanded selection of baked goods and self-service selections.
Finally, the Company has joined forces with other retailers (Toys R Us,
Starbucks and Krispy Kreme) to provide a wider selection of quality merchandise
to its customers.
All of the Company's stores carry a broad range of national brands and
offer private label brand products in many merchandise categories. During 2003
the Company launched its premium private label brand, Essensia and through
January 29, 2004 had introduced 125 Essensia products across numerous
categories. The Company's stores provide consumer information such as
nutritional signing in the meat and produce departments, freshness code dating,
unit pricing, meal ideas and food information pamphlets.
Employees
As of January 29, 2004, the Company employed approximately 212,000 people,
which included approximately 198,000 regular workers and 14,000 replacement
workers in stores directly impacted by the now resolved labor dispute in
southern California. As of January 29, 2004, approximately 58% of the Company's
employees were covered by collective bargaining agreements, primarily with the
United Food and Commercial Workers and International Brotherhood of Teamsters.
Labor agreements covering approximately 45,000 associates expire during 2004.
Negotiations with respect to some of these contracts have commenced. There can
be no assurances that the Company will be able to successfully renegotiate its
union contracts without work stoppages or on acceptable terms.
The Company considers its present relations with employees to be
satisfactory. The Company values its employees and believes that employee
loyalty and enthusiasm are key elements of its operating performance.
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 properties). The Company
conducts an ongoing program for the inspection and evaluation of potential new
sites and the remediation and monitoring of contamination at existing and
previously owned sites. Although the ultimate outcome and expense of
environmental remediation is uncertain, the Company believes that the costs of
required remediation and continuing compliance with environmental laws, in
excess of current reserves, will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
Environmental remediation costs were not material in 2003, 2002 or 2001.
5
Government Regulation
The Company is subject to regulation by a variety of governmental agencies,
including, but not limited to, the U.S. Food and Drug Administration, the U.S.
Department of Agriculture, the Occupational Health and Safety Administration,
the Environmental Protection Agency and other federal, state and local agencies.
The Company's stores are also subject to local laws regarding zoning, land use
and the sale of alcoholic beverages. The Company believes that its locations
comply, in material respects, with such laws and regulations.
Competition
Food, drug and general merchandise retailing involves intense competition
with numerous competitors. Competition is based primarily on price, product
quality and variety, service and location. The Company competes by providing
consumers with what it believes to be an overall shopping experience that
addresses these competitive factors. Price based competition has, from time to
time, adversely affected operating margins. The Company faces direct competition
from many local, regional and national supermarket chains, independent and
specialty grocers, supercenters, club stores, specialty retailers (such as pet
centers and toy stores) and large-scale drug retailers. Increasing competition
also exists from convenience stores, prepared food retailers, liquor stores,
video stores, film developing outlets and Internet and mail-order retailers.
Seasonality
The Company is subject to effects of seasonality. Sales have historically
been higher in the Company's fourth quarter than other quarters due to the
holiday season and the increase in cold and flu occurrences.
Available Information
The Company makes available its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 free of charge through the Company's Web site at
http://www.albertsons.com as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities and
Exchange Commission ("SEC").
6
Item 2. Properties.
During the past ten fiscal years, the Company has built or acquired 1,966
stores. Approximately 89% of the Company's retail square footage has been opened
or remodeled during this period.
Albertsons stores are located in 31 states concentrated in the Northeast,
Western, Midwest and Southern areas of the United States. The table below is a
summary of the stores by state and classification as of January 29, 2004:
Combination
Food-Drug Stand-Alone Other Fuel
Stores Drugstores Stores TOTAL Centers (a)
- --------------------- ---------------- ---------------- --------------- -------------- ----------------
Arizona 57 79 - 136 16
Arkansas 1 - - 1 -
California 313 322 133 768 7
Colorado 51 - 11 62 12
Delaware 10 - 2 12 1
Florida 121 - - 121 16
Idaho 31 - 5 36 16
Illinois 167 90 14 271 19
Indiana 6 45 - 51 1
Iowa 1 14 - 15 -
Kansas - 21 - 21 -
Louisiana 31 - - 31 12
Maryland 3 - 5 8 1
Michigan - 1 - 1 -
Minnesota - 1 - 1 -
Missouri - 34 - 34 -
Montana 18 8 14 40 5
Nebraska 12 13 - 25 3
Nevada 48 44 2 94 11
New Jersey 35 - 26 61 -
New Mexico 22 4 1 27 4
North Dakota 2 6 - 8 -
Oklahoma 30 - - 30 14
Oregon 45 - 9 54 13
Pennsylvania 43 - 12 55 1
South Dakota 1 1 - 2 -
Texas 158 - - 158 47
Utah 45 - 4 49 9
Washington 75 - 9 84 16
Wisconsin 15 24 - 39 1
Wyoming 10 - - 10 3
---------------- ---------------- --------------- -------------- ----------------
Total 1,351 707 247 2,305 228
================ ================ =============== ============== ================
Retail Square
Footage by Store
Type (000's) 73,663 13,102 7,234 93,999 (a)
================ ================ =============== ============== ================
(a) All fuel centers are located adjacent to retail stores, therefore the
Company does not count fuel centers as separate stores. The square
footage of fuel centers is included with the square footage of
adjacent stores.
The Company has expanded and improved its distribution facilities when
opportunities exist to improve service to the retail stores and generate an
adequate return on invested capital. During 2003 approximately 78% of the
merchandise purchased for resale in Company retail stores was received from
Company distribution centers.
7
Albertsons distribution system consists of 17 major distribution facilities
located strategically throughout the Company's operating markets. The table
below is a summary of the Company's distribution facilities and the product
categories they support, as of January 29, 2004:
High
Volume Square
Frozen Meat & Health Health General Footage
Major Distribution Facilities Grocery Food Liquor Produce Deli & Beauty & Beauty Merch. Pharmaceuticals (000's)
----------------------------- ------- ------ ------ ------- ------ -------- -------- -------- --------------- -------
Melrose Park, Illinois X X X X 1,662
Lancaster, Pennsylvania X X X X X 1,413
Brea, California X X X 1,331
La Habra, California X X X X X 1,203
Fort Worth, Texas X X X X 1,131
Plant City, Florida X X X X X X 1,011
Irvine, California X X 1,009
Elk Grove, Illinois X X X X 933
Vacaville, California X 854
Portland, Oregon X X X X 834
Phoenix, Arizona X X X X X 734
Salt Lake City, Utah X X X X 660
San Leandro, California X X X 480
Sacramento, California X X X X X 442
Ponca City, Oklahoma X X X 420
Denver, Colorado X X X X 388
Boise, Idaho X X 302
Other Distribution Facilities
-----------------------------
Las Vegas, Nevada X 30
Indianapolis, Indiana X 22
---------------
TOTAL SQUARE FOOTAGE - All
Distribution Facilities (000's) 14,859
===============
The Company currently prefers to finance most new retail store and
distribution facilities internally, thus retaining ownership of its land and
buildings. The Company's internal expansion plans are expected to be financed
primarily from cash provided by operating activities. The Company has and will
continue to finance a portion of its new stores through lease transactions when
it does not have the opportunity to own the property.
8
As of January 29, 2004, the Company held title to both the land and
buildings of 44% of the Company's stores and held title to the buildings on
leased land of an additional 11% of the Company's stores. The Company also holds
title to the land and buildings of most of its administrative offices and
distribution facilities.
Item 3. Legal Proceedings.
The Company is subject to various lawsuits, claims and other legal matters
that arise in the ordinary course of conducting business.
In March 2000 a class action complaint was filed against Albertsons as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
Albertson's, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs' allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers' compensation costs, cash shortages, premises liability and
"shrink" losses in violation of California law. In October 2001 the court
granted summary judgment against Sav-on Drug Stores, finding one of its bonus
plans unlawful under plaintiffs' liability theory. In August 2001 a class action
complaint with very similar claims, also involving bonus-eligible managers, was
filed against Albertsons as well as Lucky Stores, Inc. and American Stores
Company, wholly-owned subsidiaries of the Company, in the Superior Court for the
County of Los Angeles, California (Petersen, et al. v. Lucky Stores, Inc., et
al.). In June 2002 the cases were consolidated and in August 2002 a class action
with respect to the consolidated case was certified by the court. The Court of
Appeal of the State of California Second Appellate District decision in Ralphs
Grocery Co. vs. Superior Court, 112 Cal. App. 4th 1090 (2003) addressed certain
of the issues advanced by the plaintiffs in this lawsuit. On February 18, 2004,
the California Supreme Court declined to review this decision. Certain of the
issues were decided by the appellate court favorably to the Company's position
and certain were decided adverse to the Company's position. There remain
numerous issues to be resolved by the trial court. The Company believes it has
strong defenses on these issues and the Company is vigorously advancing its
position. 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 that the ultimate resolution of this action will have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
In April 2000 a class action complaint was filed against Albertsons as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs' allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 against the
Company's subsidiary Sav-on Drug Stores, Inc. in the Superior Court for the
County of Los Angeles, California (Rocher, Dahlin, et al. v. Sav-on Drug Stores,
Inc.) and was also certified as a class action. In April 2002 the Court of
Appeal of the State of California Second Appellate District reversed the Rocher
class certification, leaving only two plaintiffs. The California Supreme Court
has accepted plaintiffs' request for review of this class decertification. The
Gardner case is on hold pending the review of the Rocher class decertification
issue by the California Supreme Court. The Company has strong defenses against
these lawsuits and is vigorously defending them. Although these lawsuits are
subject to the uncertainties inherent in the litigation process, based on the
information presently available to the Company, management does not expect that
the ultimate resolution of these lawsuits will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
In August 2000 a class action complaint was filed against Jewel Food
Stores, Inc., an indirect wholly owned subsidiary of the Company and Dominick's
Finer Foods, Inc. in the Circuit Court of Cook County, Illinois alleging milk
price fixing (Maureen Baker et al. v. Jewel Food Stores, Inc. and Dominick's
Finer Foods, Inc., Case No. 00L 009664). In February 2003, the trial court found
in favor of the defendants and dismissed the case with prejudice. Thereafter,
the plaintiffs appealed. Briefs have now been filed for the appeal and the
matter is pending in the Illinois Appellate Court. 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 that
the ultimate resolution of this action will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
In September 2000 an agreement was reached and court approval granted, to
settle eight purported class and/or collective actions which were consolidated
in the United States District Court in Boise, Idaho and which raised various
issues including "off-the-clock" work allegations and allegations regarding
certain salaried grocery managers' exempt status. Under the settlement
9
agreement, current and former employees who met eligibility criteria have been
allowed to present their off-the-clock work claims to a settlement
administrator. Additionally, current and former grocery managers employed in the
State of California have been allowed to present their exempt status claims to a
settlement administrator. The Company mailed notices of the settlement and
claims forms to approximately 70,500 associates and former associates.
Approximately 6,000 claim forms were returned, of which approximately 5,000 were
deemed by the settlement administrator to be incapable of valuation, presumed
untimely, or both. The claims administrator was able to assign a value to
approximately 1,000 claims, which amount to a total of approximately $14,
although the value of many of those claims is still subject to challenge by the
Company. A second claim process was ordered by the court, but the parties are
still waiting for final instructions from the Court. The Company is presently
unable to determine the number of individuals who may ultimately submit valid
claims or the amounts that it may ultimately be required to pay with respect to
such claims. Based on the information presently available to it, management does
not expect that the satisfaction of valid claims submitted pursuant to the
settlement will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
On November 1, 2001, the Environmental Protection Agency ("EPA") notified
Jewel Food Stores, Inc., an indirect wholly-owned subsidiary of the Company, of
alleged violations of the Clean Air Act. No notice of violation was issued, but
the Company and the EPA entered into discussions that are expected to result in
a consent decree establishing technical protocols for the refrigerant management
program; setting a penalty of $0.1; and requiring Jewel to accelerate the
industry's future obligation to substitute non-ozone depleting refrigerant for
existing refrigerant in some of the Jewel stores.
On November 20, 2003, three consumers filed an action in California state
court (Kerner, et al. v. Albertsons, Inc.; Ralphs Grocery Company; and Safeway
Inc., dba Vons, a Safeway Company, Los Angeles Superior Court, Case No.
BC306456), claiming that certain provisions of the agreements (the "Labor
Dispute Agreements") between the Company, The Kroger Co. and Safeway Inc. (the
"Retailers") which provided for "lock-outs" in the event that any Retailer was
struck at any or all of its southern California facilities when the other
Retailers were not and contained a provision designed to prevent the union from
placing disproportionate pressure on one or more Retailer by picketing such
Retailer(s) but not the other Retailer(s), violate California's Cartwright Act
and the Unfair Competition Law. The lawsuit seeks unspecified monetary damages
and injunctive relief. On February 2, 2004, the Attorney General for the State
of California filed an action in Los Angeles federal court (California, ex rel
Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertsons, Inc. and
Ralphs Grocery Company, a division of The Kroger Co., United States District
Court Central District of California, Case No. CV04-0687) claiming that certain
provisions of the Labor Dispute Agreements violate section 1 of the Sherman Act.
The lawsuit seeks declarative and injunctive relief. The Company filed its
answer on February 24, 2004. The Company has strong defenses against these
lawsuits and is vigorously defending them. Although these lawsuits are subject
to uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect that the ultimate
resolution of these actions will have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
The Company is also involved in routine legal proceedings incidental to its
operations. Management does not expect that the ultimate resolution of these
legal proceedings will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The statements above reflect management's current expectations based on the
information presently available to the Company. However, predicting the outcomes
of claims and litigation and estimating related costs and exposures involve
substantial uncertainties that could cause actual outcomes, costs and exposures
to vary materially from current expectations. In addition, the Company regularly
monitors its exposure to the loss contingencies associated with these matters
and may from time to time change its predictions with respect to outcomes and
its estimates with respect to related costs and exposures. It is possible that
material differences in actual outcomes, costs and exposures relative to current
predictions and estimates, or material changes in such predictions or estimates,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
10
Item 3A. Executive Officers of the Registrant.
Executive and Reporting Officers
Date First Appointed
Age as of as an Executive or
Name 3/26/04 Position Reporting Officer
---- --------- -------- --------------------
Lawrence R. Johnston 55 Chairman of the Board, Chief Executive 04/23/01
Officer and President
Robert C. Butler 55 Executive Vice President, Food Operations 03/21/00
and President, Intermountain West Division
Romeo R. Cefalo 54 Executive Vice President, Real Estate, 03/21/00
Construction, Store Development and New
Formats
Robert J. Dunst, Jr. 43 Executive Vice President and Chief 11/19/01
Technology Officer
Clarence J. Gabriel 50 Executive Vice President, Supply Chain 01/13/03
Kathy J. Herbert 50 Executive Vice President, Human Resources 09/17/01
John R. Sims 54 Executive Vice President and 03/25/02
General Counsel
Felicia D. Thornton 40 Executive Vice President and Chief 08/22/01
Financial Officer
Kevin H. Tripp 49 Executive Vice President, Operations and 12/11/00
Pharmacy
Eric J. Cremers 40 Senior Vice President, Corporate Strategy 07/15/02
and Business Development
James F. Gentile 52 Senior Vice President, Six Sigma Quality 02/20/04
Susan M. Neumann 50 Senior Vice President, Education, 11/20/03
Communications and Public Affairs
Pamela S. Powell 52 Senior Vice President, Customer Service 02/20/04
Peter F. Collins 39 Group Vice President and Controller 01/15/03
Lawrence R. Johnston has served as President since July 24, 2003 and
Chairman of the Board and Chief Executive Officer since April 23, 2001.
Previously he served as President and Chief Executive Officer, General Electric
Appliances Division from November 1999; President and Chief Executive Officer,
General Electric Medical Systems-Europe, Middle East and Africa from 1997;
Chairman of General Electric Company's European Corporate Executive Council from
1998 to 1999 and Vice President, Sales and Distribution of GE Appliances
Division from 1989 to 1997.
Robert C. Butler became Executive Vice President, Food Operations and
President, Intermountain West Division on February 20, 2004. Previously he
served as Executive Vice President, Operations from March 21, 2000; Senior Vice
President, Merchandising from June 23, 1999 and Vice President, Southern
California Division from 1996.
Romeo R. Cefalo became Executive Vice President, Real Estate, Construction,
Store Development and New Formats on February 20, 2004. Previously he served as
Executive Vice President, Operations from March 21, 2000; President, Southern
California Region from June 23, 1999; Executive Vice President and General
Manager of the Lucky South Division of American Stores Company from 1997; and
Senior Vice President and General Manager of the same division from 1995.
11
Robert J. Dunst, Jr. became Executive Vice President and Chief Technology
Officer on November 19, 2001. Previously he served as Vice President,
Applications Development, Safeway, Inc. (food and drug retailing) and Director,
Systems Architecture and Infrastructure, Safeway, Inc. from 1995.
Clarence J. Gabriel became Executive Vice President, Supply Chain on
January 13, 2003. Previously he served as President, Chief Executive Officer and
Chairman of the Board, Newgistics, Inc. (returns management solutions for direct
retailers) from June 2000 and Division President, Corporate Express from
November 1997.
Kathy J. Herbert became Executive Vice President, Human Resources on
September 17, 2001. Previously she served as Vice President, Human Resources,
Jewel-Osco Division, American Stores Company and subsequently Albertsons from
April 1998.
John R. Sims became Executive Vice President and General Counsel on March
25, 2002. Previously, he was Vice President and Deputy General Counsel with
Federated Department Stores, Inc. (department store retailing) from 1990.
Felicia D. Thornton became Executive Vice President and Chief Financial
Officer on August 22, 2001. Previously she was a business consultant for HASC
(private real estate holdings) from January 2001; Group Vice President, The
Kroger Co. (food and drug retailing) from February 1999 and Group Vice
President, Corporate Planning and Accounting, The Kroger Co. from February 1996.
Kevin H. Tripp became Executive Vice President, Operations and Pharmacy on
May 19, 2002. Previously he served as Executive Vice President, Drug and General
Merchandise from December 11, 2000; President, Drug Region from June 1999; and
Executive Vice President and General Manager, American Drug Stores from November
1997.
Eric Cremers became Senior Vice President, Corporate Strategy and Business
Development on July 15, 2002. Previously he served as Managing Director,
Investment Banking, U.S. Bancorp Piper Jaffrey (investment banking) from 1999
and Vice President, Strategy and Corporate Development, Pillsbury Co. (food
manufacturing) from 1996.
James F. Gentile became Senior Vice President, Six Sigma Quality on
February 20, 2004. Previously he served as President, Northern California
Division from August 2002; Senior Vice President, Marketing - Midwest Division
from February 2001; Vice President, Grocery and General Merchandise - Midwest
Division from July 2001 and Vice President, Procurement - Midwest Division from
1994.
Susan M. Neumann was promoted to Senior Vice President, Education,
Communications and Public Affairs on November 20, 2003. Previously she served as
Group Vice President, Communications and Education from January 2002 and Vice
President, Communications from January 1996.
Pamela S. Powell was promoted to Senior Vice President, Customer Service on
February 20, 2004. Previously she served as Group Vice President, Marketing from
May 2000; Vice President, Marketing from June 1999; and Senior Vice President,
Sales & Marketing Support, American Stores Company from May 1998.
Peter F. Collins was promoted to Group Vice President and Controller on
January 15, 2003. Previously he served as Group Vice President, Corporate
Accounting and Reporting from July 2002; Partner, Arthur Andersen LLP (public
accounting) from September 1998; and Senior Manager, Arthur Andersen LLP from
September 1995.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of 2003 to a vote of
security holders through the solicitation of proxies or otherwise.
12
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The Company's common stock is traded on both the New York Stock Exchange
and the Pacific Stock Exchange under the symbol ABS. As of March 22, 2004, there
were approximately 29,235 holders of record. The following table sets forth the
reported high and low stock prices by quarter as reported by the NYSE and
dividends declared:
Common Stock Market Price
Dividends
2003 High Low Declared
----------------------- ---- --- --------
Fourth Quarter $24.19 $19.50 $0.19
Third Quarter 23.65 18.40 0.19
Second Quarter 21.91 17.91 0.19
First Quarter 21.71 17.76 0.19
2002
-----------------------
Fourth Quarter 24.60 18.85 0.19
Third Quarter 28.66 22.14 0.19
Second Quarter 35.49 26.51 0.19
First Quarter 35.49 26.88 0.19
Dividends
The Company has paid cash dividends on its Common Stock since 1959. The
Company pays these dividends at the discretion of the Board of Directors. The
continuation of these payments, the amount of such dividends and the form in
which the dividends are paid (cash or stock) depend upon many factors, including
the results of operations and the financial condition of the Company.
13
Item 6. Selected Financial Data.
The following data have been derived from the consolidated financial
statements of the Company and should be read in conjunction with those
statements.
52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
(Dollars in millions, January 29, January 30, January 31, February 1, February 3,
except per share data) 2004 2003 2002 2001 2000
- ---------------------------------- ---------------- -------------- ---------------- --------------- ---------------
Operating Results:
Sales $ 35,436 $ 35,626 $ 36,605 $ 35,501 $ 36,326
Earnings from continuing operations 556 865 496 746 395
Net earnings 556 485 501 765 404
Net earnings as a percent to sales 1.57% 1.36% 1.38% 2.15% 1.11%
Common Stock Data:
Earnings per share from continuing
operations:
Basic $ 1.51 $ 2.18 $ 1.22 $ 1.78 $ 0.93
Diluted 1.51 2.17 1.22 1.78 0.92
Net earnings per share:
Basic 1.51 1.22 1.23 1.83 0.96
Diluted 1.51 1.22 1.23 1.83 0.95
Cash dividends per share:
Albertsons 0.76 0.76 0.76 0.76 0.72
American Stores Company
equivalent - - - - 0.14
Financial Position:
Total assets $ 15,394 $ 15,211 $ 15,981 $ 16,094 $ 15,719
Long-term debt and capitalized
lease obligations 4,804 5,257 5,336 5,942 4,990
Other Year End Statistics:
Number of stores 2,305 2,287 2,421 2,512 2,492
The operating results include two significant restructuring initiatives
that were implemented in 2001 and 2002 (refer to Note 6 "Restructuring" and Note
5 "Discontinued Operations/Market Exits" in the notes to the accompanying
consolidated financial statements). Although these initiatives were similar, the
adoption of Statement of Financial Accounting Standard (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" on February 1,
2002 caused the financial statement presentation of these actions to be
dissimilar (SFAS No. 144 does not allow for the retroactive application of its
provisions). The Company's financial statements have been restated to classify
the results of operations for the 2002 restructuring that resulted in the
divestiture of 95 stores and two distribution centers and the reduction of
division offices from 15 to 11, as discontinued operations for all periods. The
operating results of the 165 stores divested under the 2001 restructuring are
included in continuing operations of the Company's financial statements for the
periods prior to their sale or closure.
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" in
2002 (refer to Note 12 "Goodwill and Other Intangible Assets" in the notes to
the accompanying consolidated financial statements).
On June 23, 1999, Albertsons and American Stores Company consummated a
merger, which was accounted for as a pooling of interests.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
During the past three years, the Company announced a variety of actions and
programs the leadership team has identified and implemented with the intent to
drive the Company's future competitiveness, profitability and return on invested
capital. The Company continues to be focused on its five strategic imperatives
that serve as a guide and a filter for all the Company's initiatives. The food,
drug and general merchandise retailing industry continues to experience intense
competition with numerous competitors. The Company is competing through planned
investments in pricing and promotion, product differentiation and customer
service. The Company's 2003 results of operations were unfavorably impacted by a
labor dispute with its retail union associates in southern California that began
on October 12, 2003 and lasted through the remainder of the Company's fiscal
year which ended on January 29, 2004 ("Labor Dispute").
All dollar amounts in this report are in millions, except per share data.
Southern California Labor Dispute
Pursuant to the terms of a multi-employer bargaining arrangement among the
Company, The Kroger Co. and Safeway Inc. (the "Retailers"), the Company "locked
out" its retail union associates in southern California food stores on October
12, 2003. This followed the United Food and Commercial Workers' ("UFCW")
decision to conduct a strike at Safeway Inc.'s southern California Vons
Supermarket stores on October 11, 2003.
In connection with the decision of the Retailers to engage in
multi-employer bargaining with the UFCW, the Retailers entered into agreements
("Labor Dispute Agreements") which provided for lock-outs in the event that any
Retailer was struck at any or all of its facilities in southern California when
the other Retailers were not and contained a provision designed to prevent the
union from placing disproportionate pressure on one or more Retailer by
picketing such Retailer(s) but not the other Retailer(s). Payments are expected
to be made or received under the Labor Dispute Agreements during the first half
of fiscal 2004 at which time only net amounts will be paid.
In November 2003, three consumers filed an action in California state court
claiming that the Labor Dispute Agreements violate antitrust and consumer
protection laws. In February 2004, the California Attorney General filed suit in
federal court claiming that certain provisions of the Labor Dispute Agreements
violate antitrust law. The Company believes that similar agreements are not
uncommon in joint bargaining situations and that the Labor Dispute Agreements
are lawful. The Company is vigorously defending itself in these proceedings.
The Labor Dispute resulted in decreased sales in the Company's southern
California combination food and drug and conventional food stores and decreased
margin as a result of inventory shrink, sales mix changes and increased
distribution costs. The Company also incurred additional costs for hiring and
training temporary workers, travel costs for temporarily reassigned key
associates from other Company divisions, increased store security and legal
costs. These impacts were partially offset by reduced labor expenses and the
estimated benefit from the multi-employer bargaining agreement discussed above.
The Labor Dispute ended with the ratification of a new collective bargaining
agreement on February 28, 2004. Under the terms of the new collective bargaining
agreement, the Company agreed to fund a one-time contribution to the union
health and welfare fund of approximately $36 as well as to make strike
ratification bonus payments of approximately $10. These amounts will be charged
to earnings in the first quarter of fiscal year 2004. Other specific impacts of
the Labor Dispute on the Company's 2003 results of operations are discussed
below.
Acquisition of Shaw's
On March 25, 2004, the Company entered into a stock purchase agreement with
J Sainsbury plc and JS USA Holdings Inc. to acquire all of the outstanding
capital stock of the entities which conduct J Sainsbury plc's U.S. retail
grocery store business for approximately $2,100 in cash, as well as the
assumption of approximately $368 in capital leases. The Company intends to use a
combination of cash-on-hand and commercial paper to finance a portion of the
purchase price of the acquisition. The commercial paper the Company intends to
issue will be backed by the Company's existing credit facilities and/or a new
senior revolving bridge facility. The Company's also contemplating various
financing alternatives, including the issuance of debt and/or equity, to finance
a portion of the purchase price and/or to repay some of the commercial paper.
The operations to be acquired consist of approximately 200 grocery stores
in the New England area operated under the banners Shaw's and Star Markets. The
operations to be acquired ("Shaw's") had sales of approximately $4,600 for the
fiscal year ended February 28, 2004 and approximately $4,400 for the fiscal year
ended March 1, 2003.
15
The acquisition is expected to close in the second quarter of 2004
following the satisfaction or waiver of certain closing conditions, including
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Act and Shaw's fiscal year ended February 28, 2004 financial
statement audit reflecting a specified minimum EBITDA. Because of the goodwill
that is expected to be generated as a result of the acquisition, the Company
will have to obtain prospective waivers from the lenders under two of the
Company's existing credit facilities in order to remain in compliance with the
consolidated tangible net worth covenant contained in the agreements. No amounts
were outstanding under these facilities as of January 29, 2004.
Strategic Imperatives
The Company's leadership team has identified many actions and programs with
which to drive the Company's future competitiveness, profitability and return on
invested capital. The Company continues to be focused on its five strategic
imperatives that serve as a guide and a filter for all of the Company's
initiatives. These five imperatives, together with the major actions taken to
date, follow:
1) Aggressive Cost and Process Control. Each main category of expense,
including labor, is monitored by a member of executive management. The
Company committed to achieve annual cost reductions and cost avoidance of
$750 by the end of 2004. By the end of 2003, the Company had achieved $609
of the $750 cost reduction goal. In February 2004, the Company announced
that it had raised its total cost-out goal to $1,000 by the end of 2005.
This additional $250 in cost savings is expected to be achieved through new
supply chain initiatives.
2) Maximize Return on Invested Capital. The Company has a formal process to
review and measure all significant investments in corporate assets. The
Company's goal is to hold a number one or two market share in an area, or
have a plan of action which provides a reasonable expectation of achieving
this goal in order to continue to maintain an investment in that area. This
process involves thorough review at both the individual asset or store
level and at the market area level.
As a result of these reviews, the Company closed or disposed of 165
underperforming stores, sold 80 non-core New England Osco drugstores and
reduced its division offices from 19 to 15 in 2001. In 2002 the Company
exited four underperforming markets resulting in the sale or closure of 95
stores, two distribution centers and the reduction of its division offices
from 15 to 11. In 2003 the Company closed 61 underperforming stores. On
January 30, 2004, the Company announced a new organizational structure in
its Dallas/Fort Worth division intended to eliminate layers of management
and streamline operations and, on February 20, 2004, the Company announced
plans to further consolidate its 11 divisions to seven and add an eighth
division to develop new formats, including price impact stores.
3) Customer-focused Approach to Growth. The Company intends to invest many of
the savings from its expense and process control programs back into the
marketplace in order to drive sales and earnings growth. The Company's
focus is on the following programs that are intended to drive customer
loyalty and profitable sales growth:
o A company-wide "Service First, Second to None" program to reinvigorate
the employees' focus on customer service.
o The "Focus on Fresh" initiative to improve the delivery of fresh foods
throughout the Company's fresh departments.
o A decade-long development of the dual branding format that provides
food and drugstore offerings in one location under multiple banners.
4) Company-wide Focus on Technology. Albertsons use of technology is designed
to better serve customers and improve operating efficiencies. In 2002
Albertsons established an information technology plan, which calls for the
replacement or upgrade of over three-quarters of the Company's current
systems by 2007. The Company initiated a project that will standardize all
front-end point-of-sale systems; built a new data center resulting in the
consolidation of two previous data centers; and started the process of
implementing a new financial applications system. In 2003, the first two
phases of the Company's new financial system were completed and a new
online recruitment tool was rolled out providing consistent processes and
automation that transformed the way Albertsons identifies, interviews and
hires quality associates across the enterprise. Technology has been
deployed in approximately 384 stores in "self-checkout" lanes, providing
customers with the option to complete their shopping trips electronically.
The Company has also been piloting a handheld scanner that the Company
describes as the Shop N Scan program that allows customers to scan
merchandise as they walk through and shop a store. The Company has also
invested in the technology to drive its supply chain initiatives. Late in
fiscal 2003, the Company signed an agreement for several planning and
analytical modules to improve supply chain efficiency. In March 2004, the
Company launched a Radio Frequency Identification (RFID) test program
intended to improve efficiencies in consumer demand chain management.
16
5) Energized Associates. The Albertsons leadership team is charged with
creating an uplifting atmosphere for associates and to inspire positive
attitudes throughout the Company. To ensure that associates are energized
and motivated to do their best work, the Company realigned processes and
programs to provide new opportunities for associates to achieve their
professional career goals. The Company changed compensation programs to
reward performance that delivers results, improved communications so
associates are better informed, streamlined education programs to meet the
needs of the business and revised benefits plans to reduce costs.
Albertsons is convinced that a team of energized associates who share a
positive attitude will achieve Albertsons goal of becoming the best food
and drug retailer in the world.
Results of Operations
Sales for 2003 were $35,436 compared to $35,626 in 2002 and $36,605 in
2001. The following table sets forth certain Statement of Earnings components
expressed as a percent to sales and the year-to-year percentage changes in the
amounts of such components:
Percentage Change
Percent To Sales Of Dollar Amounts
- ----------------------------------------- -------------------------------- ------------------------------
2003 2002 2001 2003 vs. 2002 2002 vs. 2001
- ----------------------------------------- ---------- ---------- ---------- --------------- --------------
Sales 100.00 100.00 100.00 (0.5) (2.7)
Gross profit 28.59 29.13 28.48 (2.4) (0.5)
Selling, general and administrative
expenses 24.90 24.13 23.85 2.6 (1.5)
Restructuring (credits) charges (0.03) (0.10) 1.28 n.m. n.m.
Gain on sale of New England Osco
drugstores - - (0.15) n.m. n.m.
Interest expense, net 1.15 1.11 1.16 3.3 (6.8)
Earnings from continuing operations
before income taxes 2.56 3.94 2.36 (35.5) 62.8
Earnings from continuing operations 1.57 2.43 1.36 (35.7) 74.4
(Loss) earnings from discontinued
operations - (0.80) 0.02 n.m. n.m.
Cumulative effect of change in
accounting principle, net - (0.26) - n.m. n.m.
Net earnings 1.57 1.36 1.38 14.6 3.2
n.m. - not meaningful
Sales decreased $190 in 2003 as compared to 2002 primarily due to the Labor
Dispute. The Labor Dispute resulted in decreased sales in the Company's southern
California combination food and drug and conventional stores. These decreases
were partially offset by an increased number of operating stores in 2003 as
compared to 2002. In 2003, identical store sales decreased 2.8% as compared to
2002. Identical stores are defined as stores that have been in operation for two
full fiscal years. Comparable store sales, which uses the same store base as the
identical store sales computation except it includes replacement stores,
decreased 2.4% in 2003 as compared to 2002. Excluding food stores in the
Company's Southern California Division for the last 110 days of 2003 and 2002,
identical store sales decreased 0.5% and comparable store sales decreased 0.1%
in 2003 as compared to 2002. Management estimates that overall inflation in
products the Company sells was 0.5% in the 12 months ended January 29, 2004 as
compared to an overall deflation of 0.1% in the 12 months ended January 30,
2003.
Despite the year to year declines in identical and comparable store sales,
when adjusted for the Labor Dispute the Company saw improvements in both
identical and comparable store sales in the second half of 2003 as compared to
the first half of 2003.
The following table reconciles actual identical store sales and comparable
store sales to adjusted identical store sales and comparable store sales as
presented herein. The Company presents these non-GAAP financial measures because
it believes a comparison of actual to adjusted store sales data is useful to
investors to communicate management's belief of the impact of the Labor Dispute
on trends in sales experienced during the last 110 days of 2003.
17
Actual Identical Labor Adjusted
Store Sales Dispute Identical
Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
52 weeks ended January 29, 2004 $ 33,142 $ ( 718) (1) $ 32,424
52 weeks ended January 30, 2003 34,104 (1,520) (2) 32,584
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year change (962) (160)
52 weeks ended January 30, 2003 34,104 32,584
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Identical store sales percentage change (2.8)% (0.5)%
====================================================== ================== =============== ===== ==================
====================================================== ================== =============== ===== ==================
Actual Labor Adjusted
Comparable Dispute Comparable
Store Sales Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
52 weeks ended January 29, 2004 $ 33,705 $ ( 727) (3) $ 32,978
52 weeks ended January 30, 2003 34,547 (1,534) (4) 33,013
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year change (842) ( 35)
52 weeks ended January 30, 2003 34,547 33,013
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Comparable store sales percentage change (2.4)% (0.1)%
====================================================== ================== =============== ===== ==================
(1) Represents the identical Southern California Division food store sales in
2003 during the last 110 days of the fiscal year ended January 29, 2004.
(2) Represents the identical Southern California Division food store sales in
2002 during the last 110 days of the fiscal year ended January 30, 2003.
(3) Represents the comparable Southern California Division food store sales in
2003 during the last 110 days of the fiscal year ended January 29, 2004.
(4) Represents the comparable Southern California Division food store sales in
2002 during the last 110 days of the fiscal year ended January 30, 2003.
During 2003 the Company opened 50 combination food and drug stores, 27
stand-alone drugstores, two conventional and warehouse stores and 29 fuel
centers. The Company closed or sold 15 combination food and drug stores, 18
conventional stores and 28 stand-alone drugstores. The Company also remodeled
192 stores. Net retail square footage of continuing operations was 94.0 million
square feet at the end of 2003 as compared to 92.1 million square feet in 2002.
Sales decreased in 2002 as compared to 2001 due to the Company's
restructuring activities initiated in July 2001. In 2001 the Company announced
closure of 165 stores in addition to selling 80 New England Osco drugstores.
These 245 stores' sales are included in 2001 and 2002 operating results until
their actual closure or disposition. Sales in 2002 were also impacted by
declining consumer confidence, as measured by The Conference Board Index, of
78.8 in January 2003 as compared to 97.8 in January 2002 and escalating
competitive activity. Identical and comparable store sales decreased 0.9% and
0.4%, respectively, in 2002 as compared to 2001. Management estimates that
overall deflation in products the Company sells was 0.1% and 0.3% in the twelve
months ended January 30, 2003 and January 31, 2002, respectively.
During 2002 the Company opened 59 combination food and drug stores, 31
stand-alone drugstores, two conventional and warehouse stores and 46 fuel
centers. The Company closed or sold 140 combination food and drug stores, 32
conventional and warehouse stores, 54 stand-alone drugstores and 50 fuel
centers. The Company also remodeled 207 stores. Net retail square footage at
continuing operations was 92.1 million square feet at the end of 2002 as
compared to 92.8 million square feet at the end of 2001.
Gross profit, as a percent to sales, decreased in 2003 as compared to 2002
due to decreased sales leverage as a result of the Labor Dispute and continued,
planned investments in pricing and promotion in key markets and categories to
drive sales growth and market share. These investments were partially offset by
savings generated from strategic sourcing initiatives, increased pharmacy gross
margins as a result of a new supply contract and higher generic substitution and
increased private label sales growth.
Gross profit, as a percent to sales, increased in 2002 as compared to 2001
as a result of improved Company-wide procurement practices, increased pharmacy
margins due to higher generic substitutions and the Company's restructuring
activities in 2002 and 2001, which included the sale or closure of 245
underperforming stores.
18
Selling, general and administrative (SG&A) expenses as a percent to sales
increased in 2003 as compared to 2002. This increase was attributable to the
lack of sales leverage due to the Labor Dispute as well as higher depreciation
costs associated with the Company's continued investment in information
technology and store development; increased compensation costs; increased
workers compensation costs, primarily due to actual costs of prior years' claims
exceeding prior years' estimated costs; increased employee benefit costs,
primarily due to increases in Company and union sponsored health and welfare
plans and increased pension charges, partially offset by a $36 gain associated
with the curtailment of postretirement medical benefits for employees retiring
after June 1, 2004; and contingent lease charges. The increased employee benefit
costs experienced during the year were due, in part, to increases in mandatory
contributions to multi-employer health care and pension plans to which the
Company contributes. Contribution amounts are established under the Company's
collective bargaining agreements, which are up for renewal at varying times over
the next several years. If the health care and pension plan provisions of
certain of these collective bargaining agreements cannot be renegotiated in a
manner that reduces the prospective health care and pension costs of the Company
as the Company intends, the Company's selling, general and administrative
expenses could continue to increase, possibly significantly, in the future.
The increase in SG&A expenses as a percent to sales in 2002 as compared to
2001 was primarily due to the reduction in the Company's sales base as a result
of the 2001 restructuring activities, an increase in employee benefit costs due
to mandatory contributions to multi-employer health and welfare plans and rising
workers' compensation costs. These increases were partially offset by the
elimination of goodwill amortization in 2002 due to the adoption of SFAS No. 142
and a reduction in labor costs.
The Company recorded a $54 pre-tax gain during the fourth quarter of 2001
resulting from the sale of 80 New England Osco drugstores.
Interest expense, net, during 2003 totaled $409 as compared with $396 in
the prior year. This increase was attributable to less interest being
capitalized on construction projects during 2003. The decrease in capitalized
interest was due to an overall reduction in the capital expenditures,
particularly for new stores. Interest expense, net, was $425 in 2001. The
decrease in 2002 from 2001 was due to lower average debt balances outstanding
from year to year.
Earnings from continuing operations were $556 in 2003 compared to earnings
from continuing operations of $865 for 2002. This decrease was due to lost sales
and earnings associated with the Labor Dispute, decreased gross margin
associated with planned investments in pricing and promotion and an increase in
depreciation, compensation costs, workers' compensation costs and employee
benefits costs. Earnings from continuing operations were $496 in 2001. The
increase in income from continuing operations in 2002 as compared to 2001 was
primarily attributable to the restructuring charges taken in 2001 related to the
sale and closure of 165 underperforming retail stores, reduction of
administrative and corporate overhead and consolidation and elimination of four
division offices.
The Company's effective income tax rate from continuing operations for 2003
was 38.6%, as compared to 38.4% for 2002 and 42.6% for 2001. The decrease in
2002 as compared to 2001 was the result of the elimination of goodwill
amortization.
Net earnings were $556 or $1.51 per diluted share for 2003, compared to net
earnings of $485 or $1.22 per diluted share for 2002. The improvement in 2003
was a result of a charge of $379 in 2002 related to a strategic decision to exit
underperforming markets and a charge of $94 in 2002 related to the adoption of a
new accounting principle for the recognition of vendor funds, partially offset
by the reduction in earnings from continuing operations in 2003 as a result of
the Labor Dispute. Net earnings were $501 or $1.23 per diluted share for 2001.
Restructuring and Discontinued Operations
The financial statement presentation includes the results of two
significant restructuring initiatives that were implemented in 2001 and 2002. In
July 2001, the Company's Board of Directors approved a restructuring plan that
included the closure of 165 underperforming retail stores, reduction of
administrative and corporate overhead and consolidation and elimination of four
division offices (refer to Note 6 "Restructuring" in the notes to the
accompanying consolidated financial statements). In March 2002, the Company's
Board of Directors approved the second phase of the restructuring plan which
included the complete exit of four underperforming markets resulting in the sale
or closure of 95 stores and two distribution centers and reduction of division
offices from 15 to 11 (refer to Note 5 "Discontinued Operations/Market Exits" in
the notes to the accompanying consolidated financial statements). Although the
initiatives were similar, the adoption of SFAS No. 144 "Accounting for the
19
Impairment or Disposal of Long-Lived Assets" on February 1, 2002 resulted in the
financial statement presentation of these actions to be dissimilar (SFAS No. 144
does not allow for the retroactive application of its provisions). The Company's
2002 and 2001 financial statements classify the results of operations for the 95
stores and two distribution centers divested in the 2002 initiative as
discontinued operations. The operating results of the 165 stores divested in the
2001 initiative and the restructuring charges associated with the decision to
sell or close those stores are included in continuing operations of the
Company's financial statements for the periods prior to their sale or closure.
Phase 1: Restructuring
In the first half of 2001, the Company initiated a profitability review of
all of its retail stores, utilizing a methodology based on return on invested
capital. The Company also evaluated its division management structure and the
efficiency of its transaction processing departments. Based on these reviews, in
July 2001 the Company committed to the following restructuring activities: 1)
close and dispose of 165 underperforming stores in 25 states; 2) eliminate four
of the then existing 19 division offices; 3) sell a store fixture manufacturing
operation; 4) centralize certain transaction processing functions in Boise,
Idaho; and 5) reduce general office head count.
These restructuring activities called for the elimination of 1,341
managerial and administrative positions (excluding store level terminations).
The restructuring charge recorded in 2001 included the following: employee
severance and outplacement costs of $44; asset impairments of $361; lease
termination costs of $57; and other costs of $6.
In 2001 and 2002 respectively, 80 and 82 stores were closed or sold and 995
and 297 managerial and administrative employees were terminated under this
restructuring plan. In 2002, management revised the planned restructuring
activities as follows: the store fixture manufacturing operation's performance
was re-evaluated and determined to be more cost-effective than purchasing
like-fixtures from external sources in the future, so it would be held and used;
one store's operating performance improved due to local market conditions, so it
would also be held and used; and one part of the transaction processing
consolidation was halted due to a decision to replace the Company's human
resource information systems (HRIS) to be completed by 2006. All remaining
stores in this restructuring plan were sold or closed by 2003.
20
The following table presents the pre-tax restructuring credits and charges
and the related restructuring reserves included in the Company's Consolidated
Balance Sheets:
NONCASH TOTAL CHARGES
CHARGES ACCRUALS (CREDITS)
------------------- ------------------- ------------------
2001 Activity
Asset impairments $ 361 $ - $ 361
Lease settlements - 57 57
Severance and outplacement - 44 44
Other - 6 6
------------------
Restructuring charges $ 468
==================
Cash payments during 2001 (46)
-------------------
Reserve balance at January 31, 2002 61
2002 Activity
Retain store fixtures operation (3) (2) $ (5)
Halt part of consolidation - HRIS - (2) (2)
Gains on asset sales (17) - (17)
Favorable lease settlements - (14) (14)
Severance and outplacement - 2 2
Other - (1) (1)
------------------
Restructuring credits $ (37)
==================
Cash payments during 2002 (16)
-------------------
Reserve balance at January 30, 2003 28
2003 Activity
Gains on asset sales (8) - $ (8)
Other (2) - (2)
------------------
Restructuring credits $ (10)
==================
Cash payments during 2003 (9)
-------------------
Reserve balance at January 29, 2004 $ 19
===================
The reserve balances of $19 at January 29, 2004 and $28 at January 30, 2003
are included in other current liabilities in the Company's Consolidated Balance
Sheets. The related assets are recorded at their estimated fair value, less
selling costs, of $13 as of January 29, 2004 and reported as assets held for
sale in the Company's Consolidated Balance Sheets.
Phase 2: Discontinued Operations/Market Exits
In March 2002 the Company's Board of Directors approved the second phase
of the Company's restructuring plan designed to improve future financial results
and to drive future competitiveness. This phase of the plan included the
complete exit of four underperforming markets: Memphis, Tennessee; Nashville,
Tennessee; Houston, Texas; and San Antonio, Texas. This involved the sale or
closure of 95 stores and two distribution centers and the reduction of division
offices from 15 to 11. The facilities identified for sale or closure were
evaluated for lease liability and asset impairment, including goodwill, in
accordance with the Company's policy. The operating results and gains and losses
related to these market exits have been included in discontinued operations in
the Company's Consolidated Earnings. The prior years' operating activities for
these 95 stores, two distribution centers and reduction of division offices from
15 to 11 have been reported as Discontinued operations: Operating (loss) income
in the accompanying Consolidated Earnings.
The discontinued operations generated sales of $290 and $1,326 in 2002 and
2001, respectively, and an operating loss of $50 and operating profit of $10 in
2002 and 2001, respectively. The discontinued operations were not material to
the 2003 Consolidated Earnings. The loss from discontinued operations was $286
in 2002 and consisted of a loss from operations of $50 and asset impairments,
lease settlements and other costs of $379, net of $143 in income tax benefits.
The table below details the activity associated with the disposition.
21
NONCASH ACCRUALS TOTAL CHARGES
CHARGES (CREDITS)
------------------- ------------------- ------------------
2002 Activity
Asset impairments $401 $ - $ 401
Lease settlements - 26 26
Severance and outplacement - 23 23
Other - 2 2
Gain on asset sales (63) - (63)
Favorable lease settlements - (10) (10)
-------------------
Loss on disposal $ 379
===================
Cash payments during 2002 (30)
--------------------
Reserve balance at January 30, 2003 11
2003 Activity
Unfavorable lease settlements 1 1
-------------------
Loss on disposal $ 1
===================
Cash payments during 2003 (4)
--------------------
Reserve balance at January 29, 2004 $ 8
====================
The reserve balances of $8 at January 29, 2004 and $11 at January 30, 2003
are included in other current liabilities in the Company's Consolidated Balance
Sheets.
Assets related to discontinued operations are recorded at their estimated
net realizable value, less selling costs, of $8 as of January 29, 2004 and are
reported as assets held for sale in the Company's Consolidated Balance Sheet.
These assets include land, buildings, equipment and leasehold improvements and
are being actively marketed. As of January 30, 2003, all 95 stores and both
distribution centers were closed. In addition, the Company had either sold or
terminated the leases related to 80 of the 95 stores and both distribution
centers as of January 29, 2004.
2003 unfavorable lease settlement charges are included in continuing
operations as part of selling, general and administrative expenses.
Other consists of amounts paid in connection with notification regulations
and negotiated contract terminations.
Liquidity and Capital Resources
Cash provided by operating activities during 2003 was $1,545, compared to
$2,060 in 2002 and $2,009 in 2001. The decrease in cash provided by operating
activities in 2003 as compared to 2002 was primarily due to lower earnings
before interest, taxes, depreciation and amortization from continuing
operations, a reduction in accounts payable due to lower inventory purchases and
inventory turns in the Southern California Division directly related to the
Labor Dispute and increased inventory levels as a result of increased store
count. These uses of cash were partially offset by a reduction in the Company's
current income tax payable as a result of implementation of tax planning
initiatives in 2003. In 2002, cash flows from operations increased slightly
primarily as the result of better inventory leverage in 2002 as compared to
2001. With the resolution of the Labor Dispute, management expects operating
cash flows in 2004 to increase slowly as affected stores rebuild market share in
southern California.
Cash flow used in investing activities for 2003 increased to $926 compared
to $662 in 2002. This increase was a result of 2002 investing activities that
included proceeds from the sale of assets (primarily associated with the 2001
restructuring activities and the 2002 market exits) that were $488 greater than
asset sale proceeds received in 2003, partially offset by lower capital
expenditures in 2003. Capital expenditures declined $265 in 2003 as compared to
2002, primarily due to amounts invested in new store and store remodels in 2003
being partially offset by increased expenditures on information technology. The
Company expects capital expenditures in 2004 to be approximately $300 higher
than those in 2003 due to the proposed acquisition of Shaw's and expects other
investing related activities to remain level.
22
Cash flows used in investing activities in 2002 decreased $418 as compared
to 2001 primarily due to cash received from the sale of assets associated with
the 2001 restructuring and 2002 market exits. Capital expenditures decreased $96
due to reduced spending on new store construction and store acquisitions
partially offset by increased spending on existing store upgrades and
remodeling.
The Company's financing activities for 2003, 2002 and 2001 included
payments on long-term borrowings, stock purchased and retired and dividend
payments. Cash flow used in financing activities in 2003 was $492 as compared to
$1,297 and $905 in 2002 and 2001, respectively. The primary difference in
financing activity cash flows was the Company's decision to purchase fewer
shares of its common stock in 2003. In 2002, the Company purchased $862 of its
common stock as compared to $108 in 2003.
The Board of Directors, at its March 2004 meeting, maintained the regular
quarterly cash dividend of $0.19 per share, for an effective 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 no
commercial paper or bank line borrowings outstanding at January 29, 2004 or
January 30, 2003. The Company expects to use commercial paper to fund a portion
of the purchase price for Shaw's.
The Company had three revolving credit facilities totaling $1,400 during
2003. The first agreement, a 364-day revolving credit facility with total
availability of $100 was due to expire in February 2004 but renewed for an
additional year to expire in February 2005. The second agreement, a revolving
credit facility with total availability of $350 was set to expire in March 2004,
but was extended through July 2004. The Company expects to replace this
agreement. The third agreement, a five-year facility for $950, expires
in March 2005. The agreements in place at year end also contain certain
covenants, the most restrictive of which requires the Company to maintain
consolidated tangible net worth, as defined, of at least $3,000 and a fixed
charge coverage, as defined, of no less than 2.7 times. As of January 29, 2004
and January 30, 2003, the Company was in compliance with these requirements.
However, due to goodwill that is expected to be generated as a result of the
acquisition of Shaw's, the Company will have to obtain a prospective waiver of
the consolidated tangible net worth covenant under these agreements. All of the
revolving credit agreements contain an option which would allow the Company,
upon due notice, to convert any outstanding amounts at the expiration dates to
term loans, as long as the Company is in compliance with the terms and
conditions of the related agreements. No borrowings were outstanding under the
credit facilities as of January 29, 2004 or January 30, 2003.
Albertsons filed a shelf registration statement with the Securities and
Exchange Commission, which became effective on February 13, 2001 ("2001 Shelf
Registration") to authorize the issuance of up to $3,000 in debt securities. In
May 2001 the Company issued $600 of Term Notes under the 2001 Shelf
Registration. The Notes are composed of $200 of principal bearing interest at
7.25% due May 1, 2013 and $400 of principal bearing interest at 8.0% due May 1,
2031. Proceeds were used primarily to repay borrowings under the Company's
commercial paper program. During 2002 and 2003, no securities were issued under
the 2001 Registration Statement. As of January 29, 2004, $2,400 of debt
securities remain available for issuance under the 2001 Registration Statement;
however, there can be no assurance that the Company will be able to issue debt
securities under this registration statement at terms acceptable to the Company.
During 2002, the Company purchased and retired 35.1 million shares of its
common stock for $862, at an average price of $24.54 per share. During 2003, the
Company repurchased 5.3 million shares of its common stock for a total
expenditure of $108 at an average price of $20.26 per share. On December 5,
2003, the Board of Directors reauthorized a program authorizing management, at
their discretion, to purchase and retire up to $500 of the Company's common
stock through December 31, 2004. The Company may continue or, from time to time
suspend, purchasing shares under its stock purchase program without notice,
depending on prevailing market conditions, alternate uses of capital and other
factors.
The Company's operating results continue to enhance its financial position
and ability to continue its internal expansion program. Cash flows from
operations and available borrowings are adequate to support currently planned
business operations, stock repurchases and capital expenditures. The Company has
short-term financing capacity in the form of commercial paper or bank line
borrowings up to $1,400 and long-term capacity under the 2001 Registration
Statement of $2,400. The Company intends to use a combination of cash-on-hand
and commercial paper to finance the acquisition of Shaw's.
23
As of January 29, 2004, the Company's credit ratings were as follows:
S & P Moody's Fitch
----------------------------------- ----------------- ----------------- -----------------
Long-term debt BBB Baa2 BBB
Short-term debt A2 P2 F2
The Company does not have any credit rating downgrade triggers that would
accelerate repayment in the Company's fixed-term debt portfolio were a downgrade
in the Company's credit ratings to occur. Similarly, a downgrade in the
Company's credit ratings would not affect the Company's ability to borrow
amounts under the revolving credit facilities. However, any adverse changes to
the Company's credit ratings would increase the cost of borrowings under the
Company's credit facilities. In addition, a downgrade could limit the Company's
ability to issue commercial paper. Should this occur, the Company might seek
alternative sources of funding, including the issuance of notes under the
existing shelf registration statements. In addition, up to $1,400 could be drawn
upon from the Company's senior unsecured credit facilities. The Company does not
anticipate the acquisition of Shaw's to have an impact on its credit ratings.
Contractual Obligations, Commercial Commitments and Guarantees
Contractual Obligations
The Company enters into a variety of legally binding obligations and
commitments in the normal course of its business. The table below presents the
Company's long-term contractual obligations and commitments which are considered
to represent known future cash payments that the Company will be required to
make under existing contractual arrangements. Some amounts are based on
management's estimates and assumptions and amounts actually paid may vary from
those reflected in the table.
Contractual Obligation Payments Due By Period
- -------------------------------------------------------- ---------------------------------------------------
2009 and
Total 2004 2005 - 2006 2007 - 2008 Thereafter
- --------------------------------------- ---------------- ----------- -------------- ------------ -----------
Long-term debt, including current
portion (1) $ 4,958 $ 506 $ 208 $ 74 $ 4,170
Capital lease obligations (2) 865 53 96 93 623
Operating leases (2) 3,765 349 628 531 2,257
Purchase obligations (4)
Utilities (3) 148 68 80 - -
Contracts for purchase of property
and construction of buildings 99 98 1 - -
Transportation contracts 80 80 - - -
Other
Self insurance liability 731 262 237 105 127
Compensation and benefits 530 56 91 28 355
Other long-term liabilities 13 8 5 - -
- --------------------------------------- ---------------- ------------ ------------- ------------ -----------
Total contractual cash obligations $11,189 $1,480 $1,346 $ 831 $ 7,532
======================================= ================ ============ ============= ============ ===========
(1) The Company has medium-term notes and debentures that contain put
options that would require the Company to repay borrowed amounts prior
to maturity. Medium-term notes of $30 and $50 mature in July 2027 and
April 2028, respectively, and have put options exercisable in July
2007 and April 2008, respectively. Debentures in the amount of $200
mature in May 2037 and have a put option exercisable in May 2009. For
the purpose of the table above, payments of these obligations are
assumed to occur at maturity.
(2) Represents the minimum rents payable and includes leases associated
with closed stores accrued for under the Company's restructuring and
closed store reserves. Amounts are not offset by expected sublease
income.
(3) The Company has entered into supply contracts to purchase specified
quantities of electricity and natural gas that have terms through
2006. The amounts included in the table reflect projected purchases
based on historical usage and contracted rates.
(4) In addition to the contracts noted in this table, the Company enters
into supply contracts to purchase products for resale in the ordinary
course of business. This category of contracts covers a broad spectrum
of products and sometimes includes specific merchandising obligations
relative to those products. These supply contracts typically include
either a volume commitment or a fixed expiration date; pricing terms
based on the vendor's published list price; termination provisions;
and other standard contractual considerations. There are a significant
number of these contracts, however they are typically cancelable upon
return of unearned allowances and therefore no amounts have been
included above.
24
Commercial Commitments
The Company had outstanding Letters of Credit of $103 as of January 29,
2004, all of which were issued under separate agreements with multiple financial
institutions. These agreements are not associated with the Company's credit
facilities. Of the $103 outstanding at year end, $83 were standby letters of
credit covering primarily workers' compensation or performance obligations. The
remaining $20 were commercial letters of credit supporting the Company's
merchandise import program. The Company paid issuance fees that varied,
depending on type, up to 0.90% of the outstanding balance of the letter of
credit.
Guarantees
The Company provides guarantees, indemnifications and assurances to others
in the ordinary course of its business. The Company has evaluated its agreements
that contain guarantees and indemnification clauses in accordance with the
guidance of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others".
The Company is contingently liable for certain operating leases that were
assigned to third parties in connection with various store closures and
dispositions. If any of these third parties were to fail to perform their
obligations under the lease, the Company could be responsible for the lease
obligations. In 2003, the Company was notified that certain of these third
parties have become insolvent and are seeking bankruptcy protection. At January
29, 2004, approximately 26 store leases for which the Company is contingently
liable were subject to the bankruptcy proceedings of such third parties and 22
of such had been rejected by the applicable third party. The Company recorded
pre-tax charges of $20 in 2003, which represents the remaining minimum lease
payments and other payment obligations under the 22 rejected leases, less
estimated sublease income and discounted at the Company's credit-adjusted
risk-free interest rate. As of January 29, 2004, the Company had remaining
guarantees on approximately 192 stores with leases extending through 2026.
Assuming that each respective purchaser became insolvent, an event the Company
believes to be remote because of the wide dispersion among third parties and
remedies available, the minimum future undiscounted payments, exclusive of any
potential sublease income, are $273.
In connection with the merger between the Company and American Stores
Company, the Company was made party to and guaranteed a $200 American Stores
Company bank term note due July 2004; this obligation is reflected in the
Company's Consolidated Balance Sheet as of January 29, 2004.
The Company enters into a wide range of indemnification arrangements in the
ordinary course of business. These include tort indemnifications, tax
indemnifications, indemnifications against third party claims arising out of
arrangements to provide services to Albertsons and indemnifications in merger
and acquisition agreements. It is difficult to quantify the maximum potential
liability under these indemnifications; however at January 29, 2004 the Company
was not aware of any material liabilities arising from these indemnifications.
Off Balance Sheet Arrangements
At January 29, 2004, the Company had no significant investments that were
accounted for under the equity method in accordance with accounting principles
generally accepted in the United States. Investments that were accounted for
under the equity method at January 29, 2004, had no liabilities associated with
them that were guaranteed by or that would be considered material to Albertsons.
Accordingly, the Company does not have any off balance sheet arrangements with
unconsolidated entities.
Capital Expenditures
The Company is committed to keeping its stores up to date. In the last
three years, the Company has opened or remodeled 693 stores, representing 32% of
the Company's retail square footage as of January 29, 2004. The following
summary of historical capital expenditures includes capital leases, stores
acquired in business and asset acquisitions and assets acquired with related
debt:
2003 2002 2001
- ---------------------------------------------------------------- ------------ ------------ -----------
New and acquired stores $ 371 $ 688 $ 875
Remodels 345 455 348
Retail replacement equipment, technology and other 387 221 247
Distribution facilities and equipment 53 70 64
- ---------------------------------------------------------------- ------------ ------------ -----------
Total capital expenditures $ 1,156 $ 1,434 $ 1,534
================================================================ ============ ============ ===========
Total capital expenditures include capitalized lease obligations incurred
of $62 in 2003, $75 in 2002 and $79 in 2001.
25
The Company's financial position provides the flexibility for the Company
to grow through its store development program and future acquisitions. The
Company's capital expenditure budget for 2004 is approximately $1,300 and
includes approximately $100 in new capital and operating lease obligations. The
Company expects capital expenditures to be approximately $300 higher if the
proposed acquisition of Shaw's is consummated.
Related Party Transactions
Transactions with related parties were not considered material. See Note 20
"Related Party Transactions" in the Notes to Consolidated Financial Statements.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, vendor funds, intangible assets, income taxes, assets held for
sale, impairment of long-lived assets, self-insurance, restructuring, benefit
costs, contingencies, litigation and unearned income. The Company bases its
estimates on historical experience and on various other assumptions and factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. The Company, based
on its ongoing review, will make adjustments to its judgments and estimates
where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described
above.
The Company believes the following critical accounting policies are
important to the portrayal of the Company's financial condition and results and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
VENDOR FUNDS The Company receives funds from many of the vendors whose products
the Company buys for resale in its stores. These vendor funds are provided to
increase the sell-through of the related products. The Company receives funds
for a variety of merchandising activities: placement of the vendor's products in
the Company's advertising; placement of the vendor's products in prominent
locations in the Company's stores; introduction of new products into the
Company's distribution system and retail stores; exclusivity rights in certain
categories that have slower-turning products; and to compensate for temporary
price reductions offered to customers on products held for sale at retail
stores. The Company also receives vendor funds for buying activities, such as
volume commitment rebates and credits for purchasing products in advance of
their need. The terms of vendor funds arrangements vary in length, from
short-term arrangements that are completed within a quarter, to long-term
arrangements that are expected to be completed within ten years.
Accounting for vendor funds is discussed in Emerging Issues Task Force
"EITF" Issue 02-16: Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor (EITF 02-16), which the Company adopted as
of the beginning of 2002. As a result of this guidance, the Company began
recognizing the vendor funds for merchandising activities as a reduction of cost
of sales when the related products are sold as opposed to the previous method of
recognizing these credits as a reduction to cost of sales when the merchandising
activity was performed in accordance with the underlying agreements. Vendor
funds that have been earned as a result of completing the required performance
under the terms of the underlying agreements but for which the product has not
yet been sold are recognized as reductions of inventory. The amount of vendor
funds remaining in ending inventory requires management judgment and estimates.
Management estimates these amounts based on the average inventory turnover rates
by product category for the Company's grocery, general merchandise and lobby
departments and by average inventory turnover rates by department for the
Company's remaining inventory. The amount of vendor funds reducing the Company's
inventory ("inventory offset") as of January 29, 2004 was $155, an increase of
$3 from the beginning of 2003. The vendor funds inventory offset as of January
30, 2003 was $152, a decrease of $6 from the beginning of 2002.
26
LONG-LIVED ASSET IMPAIRMENTS The Company regularly reviews long-lived assets for
indicators of impairment. Management's judgments regarding the existence of
impairment indicators are based on operational performance. Future events could
cause management to conclude that impairment indicators exist and that the value
of long-lived assets is impaired. When events or changes in circumstances
indicate that the carrying value of an asset or an asset group is not
recoverable, the fair value of the asset is compared to its carrying value.
Impairment losses are measured as the amount by which the carrying value of the
asset exceeds its estimated fair value. The estimated fair value of the assets
is determined by internal real estate specialists or by independent quotes.
These estimates can be significantly impacted by changes in real estate market
conditions, the economic environment and inflation.
For properties that have closed and are under long-term operating lease
agreements, the present value of any remaining liability under the lease,
discounted using credit risk-free rates and net of estimated sublease rentals
that could be reasonably obtained for the property, is recognized as a liability
and charged to operations. The value of any equipment and leasehold improvements
related to a closed store is reduced to reflect net recoverable values. Internal
real estate specialists estimate the subtenant income and asset recovery values
based on their historical experience and knowledge of (1) the market in which
the store to be closed is located, (2) the results of the Company's previous
efforts to dispose of similar assets and (3) the current economic conditions.
The actual cost of disposition for these leases and related assets is affected
by specific real estate markets, the economic environment and inflation.
GOODWILL The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," in 2002. Upon adoption, the aggregate of the goodwill allocated to the
stores in each reporting unit became the reporting units' goodwill balance. In
order to determine if a reporting unit's goodwill was impaired, a combination of
internal analysis, focusing on each reporting unit's implied EBITDA multiple and
estimates of fair value from independent valuation specialists were used. Based
on these analyses, there was no impairment of goodwill at the adoption date.
Subsequently, during the fourth quarter of 2002 and 2003, the Company completed
its annual impairment review and determined that there was no impairment. The
fair value estimates could change in the future depending on internal and
external factors, including the success of strategic sourcing initiatives, labor
cost controls and competitive activity.
SELF-INSURANCE The Company is primarily self-insured for property loss, workers'
compensation, automobile liability costs and general liability costs. The
Company records its self-insurance liability, determined actuarially, based on
claims filed and an estimate of claims incurred but not yet reported. Any
actuarial projection of ultimate losses is subject to a high degree of
variability. Sources of this variability are numerous and include, but are not
limited to, future development of previous claims, future economic conditions,
court decisions and legislative actions. For example, workers compensation costs
were $361, $282 and $224 in 2003, 2002 and 2001 respectively. The increase in
costs was primarily attributable to development of prior year claims that were
higher than previously estimated while the annual number of workers'
compensation claims has decreased year to year.
The Company's workers' compensation liabilities are from claims occurring
in various states. Individual state workers' compensation regulations have
received a tremendous amount of attention from state politicians, insurers,
employers and providers, as well as the public in general. Recent years have
seen an escalation in the number of legislative reforms, judicial rulings and
social phenomena affecting workers' compensation. The changes in a state's
political and economic environment increase the variability in the unpaid claim
liabilities. The Company's workers' compensation reserves do not contemplate any
of these potential developments.
LEGAL CONTINGENCIES The Company records reserves for legal contingencies when
the information available to the Company indicates that it is probable that a
liability has been incurred and the amount of the loss can be reasonably
estimated. Predicting the outcomes of claims and litigation and estimating
related costs and exposures involve substantial uncertainties that could cause
actual costs to vary materially from estimates. In addition, the Company
regularly monitors its exposure to the loss contingencies associated with these
matters and may from time to time change its predictions with respect to
outcomes and its estimates with respect to related costs and exposures. It is
possible that material differences in actual outcomes, costs and exposures
relative to current predictions and estimates, or material changes in such
predictions or estimates, could have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
PENSION COSTS Pension benefit obligations and the related effects on operations
are dependent on the Company's selection of actuarial assumptions, including the
discount rate and the expected long-term rate of return on plan assets. Actual
returns on plan assets exceeded return assumptions over an extended period in
the past, which kept pension expense and cash contributions to the plans at
modest levels. Weaker market performance may significantly increase pension
expense and cash contributions in the future. Changes in the interest rates used
to determine the discount rate may also cause volatility in pension expense and
cash contributions. Actual results that differ from the Company's assumptions
27
are accumulated and amortized over future periods and, therefore, generally
affect the Company's recognized expense and recorded obligation in such future
periods. For example, in 2003 the Company's discount rate assumption was 6.15%
and its long-term asset return assumption was 8.0%. Using these assumptions, the
Company's 2003 pension expense was $30, following expense of $12 in 2002 and
income of $9 in 2001. If the Company had decreased its estimated discount rate
to 5.9% and its expected return on plan assets to 7.5%, the Company's 2003
pension expense would have been $37 and net earnings would have decreased
approximately $4. If the Company had increased its discount rate assumption to
6.4% and its expected return on plan assets to 8.5%, 2003 pension expense would
have been $24 and net earnings would have increased approximately $4.
Recently Issued and Adopted Accounting Standards
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 became effective for the Company on January
31, 2003 and did not have a material effect on the Company's consolidated
financial statements.
In November 2002 the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued after
December 31, 2002, while the disclosure requirements were effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not have a material effect on the Company's consolidated financial
statements.
In January 2003 the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 were required to be applied for the first interim or annual
period beginning after June 15, 2003. In December 2003 the FASB issued
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51" ("FIN 46(R)"). FIN 46(R)
provides additional guidance related to identifying variable interest entities
and determining whether such entities should be consolidated. The adoption of
FIN 46(R) did not have a material effect on the Company's consolidated financial
statements.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance could be accounted for as equity, be classified as liabilities
in statements of financial position. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003 and was effective for
the Company in the third quarter. The adoption of SFAS No. 150 did not have a
material effect on the Company's consolidated financial statements.
In November 2003 the EITF confirmed as a consensus EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, `Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor,' by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF
03-10 will not impact the Company's existing accounting and reporting policies
for manufacturers' coupons that can be presented at any retailer that accepts
coupons. For arrangements with vendors that are entered into or modified after
January 29, 2004, the Company is required to record the vendor reimbursement as
a reduction of cost of sales (instead of sales) if the coupon can only be
redeemed at a Company retail store. This modification to the Company's
accounting and reporting policies will only impact sales and cost of sales
beginning in the Company's first quarter of 2004 and is not expected to have a
material impact on sales or cost of sales.
In December 2003 the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosure about Pensions and Other Postretirement Benefits - An Amendment of
FASB Statements No. 87, 88 and 106" ("SFAS No. 132(R)"). This statement
increases the existing disclosure requirements by requiring more details about
pension plan assets, benefit obligations, cash flows, benefit costs and related
information. The disclosures required by SFAS No. 132(R) are included in Note 18
"Employee Benefit Plans".
28
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 properties). The Company
conducts an ongoing program for the inspection and evaluation of potential new
sites and the remediation and monitoring of contamination at existing and
previously owned sites. Although the ultimate outcome and expense of
environmental remediation is uncertain, the Company believes that the costs of
required remediation and continuing compliance with environmental laws, in
excess of current reserves, will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.
Environmental remediation costs were not material in 2003, 2002 or 2001.
Item 7A. 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
certain derivative transactions. The Company does not enter into derivative
financial instruments for trading purposes. The Company uses derivatives
primarily as cash flow hedges to set interest rates for forecasted debt
issuances, such as interest rate locks.
The Company is subject to interest rate risk on its fixed interest rate
debt obligations. 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.
As of January 29, 2004 and January 30, 2003, the Company had no foreign
exchange exposure and no outstanding derivative transactions. There have been no
material changes in the primary risk exposures or management of the risks since
the prior year. The Company expects to continue to manage risks in accordance
with the current policy.
The table below provides information about the Company's debt obligations
whose fair values 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
2004 2005 2006 2007 2008 After Total Value
- --------------------- -------- -------- --------- -------- ---------- ----------- ----------- -----------
Fixed rate debt $ 506 $ 206 $ 2 $ 12 $ 62 $ 4,170 $ 4,958 $ 5,491
Obligations
Weighted average
interest rate 6.7% 7.3% 8.5% 6.9% 6.6% 7.6% 7.4% -
29
Item 8. Financial Statements and Supplementary Data.
Albertson's, Inc.
Index to Consolidated Financial Statements
Page
Number
Independent Auditors' Report 31
Consolidated Earnings for the fiscal years ended January 29, 2004, January 30, 2003 and
January 31, 2002 32
Consolidated Balance Sheets at January 29, 2004 and January 30, 2003 33
Consolidated Cash Flows for the fiscal years ended January 29, 2004, January 30, 2003 and
January 31, 2002 34
Consolidated Stockholders' Equity for the fiscal years ended January 29, 2004, January 30,
2003 and January 31, 2002 35
Notes to Consolidated Financial Statements 36
30
INDEPENDENT AUDITORS' REPORT
To 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 January 29, 2004 and January 30, 2003
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the three years in the period ended January 29, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Albertson's, Inc. and
subsidiaries at January 29, 2004 and January 30, 2003 and the results of their
operations and their cash flows for each of the three years in the period ended
January 29, 2004, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in the notes to the consolidated financial statements, during
the year ended January 30, 2003, the Company changed its methods of accounting
for goodwill (Notes 2 and 12) and for closed stores (Note 5) to conform to
Statements of Financial Accounting Standards No. 142 and 144. Also during the
year ended January 30, 2003, the Company changed its method of accounting for
vendor funds (Notes 2 and 3) to conform to Emerging Issues Task Force Issue No.
02-16.
As discussed in Note 25 to the consolidated financial statements, on March
25, 2004, the Company entered into a stock purchase agreement with J Sainsbury
plc and JS USA Holdings Inc. to acquire all of the outstanding capital stock of
the entities which conduct J Sainsbury plc's U.S. retail grocery business.
Deloitte & Touche LLP
Boise, Idaho
March 25, 2004
31
ALBERTSON'S, INC.
CONSOLIDATED EARNINGS
For the 52 weeks ended January 29, January 30, January 31,
(In millions, except per share data) 2004 2003 2002
- ------------------------------------------------------------- ----------------- --------------- ------------------
Sales $ 35,436 $ 35,626 $ 36,605
Cost of sales 25,306 25,248 26,179
- ------------------------------------------------------------- ----------------- --------------- ------------------
Gross profit 10,130 10,378 10,426
Selling, general and administrative expenses 8,822 8,598 8,731
Restructuring (credits) charges (10) (37) 468
Gain on sale of New England Osco drugstores - - (54)
Merger-related credits - - (15)
- ------------------------------------------------------------- ----------------- --------------- ------------------
Operating profit 1,318 1,817 1,296
Other expenses:
Interest, net (409) (396) (425)
Other, net (3) (16) (8)
- ------------------------------------------------------------- ----------------- --------------- ------------------
Earnings from continuing operations before income taxes 906 1,405 863
Income tax expense 350 540 367
- ------------------------------------------------------------- ----------------- --------------- ------------------
Earnings from continuing operations 556 865 496
Discontinued operations:
Operating (loss) income - (50) 10
Loss on disposal - (379) -
Income tax (benefit) expense - (143) 5
- ------------------------------------------------------------- ----------------- --------------- ------------------
(Loss) earnings from discontinued operations - (286) 5
- ------------------------------------------------------------- ----------------- --------------- ------------------
Earnings before cumulative effect of change in accounting 556 579 501
principle
Cumulative effect of change in accounting principle (net of
tax of $60) - (94) -
- ------------------------------------------------------------- ----------------- --------------- ------------------
Net Earnings $ 556 $ 485 $ 501
============================================================= ================= =============== ==================
Earnings (loss) per share:
Basic
Continuing operations $ 1.51 $ 2.18 $ 1.22
Discontinued operations - (0.72) 0.01
Cumulative effect of change in accounting principle (net
of tax of $0.15) - (0.24) -
- ------------------------------------------------------------- ----------------- --------------- ------------------
Net Earnings $ 1.51 $ 1.22 $ 1.23
============================================================= ================= =============== ==================
Diluted
Continuing operations $ 1.51 $ 2.17 $ 1.22
Discontinued operations - (0.72) 0.01
Cumulative effect of change in accounting principle (net
of tax of $0.15) - (0.23) -
- ------------------------------------------------------------- ----------------- --------------- ------------------
Net Earnings $ 1.51 $ 1.22 $ 1.23
============================================================= ================= =============== ==================
Weighted average common shares outstanding:
Basic 368 397 406
Diluted 368 399 408
See Notes to Consolidated Financial Statements
32
ALBERTSON'S, INC.
CONSOLIDATED BALANCE SHEETS
January 29, January 30,
(In millions, except par value data) 2004 2003
- -------------------------------------------------------------------------- ------------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 289 $ 162
Accounts and notes receivable, net 683 647
Inventories 3,035 2,973
Assets held for sale 69 120
Prepaid and other 343 366
- -------------------------------------------------------------------------- ------------------- ------------------
Total Current Assets 4,419 4,268
Land, buildings and equipment, net 9,145 9,029
Goodwill 1,400 1,399
Intangibles, net 130 214
Other assets 300 301
- -------------------------------------------------------------------------- ------------------- ------------------
Total Assets $ 15,394 $ 15,211
========================================================================== =================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,774 $ 1,993
Salaries and related liabilities 659 615
Self-insurance 262 244
Current maturities of long-term debt and capital lease obligations 520 119
Other current liabilities 470 477
- -------------------------------------------------------------------------- ------------------- ------------------
Total Current Liabilities 3,685 3,448
Long-term debt 4,452 4,950
Capital lease obligations 352 307
Self-insurance 469 367
Other long-term liabilities and deferred credits 1,055 942
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 -
368 shares and 372 shares, respectively 368 372
Capital in excess of par 155 128
Accumulated other comprehensive loss (109) (96)
Retained earnings 4,967 4,793
- -------------------------------------------------------------------------- ------------------- ------------------
Total Stockholders' Equity 5,381 5,197
- -------------------------------------------------------------------------- ------------------- ------------------
Total Liabilities and Stockholders' Equity $ 15,394 $ 15,211
========================================================================== =================== ==================
See Notes to Consolidated Financial Statements
33
ALBERTSON'S, INC.
CONSOLIDATED CASH FLOWS
For the 52 weeks ended January 29, January 30, January 31,
(In millions) 2004 2003 2002
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Cash Flows From Operating Activities:
Net earnings $ 556 $ 485 $ 501
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 969 943 913
Net deferred income taxes 172 100 (129)
Other noncash charges 48 21 42
Stock-based compensation 25 19 19
Goodwill amortization - - 56
Gain on curtailment of postretirement benefits (36) - (36)
Net gain on asset sales (24) (9) (54)
Restructuring (credits) charges (8) (16) 424
Discontinued operations noncash charges 365 54
Cumulative effect of change in accounting principle - 94 -
Changes in operating assets and liabilities:
Receivables and prepaid expenses (38) 21 (110)
Inventories (62) 112 40
Accounts payable (242) (100) (68)
Other current liabilities 29 (88) 287
Self-insurance 120 106 71
Unearned income 25 32 3
Other long-term liabilities (11) (25) (4)
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Net cash provided by operating activities 1,545 2,060 2,009
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Cash Flows From Investing Activities:
Capital expenditures (1,094) (1,359) (1,455)
Proceeds from disposal of land, buildings and
equipment 72 101 288
Proceeds from disposal of assets held for sale 119 578 118
Other (23) 18 (31)
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Net cash used in investing activities (926) (662) (1,080)
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Cash Flows From Financing Activities:
Cash dividends paid (279) (306) (309)
Payments on long-term borrowings (120) (143) (89)
Stock purchases and retirements (108) (862) -
Proceeds from long-term borrowings 9 - 623
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Proceeds from stock options exercised 6 14 23
Net commercial paper activity and bank borrowings - - (1,153)
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Net cash used in financing activities (492) (1,297) (905)
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Net Increase in Cash and Cash Equivalents 127 101 24
Cash and Cash Equivalents at Beginning of Year 162 61 37
- ----------------------------------------------------------- ----------------- ------------------ ------------------
Cash and Cash Equivalents at End of Year $ 289 $ 162 $ 61
=========================================================== ================= ================== ==================
Supplemental Cash Flow Information:
Cash payments for income taxes, net of refunds $ 231 $ 376 $ 403
Cash payments for interest, net of amounts capitalized 401 390 299
Noncash investing and financing activities:
Capitalized lease obligations incurred 62 75 79
See Notes to Consolidated Financial Statements
34
ALBERTSON'S, INC.
CONSOLIDATED STOCKHOLDERS' EQUITY
Common Capital Accumulated
Stock In Excess Other Total
$1.00 Par Of Par Comprehensive Retained Stockholders' Comprehensive
(Dollars in millions) Value Value (Loss) Income Earnings Equity Income
- -----------------------------------------------------------------------------------------------------------------
Balance at February 1, 2001 $405 $ 48 $ - $ 5,241 $ 5694 $765
=====
Net earnings - - - 501 501 501
Exercise of stock options,
including tax benefits 2 26 - - 28 -
Deferred stock unit plan - 19 - - 19 -
Directors' stock plan - 1 - - 1 -
Dividends - - - (309) (309) -
Minimum pension liability
adjustment (net of tax of
$16) - - (23) - (23) (23)
Interest rate locks:
Cumulative effect of
adoption of new accounting
principle (net of tax of $3) - - 5 - 5 5
Loss on settled contracts
(net of tax of $1) - - (1) - (1) (1)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Balance at January 31, 2002 407 94 (19) 5,433 5,915 482
====
Net earnings - - - 485 485 485
Exercise of stock options,
including tax benefits - 15 - - 15 -
Stock purchases and
retirements - 35,129,397
shares (35) - - (827) (862) -
Deferred stock unit plan - 18 - - 18 -
Directors' stock plan - 1 - - 1 -
Dividends - - - (298) (298) -
Minimum pension liability
adjustment (net of tax of
$49) - - (77) - (77) (77)
- -----------------------------------------------------------------------------------------------------------------
Balance at January 30, 2003 372 128 (96) 4,793 5,197 408
====
Net earnings - - - 556 556 556
Exercise of stock options,
including tax benefits - 6 - - 6 -
Stock purchases and
retirements - 5,314,700 (103) (108)
shares (5) - - -
Deferred stock unit plan 1 20 - - 21 -
Directors' stock plan - 1 - - 1 -
Dividends - - - (279) (279) -
Minimum pension liability
adjustment (net of tax of (13) (13) (13)
$8) - - -
- -----------------------------------------------------------------------------------------------------------------
Balance at January 29, 2004 $368 $155 $ (109) $ 4,967 $5,381 $543
=================================================================================================================
See Notes to Consolidated Financial Statements
35
ALBERTSON'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. Business Description and Basis of Presentation
Albertson's, Inc. ("Albertsons" or 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 world.
As of January 29, 2004 the Company operated 2,305 stores in 31 states.
Retail operations are supported by 17 major Company distribution operations,
strategically located in the Company's operating markets. The Company also
operated 228 fuel centers near existing stores.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include all
entities in which the Company has control, including its majority-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated.
2. Summary of Significant Accounting Policies
Fiscal Year End: The Company's fiscal year ends on the Thursday nearest to
January 31. As a result, the Company's fiscal year includes a 53rd week every 5
to 6 years. Fiscal years 2003, 2002 and 2001 each contained 52 weeks and ended
on January 29, 2004, January 30, 2003 and January 31, 2002, respectively.
Use of Estimates: The preparation of the Company's consolidated financial
statements, in conformity with accounting principles generally accepted in the
United States, requires management to make estimates and assumptions. Some of
these estimates require difficult, subjective or complex judgments about matters
that are inherently uncertain. As a result, actual results could differ from
these estimates. 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.
Segment Information: The Company operates retail food and drug stores. These
operations are within a single operating segment and are located within the
United States.
Derivatives: From time to time, the Company enters into certain derivative
transactions, however the Company does not enter into derivative financial
instruments for trading purposes. The Company uses derivatives primarily as cash
flow hedges to set interest rates for forecasted debt issuances, such as
interest rate locks. These contracts are with major financial institutions and
are very short-term in nature. The gain or loss on interest rate locks is
deferred in accumulated other comprehensive income and recognized as an
adjustment to interest expense over the life of the related debt instrument.
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.
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.
Vendor Funds: The Company receives funds from many of the vendors whose products
the Company buys for resale in its stores. These vendor funds are provided to
increase the sell-through of the related products. The Company receives funds
for a variety of merchandising activities: placement of the vendor's products in
the Company's advertising; placement of the vendor's products in prominent
locations in the Company's stores; introduction of new products into the
Company's distribution system and retail stores; exclusivity rights in certain
categories that have slower-turning products; and to compensate for temporary
price reductions offered to customers on products held for sale at retail
stores. The Company also receives vendor funds for buying activities, such as
volume commitment rebates and credits for purchasing products in advance of
their need. The terms of vendor funds arrangements vary in length, from
short-term arrangements that are completed within a quarter, to long-term
arrangements that are expected to be completed within ten years.
36
Accounting for vendor funds is discussed in Emerging Issues Task Force
"EITF" Issue 02-16: "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"), which the Company adopted
as of the beginning of 2002. As a result of this adoption, the Company began
recognizing vendor funds for merchandising activities as a reduction of cost of
sales when the related products are sold as opposed to the previous method of
recognizing these credits as a reduction to cost of sales when the merchandising
activity was performed in accordance with the underlying agreements. In
connection with the implementation of this new accounting method, the Company
recorded a charge in 2002 of $94, net of tax benefit of $60.
The amount of vendor funds reducing the Company's inventory ("inventory
offset") as of January 29, 2004 was $155, an increase of $3 from the beginning
of 2003. The vendor funds inventory offset as of January 30, 2003 was $152, a
decrease of $6 from the beginning of 2002. The inventory offset was determined
by estimating the average inventory turnover rates by product category for the
Company's grocery, general merchandise and lobby departments (these departments
received over three-quarters of the Company's vendor funds in 2003) and by
average inventory turnover rates by department for the Company's remaining
inventory.
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
8 years; software-3 to 5 years; leasehold improvements-10 to 25 years;
intangibles-3 to 10 years; and assets held under capitalized leases-20 to 30
years.
The costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements and 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 and
amortized on the straight-line method over the lease 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. Beginning in 2002 the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets", which required goodwill to no longer be amortized,
but instead tested for impairment at least annually, or more frequently if
circumstances indicate potential impairment, through a comparison of fair value
to its carrying value. Prior to 2002, goodwill was amortized using the
straight-line method over its estimated benefit period of 40 years.
Company Owned Life Insurance: The Company has purchased life insurance policies
to fund 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 expenses in the Company's Consolidated Earnings.
Impairment of Long Lived Assets and Closed Store Reserves: The Company assesses
long-lived assets for indicators of impairment based on operational performance.
When events or changes in circumstances indicate that the carrying value of an
asset or an asset group may not be recoverable, the asset's fair value is
compared to its carrying value. Impairment losses are recognized as the amount
by which the carrying amounts of the assets exceed their fair values. Asset fair
values are determined by internal real estate specialists or by independent
quotes. These estimates can be significantly impacted by changes in real estate
market conditions, the economic environment and inflation.
For properties that are closed and are under long-term lease agreements,
the present value of any remaining liability under the lease, discounted using
credit risk-free rates and net of expected sublease recovery, is recognized as a
liability and expensed. The value of any equipment and leasehold improvements
related to a closed store is reduced to reflect net recoverable values. Internal
real estate specialists estimate the subtenant income, future cash flows and
asset recovery values based on their historical experience and knowledge of (1)
the market in which the store to be closed is located, (2) the results of the
Company's previous efforts to dispose of similar assets and (3) the current
economic conditions. The actual cost of disposition for these leases and related
assets is affected by specific real estate markets, the economic environment and
inflation.
37
Self-Insurance: The Company is primarily self-insured for property loss,
workers' compensation, automobile liability costs and general liability costs.
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.
Deferred Rent: The Company recognizes rent holidays and rent escalations on a
straight-line basis over the term of the lease. The deferred rent amount is
included in other long-term liabilities and deferred credits on the Company's
Consolidated Balance Sheets.
Revenue Recognition: Revenue is recognized at the point of sale for retail
sales. The discount earned by customers by using their preferred loyalty card is
recorded by the Company as a reduction to sales. The only income recognized from
any in-store rental arrangement is the lease amount received based on space
occupied.
Procurement, Distribution and Merchandising Costs: Cost of sales include, among
other things, purchasing, inbound freight costs, product quality testing costs,
warehousing costs, internal transfer costs, advertising, private label program
and strategic sourcing program costs. Selling, general and administrative
expenses include, among other things, merchandising planning and management
costs, store-based purchasing and receiving costs and inventory management
costs.
Store Opening Costs: Noncapital expenditures incurred in opening new stores or
remodeling existing stores are expensed in the year in which they are incurred.
Advertising: Advertising costs are expensed when incurred. In 2003 and 2002,
cooperative advertising funds were accounted for as vendor funds as described
above. In 2001, cooperative advertising funds from vendors were recorded in the
period which the related expense was incurred. Gross advertising expenses of
$472, $527 and $537, excluding cooperative advertising money received from
vendors, were included with cost of sales in the Company's Consolidated Earnings
for 2003, 2002 and 2001, respectively.
Stock-Based Compensation: The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost of stock-based compensation 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. SFAS No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123", encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. If the fair value-based accounting method was utilized for
stock-based compensation, the Company's pro forma net earnings and earnings per
share would have been as follows:
2003 2002 2001
------------------------------------------------------- -------------- ------------ -----------
Net Earnings as reported $ 556 $ 485 $ 501
Add: Stock-based compensation expense included in
reported net earnings, net of related tax effects 16 12 11
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (45) (44) (41)
--------------------------------------------------------- ------------ ------------ -----------
Pro Forma Net Earnings $ 527 $ 453 $ 471
========================================================= ============ ============ ===========
Basic Earnings Per Share:
As Reported $ 1.51 $ 1.22 $ 1.23
Pro Forma 1.43 1.14 1.16
========================================================= ============ ============ ===========
Diluted Earnings Per Share:
As Reported $ 1.51 $ 1.22 $ 1.23
Pro Forma 1.43 1.14 1.15
========================================================= ============ ============ ===========
The 2003, 2002 and 2001 pro forma net earnings resulted from reported net
earnings less pro forma after-tax compensation expense. The pro forma effect on
net earnings is not representative of the pro forma effect on net earnings in
future years. For more information on the method and assumptions used in
determining the fair value of stock-based compensation, see Note 16.
38
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred income taxes represent future net tax effects resulting from
temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to be settled or realized. A valuation allowance is
recorded for deferred tax assets considered not likely to be realized. The major
temporary differences and their net effect are shown in Note 15 "Income Taxes".
Comprehensive Income: Comprehensive income refers to revenues, expenses, gains
and losses that are not included in net earnings but rather are recorded
directly in stockholders' equity. Items of comprehensive income other than net
earnings were primarily related to the minimum pension liability of $21 ($13 net
of tax), $126 ($77 net of tax) and $39 ($23 net of tax) for 2003, 2002 and 2001,
respectively.
Reclassifications: Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the current year.
3. Cumulative Effect of Change in Accounting Principle
As discussed in Note 2 "Summary of Significant Accounting Policies", in
2002 the Company adopted a new method for recognizing vendor funds related to
merchandising activities. The pro forma amounts shown below reflect the
retroactive application of the new method as if it had been in effect for 2002
and 2001.
2002 2001
--------------------------------------------------------------------- ------------- --------------
Net earnings $ 579 $ 497
Earnings per share - basic $1.46 $1.22
Earnings per share - diluted $1.45 $1.22
4. New and Recently Adopted Accounting Standards
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 became effective for the Company on January
31, 2003 and did not have a material effect on the Company's consolidated
financial statements.
In November 2002 the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued after
December 31, 2002, while the disclosure requirements were effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not have a material effect on the Company's consolidated financial
statements.
In January 2003 the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 were required to be applied for the first interim or annual
period beginning after June 15, 2003. In December 2003 the FASB issued
Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51" ("FIN 46(R)"). FIN 46(R)
provides additional guidance related to identifying variable interest entities
and determining whether such entities should be consolidated. The adoption of
FIN 46(R) did not have a material effect on the Company's consolidated financial
statements.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 requires that certain financial instruments, which under
previous guidance could be accounted for as equity, be classified as liabilities
in statements of financial position. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and was effective for
the Company in the third quarter. The adoption of SFAS No. 150 did not have a
material effect on the Company's consolidated financial statements.
39
In November 2003 the EITF confirmed as a consensus EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, `Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor,' by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF
03-10 will not impact the Company's existing accounting and reporting policies
for manufacturers' coupons that can be presented at any retailer that accepts
coupons. For arrangements with vendors that are entered into or modified after
January 29, 2004, the Company is required to record the vendor reimbursement as
a reduction of cost of sales (instead of sales) if the coupon can only be
redeemed at a Company retail store. This modification to the Company's
accounting and reporting policies will only impact sales and cost of sales
beginning in the Company's first quarter of 2004 and is not expected to have a
material impact on sales or cost of sales.
In December 2003 the FASB issued SFAS No. 132 (Revised 2003), "Employers'
Disclosure about Pensions and Other Postretirement Benefits - An Amendment of
FASB Statements No. 87, 88 and 106" ("SFAS No. 132(R)"). This statement
increases the existing disclosure requirements by requiring more details about
pension plan assets, benefit obligations, cash flows, benefit costs and related
information. The disclosures required by SFAS No. 132(R) are included in Note 17
"Employee Benefit Plans".
5. Discontinued Operations/Market Exits
In March 2002 the Company's Board of Directors approved the second phase
of the Company's restructuring plan designed to improve future financial results
and to drive future competitiveness. This phase of the plan included the
complete exit of four underperforming markets: Memphis, Tennessee; Nashville,
Tennessee; Houston, Texas; and San Antonio, Texas. This involved the sale or
closure of 95 stores and two distribution centers and the reduction of division
offices from 15 to 11. The facilities identified for sale or closure were
evaluated for lease liability and asset impairment, including goodwill, in
accordance with the Company's policy. The 2001 and 2002 operating activities for
these 95 stores, two distribution centers and the related division offices have
been classified in Discontinued operations: Operating (loss) income in the
accompanying Consolidated Earnings.
The discontinued operations generated sales of $290 and $1,326 in 2002 and
2001, respectively, and an operating loss of $50 and operating profit of $10 in
2002 and 2001, respectively. The discontinued operations were not material to
the 2003 Consolidated Earnings. The loss from discontinued operations was $286
in 2002 and consisted of a loss from operations of $50 and asset impairments,
lease settlements and other costs of $379, net of $143 in income tax benefits.
The table below details the activity associated with the disposition:
NONCASH TOTAL CHARGES
CHARGES ACCRUALS (CREDITS)
------------------- ------------------- ------------------
2002 Activity
Asset impairments $401 $ - $ 401
Lease settlements - 26 26
Severance and outplacement - 23 23
Other - 2 2
Gain on asset sales (63) - (63)
Favorable lease settlements - (10) (10)
------------------
Loss on disposal $379
==================
Cash payments during 2002 (30)
-------------------
Reserve balance at January 30, 2003 11
2003 Activity
Unfavorable lease settlements 1 1
------------------
Loss on disposal $ 1
------------------- ==================
Cash payments during 2003 (4)
-------------------
Reserve balance at January 29, 2004 $ 8
===================
The reserve balance of $8 at January 29, 2004 and $11 at January 30, 2003
are included in other current liabilities in the Company's Consolidated Balance
Sheet.
40
Assets related to discontinued operations are recorded at their estimated
net realizable value, less selling costs, of $8 as of January 29, 2004 and are
reported as assets held for sale in the Company's Consolidated Balance Sheet.
These assets include land, buildings, equipment and leasehold improvements and
are being actively marketed. As of January 30, 2003, all 95 stores and both
distribution centers were closed. The Company had either sold or terminated the
leases related to 80 of the 95 stores and both distribution centers as of
January 29, 2004.
2003 unfavorable lease settlement charges are included in continuing
operations as part of selling, general and administrative expenses.
Other consists of amounts paid in connection with notification regulations
and negotiated contract terminations.
6. Restructuring
In the first half of 2001, the Company initiated a profitability review of
all of its retail stores, utilizing a methodology based on return on invested
capital. The Company also evaluated its division management structure and the
efficiency of its transaction processing departments. Based on these reviews, in
July 2001 the Company committed to the following restructuring activities: 1)
close and dispose of 165 underperforming stores in 25 states; 2) eliminate four
of the then existing 19 division offices; 3) sell a store fixture manufacturing
operation; 4) centralize certain transaction processing functions in Boise,
Idaho; and 5) reduce general office head count.
These restructuring activities called for the elimination of 1,341
managerial and administrative positions (excluding store level terminations).
The restructuring charge recorded in 2001 included the following: employee
severance and outplacement costs of $44; asset impairments of $361; lease
termination costs of $57; and other costs of $6.
In 2001 and 2002, respectively, 80 and 82 stores were closed or sold and
995 and 297 managerial and administrative employees were terminated. In 2002,
management revised the planned restructuring activities to retain the Company's
store fixture manufacturing operation, as it was determined to be more
cost-effective than purchasing like-fixtures from external sources in the
future; to retain one store due to improved operating performance; and to halt
one part of the transaction processing consolidation due to a decision to
replace the Company's human resource information systems (HRIS) by 2006. All
remaining stores in this restructuring plan were sold or closed by 2003.
41
The following table presents the pre-tax restructuring credits and charges
and the related restructuring reserves included in the Company's Consolidated
Balance Sheets:
NONCASH ACCRUALS TOTAL CHARGES
CHARGES (CREDITS)
------------------- ------------------- ------------------
2001 Activity
Asset impairments $ 361 $ - $ 361
Lease settlements - 57 57
Severance and outplacement - 44 44
Other - 6 6
------------------
Restructuring charges $ 468
==================
Cash payments during 2001 (46)
-------------------
Reserve balance at January 31, 2002 61
2002 Activity
Retain store fixtures operation (3) (2) $ (5)
Halt part of consolidation - HRIS - (2) (2)
Gains on asset sales (17) - (17)
Favorable lease settlements - (14) (14)
Severance and outplacement - 2 2
Other - (1) (1)
------------------
Restructuring credits $ (37)
==================
Cash payments during 2002 (16)
-------------------
Reserve balance at January 30, 2003 28
2003 Activity
Gains on asset sales (8) - $ (8)
Other (2) - (2)
------------------
Restructuring credits $ (10)
==================
Cash payments during 2003 (9)
-------------------
Reserve balance at January 29, 2004 $ 19
===================
The reserve balances of $19 at January 29, 2004 and $28 at January 30, 2003
are included in other current liabilities in the Company's Consolidated Balance
Sheets. The related assets are recorded at their estimated fair value, less
selling costs, of $13 as of January 29, 2004, and reported as assets held for
sale in the Company's Consolidated Balance Sheet.
42
7. Closed Store Reserves
The following table shows the pre-tax expense and related reserves, for
closed stores and other surplus property:
NONCASH ACCRUALS TOTAL
CHARGES
CHARGES (CREDITS)
------------------ ------------------- ------------------
Reserve balance at February 1, 2001 $ 22
2001 Activity
Asset impairments $ 44 - $ 44
Lease terminations - 27 27
Favorable lease termination - (2) (2)
Gains on disposition (2) - (2)
------------------
Closed store charge $ 67
==================
Cash payments during 2001 (8)
-------------------
Reserve balance at January 31, 2002 39
2002 Activity
Asset impairments 23 - $ 23
Lease terminations - 8 8
Favorable lease termination - (1) (1)
Loss on disposition 5 - 5
------------------
Closed store charge $ 35
==================
Cash payments during 2002 (16)
-------------------
Reserve balance at January 30, 2003 30
2003 Activity
Asset impairments 27 - $ 27
Lease terminations - 5 5
Favorable lease termination - (6) (6)
Gains on disposition (13) - (13)
------------------
Closed store charge $ 13
==================
Cash payments during 2003 (9)
-------------------
Reserve balance at January 29, 2004 $ 20
===================
As of January 29, 2004, $6 of the reserve balance was included with
accounts payable and the remaining $14 was included with other long-term
liabilities and deferred credits in the Company's Consolidated Balance Sheet.
The related assets are recorded at their estimated fair value of $43 as of
January 29, 2004, less selling costs, and reported as assets held for sale in
the Company's Consolidated Balance Sheet.
During fiscal 2001, the restructuring plan (discussed in Note 6
"Restructuring") included actions to accelerate the disposal of surplus property
that included terminating leases through negotiated buyouts and selling owned
properties through auctions. As a result of these actions, the Company incurred
$51 of pre-tax restructuring adjustments. These charges were included in
selling, general and administrative expenses in the Company's 2001 Consolidated
Earnings.
In January 2002 the Company sold a total of 80 Osco drugstores in Maine,
Massachusetts and New Hampshire for $235 which resulted in a $54 pre-tax gain.
8. Merger-related Credits
Merger-related (credits) charges for 2001 represent a credit of $15
associated with the sale of an asset for an amount that was greater than
originally estimated.
43
9. Accounts and Notes Receivable
Accounts and notes receivable, net, consisted of the following:
January 29, January 30,
2004 2003
- -------------------------------------------------------------------- ----------------- ------------------
Trade and other accounts receivable $ 693 $ 664
Current portion of notes receivable 8 6
Allowance for doubtful accounts (18) (23)
- -------------------------------------------------------------------- ----------------- ------------------
$ 683 $ 647
==================================================================== ================= ==================
10. Inventories
Approximately 96% of the Company's inventories are valued using the
last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method had
been used, inventories would have been $576 and $589 higher at the end of 2003
and 2002, respectively. Net earnings (basic and diluted earnings per share)
would have been lower by $8 ($0.02) in 2003, lower by $2 ($0.01) in 2002 and
higher by $3 ($0.01) in 2001. The replacement cost of inventories valued at LIFO
approximates FIFO cost.
During 2003 and 2002, inventory quantities in certain LIFO layers were
reduced. These reductions resulted in a liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years as compared with the cost of
2003 and 2002 purchases. As a result, cost of sales decreased by $3 in 2003, $4
in 2002 and $10 in 2001. This increased net earnings (basic and diluted earnings
per share) by $2 ($0.01) in 2003, by $2 ($0.01) in 2002 and by $6 ($0.01) in
2001.
11. Land, Buildings and Equipment
Land, buildings and equipment, net, consisted of the following:
January 29, January 30,
2004 2003
- ---------------------------------------------------------- --------------------- ---------------------
Land $1,936 $1,939
Buildings 5,978 5,713
Fixtures and equipment 5,928 5,561
Leasehold improvements 1,728 1,619
Capitalized leases 420 355
- ---------------------------------------------------------- --------------------- ---------------------
15,990 15,187
Accumulated depreciation (6,735) (6,060)
Accumulated amortization on capital leases (110) (98)
- ---------------------------------------------------------- --------------------- ---------------------
$9,145 $9,029
========================================================== ===================== =====================
Depreciation expense was $931, $901 and $869 for 2003, 2002 and 2001.
Amortization expense of capital leases was $18, $18 and $19 for 2003, 2002 and
2001, respectively.
12. Goodwill and Other Intangible Assets
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
in 2002. As a result, the Company did not incur any expense for the amortization
of goodwill in 2003 or 2002. The pretax expense for the amortization of goodwill
included in continuing operations was $56 in 2001. Upon adoption, the aggregate
of the goodwill allocated to the stores in each reporting unit became the
reporting units' goodwill balance. In order to determine if a reporting unit's
goodwill was impaired, a combination of internal analysis, focusing on each
reporting unit's implied EBITDA multiple and estimates of fair value from
independent valuation specialists were used. Based on these analyses, there was
no impairment of goodwill at the adoption date. Subsequently, during the fourth
quarter of 2002 and 2003, the Company completed its annual impairment review and
determined that there was no impairment. The fair value estimates could change
in the future depending on internal and external factors, including the success
of strategic sourcing initiatives, labor cost controls and competitive activity.
44
The following table presents the Company's 2001 net earnings and earnings
per share as if SFAS No. 142 had been adopted as of the beginning of fiscal year
2001:
January 29, 2004 January 30, 2003 January 31, 2002
----------------- ------------------ ------------------
Net earnings, as reported $ 556 $ 485 $ 501
Add back goodwill amortization, net of tax - - 56
----------------- ------------------ ------------------
Adjusted net earnings $ 556 $ 485 $ 557
================= ================== ==================
Basic EPS $1.51 $1.22 $1.23
Add back goodwill amortization, net of tax - - 0.14
----------------- ------------------ ------------------
Adjusted Basic EPS $1.51 $1.22 $1.37
================= ================== ==================
Diluted EPS $1.51 $1.22 $1.23
Add back goodwill amortization, net of tax - - 0.14
----------------- ------------------ ------------------
Adjusted Diluted EPS $1.51 $1.22 $1.37
================= ================== ==================
In 2003 there was no material change in the net carrying amount of
goodwill. In connection with the complete exit of certain markets discussed in
Note 5, the Company wrote off $68 of goodwill, net in 2002. The goodwill written
off arose from the original acquisition of the operating assets in those
markets.
The carrying amount of intangible assets was as follows:
January 29, 2004 January 30, 2003
-------------------- -------------------
Amortizing:
Favorable acquired operating leases $ 221 $ 231
Customer lists and other contracts 56 53
-------------------- -------------------
277 284
Accumulated amortization (186) (173)
-------------------- -------------------
91 111
Non-Amortizing:
Liquor licenses 39 39
Pension related intangible assets - 64
-------------------- -------------------
39 103
-------------------- -------------------
$ 130 $ 214
==================== ===================
Straight line amortization expense for intangibles was $20, $24 and $25 in
2003, 2002 and 2001, respectively. Amortizing intangible assets have remaining
useful lives from 2 to 38 years. Projected amortization expense for existing
intangible assets is: $19, $12, $7, $6 and $5, for 2004, 2005, 2006, 2007 and
2008, respectively.
45
13. Indebtedness
Long-term debt consisted of the following (borrowings are unsecured unless
indicated):
January 29, January 30,
2004 2003
- ----------------------------------------------------------------------------- --------------- --------------
8.0% Debentures due May 1, 2031 $ 400 $ 400
7.25% Notes due May 1, 2013 200 200
7.5% Notes due February 15, 2011 700 700
8.35% Notes due May 1, 2010 275 275
8.7% Debentures due May 1, 2030 225 225
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 15, 2026 200 200
7.5% Debentures due May 1, 2037 200 200
8.0% Debentures due June 1, 2026 272 272
7.9% Debentures due May 1, 2017 95 95
7.4% Notes due May 15, 2005 200 200
Medium-term Notes, due 2008 through 2028, average interest rate of 6.9% 145 245
Notes due July 3, 2004, average interest rate of 6.95% and 6.7%,
respectively 200 200
Industrial revenue bonds, average interest rate of 5.9% and 5.9%,
respectively due October 1, 2004 through December 15, 2011 5 8
Secured mortgage notes and other notes payable, average interest rates of
6.9% and 9.1%, respectively due 2004 through 2019 24 18
- ----------------------------------------------------------------------------- --------------- --------------
4,958 5,055
Current maturities (506) (105)
- ----------------------------------------------------------------------------- --------------- --------------
$4,452 $4,950
============================================================================= =============== ==============
The Company had three revolving credit facilities totaling $1,400 during
2003. The first agreement, a 364-day revolving credit facility with total
availability of $100 was due to expire in February 2004 but renewed for an
additional year to expire in February 2005. The second agreement, a revolving
credit facility with total availability of $350 was set to expire in March 2004,
but was extended through July 2004. The Company expects to replace this
agreement. The third agreement, a five-year facility for $950, expires in March
2005. The agreements in place at year end also contain certain covenants, the
most restrictive of which requires the Company to maintain consolidated tangible
net worth, as defined, of at least $3,000 and a fixed charge coverage, as
defined, of no less than 2.7 times. As of January 29, 2004 and January 30, 2003,
the Company was in compliance with these requirements. However, due to goodwill
that is expected to be generated as a result of the acquisition of the
operations of J Sainsbury plc to be acquired by the Company (Shaw's) (see Note
25 "Subsequent Events" for further discussion of the anticipated acquisition of
Shaw's) the Company will have to obtain a prospective waiver of the consolidated
tangible net worth covenant under these agreements. All of the revolving credit
agreements contain an option which would allow the Company, upon due notice, to
convert any outstanding amounts at the expiration dates to term loans, as long
as the Company is in compliance with the terms and conditions of the related
agreements. No borrowings were outstanding under the credit facilities as of
January 29, 2004 or January 30, 2003.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective on February 13, 2001 ("2001 Shelf
Registration") to authorize the issuance of up to $3,000 in debt securities. In
May 2001 the Company issued $600 of term notes under the 2001 Shelf
Registration. The notes are composed of $200 of principal bearing interest at
7.25% due May 1, 2013 and $400 of principal bearing interest at 8.0% due May 1,
2031. Proceeds were used primarily to repay borrowings under the Company's
commercial paper program.
46
The Company has pledged real estate with a cost of $36 as collateral for
mortgage notes which are payable on various schedules, including interest at
rates ranging from 6.8% to 10.7%. The notes mature from 2004 to 2014.
Medium-term notes of $30 due July 2027 contain a put option that 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 contains a put option that would
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.
Net interest expense was as follows:
2003 2002 2001
----------------------------------------------------------- ------------ ------------ -------------
Long-term debt $ 374 $ 377 $ 401
Capitalized leases 36 35 30
Capitalized interest (16) (27) (23)
----------------------------------------------------------- ------------ ------------ -------------
Interest expense 394 385 408
Bank service charges, net of interest income 15 11 17
----------------------------------------------------------- ------------ ------------ -------------
$ 409 $ 396 $ 425
=========================================================== ============ ============ =============
The scheduled aggregate maturities of long-term debt outstanding at January
31, 2004, are summarized as follows: $506 in 2004, $206 in 2005, $2 in 2006, $12
in 2007, $62 in 2008 and $4,170 thereafter. These figures do not include the
potential accelerations due to put options.
14. Capital Stock
On December 2, 1996, the Board of Directors adopted a stockholder rights
plan, which was amended on August 2, 1998, March 16, 1999 and September 26, 2003
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 per one one-thousandth share. Subject to certain
exceptions, the rights will become exercisable for shares of preferred stock
upon the earlier of (1) 10 days following a public announcement that a person or
group of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of common
stock and (2) 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 (collectively, the persons or groups
referenced in (1) and (2) are referred to as an "Acquiring Person").
Under the plan, subject to certain exceptions, if any person becomes an
Acquiring Person, each right will then entitle its holder as defined by the
plan, other than such Acquiring Person, upon payment of the $160 per one
one-thousandth share 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.
During 2002, the Company purchased and retired 35.1 million shares of the
Company's common stock for $862, at an average price of $24.54 per share. During
2003, the Company purchased and retired 5.3 million shares for $108, at an
average price of $20.26 per share. On December 5, 2003, the Board of Directors
reauthorized a program authorizing management, at their discretion, to purchase
and retire up to $500 of the Company's common stock through December 31, 2004.
The Company may continue or, from time to time suspend, purchasing shares under
its stock purchase program without notice, depending on prevailing market
conditions, alternate uses of capital and other factors.
47
15. Income Taxes
Deferred tax assets and liabilities consist of the following:
January 29, January 30,
2004 2003
- ----------------------------------------------------------------------- --------------- ----------------
Deferred tax assets:
Compensation and benefits $ 301 $ 317
Self-insurance 149 216
Basis in fixed assets 157 184
Unearned income 33 17
Other, net 65 69
Valuation allowance (3)
-
- ----------------------------------------------------------------------- --------------- ----------------
Total deferred tax assets 702 803
- ----------------------------------------------------------------------- --------------- ----------------
Deferred tax liabilities:
Basis in fixed assets and capitalized leases (602) (537)
Inventories (83) (82)
Compensation and benefits (23) (51)
Self-insurance (14) -
Other, net (37) (25)
- ----------------------------------------------------------------------- --------------- ----------------
Total deferred tax liabilities (759) (695)
- ----------------------------------------------------------------------- --------------- ----------------
Net deferred tax (liabilities) assets $ (57) $ 108
======================================================================= =============== ================
The change in net deferred tax assets includes total adjustments of $7 for
the year ended January 29, 2004 related to stock units of $(1) and other
comprehensive income of $8.
The Company has federal and state net operating loss carryforwards of $1
and $159, respectively, which will expire in years 2005 through 2021.
Annual tax provisions include amounts considered sufficient to pay
assessments that may result from examination of prior year tax returns; however,
the amount ultimately paid upon resolution of issues raised may differ
materially from the amount accrued. These accrued amounts are classified in
other long term liabilities based on expected settlement dates.
Income tax expense related to continuing operations consists of the
following:
2003 2002 2001
---------------------------------------------------------------- ------------ ------------ -----------
Current:
Federal $ 159 $ 448 $ 454
State 19 52 50
---------------------------------------------------------------- ------------ ------------ -----------
178 500 504
Deferred:
Federal 154 36 (124)
State 18 4 (13)
---------------------------------------------------------------- ------------ ------------ -----------
172 40 (137)
---------------------------------------------------------------- ------------ ------------ -----------
$ 350 $ 540 $ 367
================================================================ ============ ============ ===========
The reconciliations between the federal statutory tax rate and the
Company's effective tax rates are as follows:
2003 Percent 2002 Percent 2001 Percent
- ----------------------------------- ----------- ------------- ---------- ------------- ---------- -------------
Taxes computed at statutory rate $ 317 35.0 $ 492 35.0 $ 302 35.0
State income taxes net of federal
income tax benefit 36 4.0 56 4.0 37 4.2
Goodwill amortization - - - - 27 3.1
Other (3) (0.4) (8) (0.6) 1 0.3
- ----------------------------------- ----------- ------------- ---------- ------------- ---------- -------------
$ 350 38.6 $ 540 38.4 $ 367 42.6
=================================== =========== ============= ========== ============= ========== =============
48
16. Stock Options and Stock Awards
At January 29, 2004, Albertsons had one stock-based incentive plan in
effect under which grants could be made with respect to 50 million shares of the
Company's common stock (Albertson's, Inc. 1995 Amended and Restated Stock-Based
Incentive Plan) (the "1995 Plan"). Under the 1995 Plan, approved by the
stockholders most recently in 2001, options to purchase the Company's common
stock and stock awards may be granted to officers, key employees, special
advisors (as defined in the 1995 Plan) and non-employee members of the Board of
Directors. During 2001, the 1995 Plan was amended to, among other things,
increase the number of shares allowed by the plan from 30 million to 50 million.
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 or vest 100% on the third
anniversary of the grant date and have a maximum term of 7 to 10 years.
Deferrable or Deferred Stock Units: From time to time, deferrable or deferred
stock units with dividend equivalents paid in cash quarterly are awarded under
the 1995 Plan to key officers of the Company. Deferred stock units are also
awarded to non-employee members of the Board of Directors.
Grants of 1,672,398 units were made during 2003 to key officers and
non-employee directors of the Company, of which 1,046,548 and 356,885 units will
vest at a rate of 33% per year after the first two years and 20% per year for
the first five years, respectively, and be distributed in a manner elected by
the participant on a date after the participant ceases to be an officer of the
Company, 253,500 units will vest at a rate of 20% per year for the first five
years and be distributed in stock at each vesting date unless otherwise deferred
and 15,465 units were fully vested at their grant date.
Grants of 1,080,441 units were made during 2002 to key officers and
non-employee directors of the Company, of which 432,841 units will vest at a
rate of 20% per year for the first five years and be distributed in a manner
elected by the participant on a date after the participant ceases to be an
officer of the Company, 638,540 units will vest at a rate of 20% per year for
the first five years and be distributed in stock at each vesting date unless
otherwise deferred and 9,060 units were fully vested at their grant date.
Grants of 1,089,104 units were made during 2001 to key officers and
non-employee directors of the Company of which 788,670 units will vest over time
and be distributed in a manner elected by the participant on a date after the
participant ceases to be an officer of the Company, 186,217 units will vest at a
rate of 20% per year for the first five years and be distributed in stock at
each vesting date unless otherwise deferred and 14,217 were fully vested at
their grant date.
Compensation expense for deferred stock units of $25, $19 and $19 was
recorded in selling, general and administrative expenses in 2003, 2002 and 2001,
respectively.
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):
January 29, 2004 January 30, 2003 January 31, 2002
----------------------- ----------------------- -----------------------
Shares Price Shares Price Shares Price
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year 30,245 $ 31.41 28,045 $ 33.06 25,290 $ 32.79
Granted 7,169 20.35 5,312 23.06 6,406 32.64
Exercised (295) 21.72 (722) 23.99 (1,303) 22.71
Forfeited (1,955) 32.14 (2,390) 34.43 (2,348) 34.70
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year 35,164 $ 29.20 30,245 $ 31.41 28,045 $ 33.06
================================= =========== =========== =========== =========== =========== ===========
Options exercisable at end of
year 16,626 $ 34.08 13,523 $ 35.04 11,414 $ 35.67
================================= =========== =========== =========== =========== =========== ===========
As of January 29, 2004, 9 million shares of the Company's common stock were
reserved for future grants of stock options and stock awards.
49
The following table summarizes options outstanding and options exercisable
as of January 29, 2004 and the related weighted average remaining contractual
life (years) and weighted average exercise price (shares in thousands):
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Shares Remaining Average Shares Average
Option Price Per Share Outstanding Life Price Exercisable Price
----------------------------- --------------- ------------- --------- ---------------- ----------
$ 20.23 - $ 22.52 17,062 8.3 $ 21.18 3,970 $ 21.72
23.52 - 34.87 12,160 6.7 31.55 7,282 31.26
35.00 - 45.94 1,971 2.9 39.86 1,961 39.87
47.00 - 51.19 3,971 5.4 51.14 3,413 51.13
----------------------------- --------------- ------------- --------- ---------------- ----------
$ 20.23 - $ 51.19 35,164 7.1 $ 29.20 16,626 $ 34.08
============================= =============== ============= ========= ================ ==========
The weighted average fair value at date of grant for Albertsons options
granted during 2003, 2002 and 2001 was $6.44, $6.80 and $10.16 per option,
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
2003 2002 2001
------------------------------------------------------- --------------- ---------------- -------------
Expected life (years) 5.7 5.7 5.8
Risk-free interest rate 3.56% 3.15% 3.62%
Volatility 39.4% 38.0% 34.8%
Dividend yield 3.74% 3.38% 2.33%
17. Employee Benefit Plans and Collective Bargaining Agreements
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 unless
the collective bargaining agreement provides for participation in
Company-sponsored plans. The Company sponsors both defined benefit and defined
contribution plans.
The Albertsons Salaried Employees Pension Plan and Albertsons Employees
Corporate Pension Plan are funded, qualified, defined benefit, noncontributory
plans for eligible Albertsons 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. In 1999, in
conjunction with the authorization of ASRE (described later), the
Company-sponsored defined benefit plans were amended to close the plans to
future new entrants, with the exception of certain union employees based on
current contracts. 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. The Company's funding policy for the defined benefit
plans is to contribute the minimum contribution allowed under the Employee
Retirement Income Security Act ("ERISA"), with consideration given to
contributing larger amounts in order to be exempt from Pension Benefit Guaranty
Corporation ("PBGC") variable rate premiums and/or participant notices of
under-funding. The Company will recognize contributions in accordance with
applicable regulations, with consideration given to recognition for the earliest
plan year permitted.
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 that supplement those provided by the Company's
other retirement plans.
The Company offers health and life insurance to retirees under multiple
programs. The terms of these plans vary based on employment history and date of
retirement. For certain pre-1991 retirees, the Company provides coverage at
little or no cost to the retirees. For other current retirees, the Company
provides a fixed dollar contribution and retirees pay contributions to fund the
remaining cost. On December 5, 2003, the Board of Directors approved a
curtailment of retirement medical benefits for all non-retired employees. For
retirees after June 1, 2004 the fixed dollar employer contribution will be
reduced to $0 and retiree contributions will fund the entire benefit. The impact
of the curtailment for 2003 was a gain of $36, recorded in selling, general and
administrative expenses in Consolidated Earnings.
The Company uses its fiscal year-end date as the measurement date for its
Company-sponsored defined benefit pension plans and postretirement benefit
plans.
50
The following table sets forth the obligations and funded status of the
Company-sponsored defined benefit pension plans and postretirement health and
life insurance benefit plans:
Pension Benefits Other Benefits
January 29, January 30, January 29, January 30,
2004 2003 2004 2003
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
Change in benefit obligation:
Benefit obligation at beginning of $ 656 $ 567 $ 69 $ 71
year
Service cost 13 12 2 3
Interest cost 40 37 4 4
Curtailment gain - - (36) (6)
Plan participants' contributions - - 12 12
Actuarial loss (gain) 42 59 (6) (1)
Benefits paid (18) (19) (16) (14)
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
End of year benefit obligation 733 656 29 69
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
Change in plan assets:
Fair value of plan assets at
beginning of year 398 466 - -
Actual return on plan assets 104 (51) - -
Employer contributions 21 2 4 2
Plan participants' contributions - - 12 12
Benefits paid (18) (19) (16) (14)
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
Fair value of plan assets at end of 505 398 - -
year
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
Funded status (228) (258) (29) (69)
Unrecognized net actuarial loss (gain) 252 304 (18) (13)
Unrecognized prior service benefit (51) (64) - -
---------------------------------------- ------------- -- -------------- -- -------------- -- --------------
Net amount recognized $ (27) $ (18) $ (47) $ (82)
======================================== ============= == ============== == ============== == ==============
Amounts recognized in the statement of financial position consist of:
Pension Benefits Other Benefits
January 29, January January 29, January 30,
2004 30, 2003 2004 2003
-------------- ------------- -------------- --------------
Accrued benefit liability $(212) $(246) $ (47) $ (82)
Intangible assets - 64 - -
Accumulated
other
comprehensive income,
net of taxes 112 99 - -
Deferred income taxes 73 65 - -
-------------- ------------- -------------- --------------
Net amount recognized $ (27) $ (18) $ (47) $ (82)
============== ============= ============== ==============
The accumulated benefit obligation for all defined benefit pension plans
was $717 and $644 at January 29, 2004 and January 30, 2003.
At January 29, 2004, the accumulated benefit obligation exceeded the fair
value of the plans' assets in the Albertsons Employees Corporate Pension Plan,
Albertsons Salaried Employees Pension Plan and the Executive Pension Makeup
Plan. The provisions of SFAS No. 87, "Employers' Accounting for Pensions,"
require recognition in the balance sheet of an additional minimum liability and
related intangible asset for pension plans with accumulated benefits in excess
of plan assets; any portion of such additional liability which is in excess of
the plan's unrecognized prior service cost is a component of other comprehensive
income and is reflected in stockholders' equity, net of related tax benefit.
51
The following table summarizes the projected benefit obligation,
accumulated benefit obligation and plan assets of the individual plans that have
a projected benefit obligation in excess of plan assets:
January 29, January 30,
2004 2003
------------------------------------------------------------------- ----------------- -----------------
Projected benefit obligation:
Albertsons Employees Corporate Pension Plan $432 $383
Albertsons Salaried Employees Pension Plan 280 253
Executive Pension Makeup Plan 21 20
Accumulated benefit obligation:
Albertsons Employees Corporate Pension Plan 429 381
Albertsons Salaried Employees Pension Plan 267 243
Executive Pension Makeup Plan 21 20
Plan assets (fair market value):
Albertsons Employees Corporate Pension Plan 279 216
Albertsons Salaried Employees Pension Plan 226 181
Net periodic benefit expense (income) for Company-sponsored defined benefit
pension plans was as follows:
2003 2002 2001
-------------------------------------------------------- ----------------- ---------------- -------------
Service cost - benefits earned during the period $13 $12 $11
Interest cost on projected benefit obligations 40 37 35
Expected return on assets (32) (39) (48)
Amortization of prior service cost (6) (7) (7)
Recognized net actuarial loss 22 9 -
Curtailment gain (7) - -
-------------------------------------------------------- ----------------- ---------------- -------------
Net periodic benefit expense (income) $30 $12 $(9)
======================================================== ================= ================ =============
The net periodic postretirement benefit cost was as follows:
2003 2002 2001
---------------------------------------------------------- -------------- ----------------- -----------
Service cost $2 $3 $3
Interest cost 4 4 4
Amortization of unrecognized gain (1) (1) (1)
---------------------------------------------------------- -------------- ----------------- -----------
Net periodic postretirement benefit cost $5 $6 $6
========================================================== ============== ================= ===========
Net periodic benefit expense (income) 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. Weighted-average assumptions used for the
Company-sponsored defined benefit pension plans were as follows:
2003 2002 2001
------------------------------------------ -------------- -- ------------- -- --------------
Weighted-average assumptions used to
determine benefit obligations:
Discount rate 5.80% 6.15% 6.75%
Rate of compensation increase 3.45-4.50% 3.40-4.50% 3.70-4.50%
Weighted-average assumptions used to
determine net periodic benefit cost:
Discount rate 6.15% 6.75% 7.15%
Rate of compensation increase 3.45-4.50% 3.40-4.50% 3.70-4.50%
Expected long-term return on plan 8.00% 8.50% 9.50%
assets
The discount rate used to determine the Company-sponsored postretirement
health and life insurance benefits plans was 3.55%, 6.10% and 6.75% as of the
end of 2003, 2002 and 2001, respectively. As a result of a plan curtailment in
fiscal year 2003, there are no expected employer paid benefit payments for any
employees who retire after June 1, 2004. Therefore, the duration of the expected
employer paid benefit payments was reduced. Discount rates are based on the
expected timing and amounts of the expected employer paid benefits.
52
Expected long-term return on plan assets is estimated by asset class and is
generally based on historical returns, volatilities and risk premiums. Based
upon the plan's asset allocation, composite return percentiles are developed
upon which the plan's expected long-term return is based.
The expected employer benefit payments for certain pre-1991 retirees were
measured using an annual medical trend in the age-specific per capita cost of
covered health care benefits of 6% for years 2002 and later. Medical trend does
not affect the expected employer benefit payments for other retirees.
With the exception of the plans covering ASC grandfathered retirees, all
postretirement plans are contributory, with participants' contributions adjusted
periodically. 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 Albertsons 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.
Assets of the two funded Company defined benefit pension plans are invested
in directed trusts. Assets in the directed trusts are invested as follows:
January 29, 2004 January 30,
2003
-------------------------------------------------------- ----------------- ----------------
Company common stock ($0 and $39 at January 29, 2004 0% 10%
and January 30, 2003)
Domestic equity 53% 39%
International equity 18% 15%
Fixed income 27% 34%
Cash equivalents 2% 2%
-------------------------------------------------------- ----------------- ----------------
100% 100%
======================================================== ================= ================
Investments in the pension trust are overseen by the Investment Management
Subcommittee which is made up of officers of the Company and outside experts.
The overall investment strategy and policy has been developed based on the
need to satisfy the long-term liabilities of the Company's pension plans. Risk
management is accomplished through diversification across asset classes,
multiple investment manager portfolios and both general and portfolio-specific
investment guidelines. The asset allocation guidelines are as follows:
Minimum Exposure Target Maximum Exposure
---------------- ------ ----------------
Domestic Equities
Large 40% 50% 60%
Small 5 10 15
Non-U.S. Equities 10 15 20
Fixed Income 20 25 30
Managers are expected to generate a total return consistent with their
philosophy offer protection in down markets and outperform both their respective
peer group medians and an appropriate benchmark, net of expenses, over a
three-to-five year period.
The investment guidelines contain the following:
-Categorical restrictions such as no commodities, no short sales, and
no margin purchases;
-Portfolio restrictions that address such things as proxy voting,
brokerage arrangements and restrictions on the purchase of Company
Securities;
-Asset class restrictions that address such things as single security
or sector concentration, capitalization limits and minimum quality
standards; and
-A provision for specific exemptions from the above guidelines upon
approval by the Investment Management Subcommittee.
Futures and options must be used for hedging purposes only and not for
speculative purposes. Long futures positions may be used in place of cash market
securities (e.g., treasury futures purchased in place of buying long treasury
bonds).
53
The Company expects to contribute $65 to its pension plans in 2004. The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid by the Company's defined benefit pension
plans:
Pension Benefits
-------------------------------------------------------- -----------------
2004 $19
2005 22
2006 24
2007 27
2008 30
Years 2009-2013 208
The Company also sponsors the Albertsons Savings and Retirement Estates
("ASRE") Plan (formerly the American Stores Retirement Estates Plan) which is a
defined contribution retirement Plan. ASRE is a profit sharing plan with a
salary deferral feature pursuant to Section 401(k) of the Internal Revenue Code.
Most participants in ASRE are eligible to receive a profit sharing contribution
(Company contribution based on employee compensation). In addition, the Company
provides a matching contribution based on the amount of eligible compensation
contributed by the associate. ASRE was originally authorized by the ASC Board of
Directors for the purpose of providing retirement benefits for employees of ASC
and its subsidiaries.
In addition to ASRE, the Company sponsors a tax-deferred savings plan that
is also a salary deferral plan pursuant to Section 401(k) of the Internal
Revenue Code. The plan covers employees represented by a labor union who meet
age and service eligibility requirements and whose collective bargaining
agreement provides for participation.
All Company contributions to ASRE 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 contributes to various plans under industry wide
collective bargaining agreements, primarily for defined benefit pension plans.
Total contributions to these plans were $92 for 2003, $80 for 2002 and $49 for
2001. The Company also contributes to various plans under industry wide
collective bargaining agreements which provide for health care benefits to both
active employees and retirees. Total contributions to these plans were $416 for
2003, $408 for 2002 and $371 for 2001.
Retirement plans expense (income) was as follows:
2003 2002 2001
------------------------------------------------------------- ------------ ------------- ------------
Defined benefit pension plans $ 30 $ 12 $ ( 9)
ASRE defined contribution plan 143 153 150
Multi-employer plans 92 80 49
------------------------------------------------------------- ------------ ------------- ------------
$ 265 $ 245 $ 190
============================================================= ============ ============= ============
SFAS 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:
January 29, January 30,
2004 2003
-------------------------------------------------------------------- ------------------ -----------------
Included with salaries and related liabilities $ 37 $ 25
Included with other long-term liabilities 63 67
-------------------------------------------------------------------- ------------------ -----------------
$ 100 $ 92
==================================================================== ================== =================
On December 8, 2003 the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduces a
prescription drug benefit under Medicare Part D as well as a federal subsidy to
sponsors of retiree health benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In accordance with FASB Staff
Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003", the
Company has deferred recognition of any effects the Act may have on
Company-sponsored postemployment benefit plans and has not yet determined the
impact, if any, on the Company. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued,
could result in a retroactive change in previously reported information.
54
Collective Bargaining Agreements: As of January 29, 2004, the Company
employed approximately 212,000 people, which included approximately 198,000
regular workers and 14,000 replacement workers in stores directly impacted by
the now resolved labor dispute in southern California. As of January 29, 2004,
approximately 58% of the Company's employees were covered by collective
bargaining agreements, primarily with the United Food and Commercial Workers and
International Brotherhood of Teamsters. Labor agreements covering approximately
45,000 associates expire during 2004.
18. Employment Contracts and Change in Control Agreements
The Company has entered into a ten-year employment agreement with its
Chairman of the Board, Chief Executive Officer and President, which provides a
minimum base salary, signing bonus, annual bonus payments, stock options and
deferrable stock awards as well as other benefits (the "CEO Agreement"). The
Company has also entered into agreements with certain other officers (the
"Officers Agreements"). These agreements include specified amounts for signing
bonus, base salary, annual bonus payments, stock option awards and deferrable or
deferred stock unit awards. In the event of termination of employment without
cause within the first two or three years of service for purposes of the
Officers Agreements and during the ten-year term for purposes of the CEO
Agreement, the executive would be entitled to certain guaranteed payments and
the vesting of stock awards.
The Company has entered into change-in-control ("CIC") agreements with
certain executives to provide them with stated severance compensation should
their employment with the Company be terminated under certain defined
circumstances prior to or following a CIC. The CIC agreements have varying terms
and provisions depending upon the executive's level within the organization and
other considerations, including up to three times current base salary and
current target bonus, payable in lump sum for the most senior executives and,
for these executives, a tax gross-up payment to make the executive whole for any
excise taxes incurred due to Section 280G of the Internal Revenue Code.
The CIC agreements have a term of approximately three years and three
months, with each agreement expiring on December 31, 2005. However, beginning on
January 1, 2004 and each January 1st thereafter, the term of the agreement will
automatically be extended for an additional year unless the Company or the
executive gives notice by September 30 of the preceding year that it does not
wish to extend the agreement. In the event that a CIC occurs during the term of
the agreement, the agreement provides for a two-year protection period (referred
to as the severance period) during which the executive will receive the stated
benefits upon an involuntary termination (other than for cause) or resignation
for Good Reason as defined in the agreements.
The agreements are considered to be "double trigger" arrangements wherein
the payment of severance compensation is predicated upon the occurrence of two
triggering events: (1) the occurrence of a CIC as defined in the agreements; and
(2) the involuntary termination of the executive (other than for cause) or the
executive's termination of employment with the Company for Good Reason as
defined in the agreements.
In consideration for the severance protection afforded by such agreements,
the senior executives have agreed to non-compete provisions for the term of the
agreements and for one year following the date of termination and all of the
executives covered by the CIC program described above have agreed to
non-solicitation provisions for the term of the agreements and for one year
following the date of termination.
19. 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.
55
Following is a summary of the Company's assets under capitalized leases; $2
of real estate and equipment is included in assets held for sale at January 29,
2004 and January 30, 2003:
January 29, January 30,
2004 2003
-------------------------------------------------------------- ------------------ -------------------
Real estate and equipment $ 420 $ 355
Accumulated amortization (110) (98)
-------------------------------------------------------------- ------------------ -------------------
$ 310 $ 257
============================================================== ================== ===================
Future minimum lease payments for noncancelable operating leases (which
exclude the amortization of acquisition-related fair value adjustments), related
subleases and capital leases at January 29, 2004, are as follows:
Operating Capital
Leases Subleases Leases
--------------------------------------------------- ----------------- --------------- ----------------
2004 $ 349 $ (41) $ 53
2005 326 (41) 49
2006 302 (38) 47
2007 280 (35) 47
2008 251 (22) 46
Thereafter 2,257 (49) 623
--------------------------------------------------- ----------------- --------------- ----------------
Total minimum obligations (receivables) $ 3,765 $ (226) 865
=================================================== ================= ===============
Interest (499)
--------------------------------------------------- ----------------- --------------- -----------------
Present value of net minimum obligations 366
Current portion (14)
--------------------------------------------------- ----------------- --------------- -----------------
Long-term obligations at January 29, 2004 $ 352
=================================================== ================= =============== =================
Rent expense under operating leases was as follows:
2003 2002 2001
---------------------------------------------------- ------------------ ------------------ --------------
Minimum rent $ 396 $ 389 $ 375
Contingent rent 18 26 28
---------------------------------------------------- ------------------ ------------------ --------------
414 415 403
Sublease rent (94) (92) (94)
---------------------------------------------------- ------------------ ------------------ --------------
$ 320 $ 323 $ 309
==================================================== ================== ================== ==============
20. Related Party Transactions
In 2003, the Company leased one store and two office locations ($1 of rent,
common area maintenance fees and taxes paid) from an entity that has a
relationship with a member of the Board of Directors. In 2001 and 2002, the
Company leased nine stores and two office locations and paid common area
maintenance fees for eight other stores ($3 and $3 of rent, common area
maintenance fees and taxes paid during 2002 and 2001, respectively) purchased a
piece of land ($2 during 2001) and obtained consulting services (insignificant)
from entities that have or, at the time had, a relationship with certain members
of the Board of Directors.
21. Financial Instruments
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash equivalents and
receivables. The Company limits the amount of credit exposure to each individual
financial institution and places its temporary cash into investments of high
credit quality. Concentrations of credit risk with respect to receivables are
limited due to their dispersion across various companies and geographies.
The estimated fair values of cash and cash equivalents, accounts
receivable, accounts payable, short-term debt and 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 bank line borrowings) were as follows:
January 29, January 30,
2004 2003
---------------------------------------------------------------- ---------------- ------------------
Fair value $ 5,491 $ 5,675
Carrying amount 4,958 5,055
56
22. Legal Proceedings
The Company is subject to various lawsuits, claims and other legal matters
that arise in the ordinary course of conducting business.
In March 2000 a class action complaint was filed against Albertsons as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
Albertson's, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs' allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers' compensation costs, cash shortages, premises liability and
"shrink" losses in violation of California law. In October 2001 the court
granted summary judgment against Sav-on Drug Stores, finding one of its bonus
plans unlawful under plaintiffs' liability theory. In August 2001 a class action
complaint with very similar claims, also involving bonus-eligible managers, was
filed against Albertsons as well as Lucky Stores, Inc. and American Stores
Company, wholly-owned subsidiaries of the Company, in the Superior Court for the
County of Los Angeles, California (Petersen, et al. v. Lucky Stores, Inc., et
al.). In June 2002 the cases were consolidated and in August 2002 a class action
with respect to the consolidated case was certified by the court. The Court of
Appeal of the State of California Second Appellate District decision in Ralphs
Grocery Co. vs. Superior Court, 112 Cal. App. 4th 1090 (2003) addressed certain
of the issues advanced by the plaintiffs in this lawsuit. On February 18, 2004,
the California Supreme Court declined to review this decision. Certain of the
issues were decided by the appellate court favorably to the Company's position
and certain were decided adverse to the Company's position. There remain
numerous issues to be resolved by the trial court. The Company believes it has
strong defenses on these issues and the Company is vigorously advancing its
position. 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 that the ultimate resolution of this action will have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
In April 2000 a class action complaint was filed against Albertsons as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs' allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 against the
Company's subsidiary Sav-on Drug Stores, Inc. in the Superior Court for the
County of Los Angeles, California (Rocher, Dahlin, et al. v. Sav-on Drug Stores,
Inc.) and was also certified as a class action. In April 2002 the Court of
Appeal of the State of California Second Appellate District reversed the Rocher
class certification, leaving only two plaintiffs. The California Supreme Court
has accepted plaintiffs' request for review of this class decertification. The
Gardner case is on hold pending the review of the Rocher class decertification
issue by the California Supreme Court. The Company has strong defenses against
these lawsuits and is vigorously defending them. Although these lawsuits are
subject to the uncertainties inherent in the litigation process, based on the
information presently available to the Company, management does not expect that
the ultimate resolution of these lawsuits will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
In September 2000, an agreement was reached and court approval granted, to
settle eight purported class and/or collective actions which were consolidated
in the United States District Court in Boise, Idaho and which raised various
issues including "off-the-clock" work allegations and allegations regarding
certain salaried grocery managers' exempt status. Under the settlement
agreement, current and former employees who met eligibility criteria have been
allowed to present their off-the-clock work claims to a settlement
administrator. Additionally, current and former grocery managers employed in the
State of California have been allowed to present their exempt status claims to a
settlement administrator. The Company mailed notices of the settlement and
claims forms to approximately 70,500 associates and former associates.
Approximately 6,000 claim forms were returned, of which approximately 5,000 were
deemed by the settlement administrator to be incapable of valuation, presumed
untimely, or both. The claims administrator was able to assign a value to
approximately 1,000 claims, which amount to a total of approximately $14,
although the value of many of those claims is still subject to challenge by the
Company. A second claim process was ordered by the court, but the parties are
still waiting for final instructions from the Court. The Company is presently
unable to determine the number of individuals who may ultimately submit valid
claims or the amounts that it may ultimately be required to pay with respect to
such claims. Based on the information presently available to it, management does
not expect that the satisfaction of valid claims submitted pursuant to the
settlement will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
57
On November 20, 2003, three consumers filed an action in California state
court (Kerner, et al. v. Albertsons, Inc.; Ralphs Grocery Company; and Safeway
Inc., dba Vons, a Safeway Company, Los Angeles Superior Court, Case No.
BC306456), claiming that certain provisions of the Labor Dispute Agreements
violate California's Cartwright Act and the Unfair Competition Law. The lawsuit
seeks unspecified monetary damages and injunctive relief. On February 2, 2004,
the Attorney General for the State of California filed an action in Los Angeles
federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway
Company; Albertsons, Inc. and Ralphs Grocery Company, a division of The Kroger
Co., United States District Court Central District of California, Case No.
CV04-0687) claiming that certain provisions of the Labor Dispute Agreements
violate section 1 of the Sherman Act. The lawsuit seeks declarative and
injunctive relief. The Company filed its answer on February 24, 2004. The
Company has strong defenses against these lawsuits and is vigorously defending
them. Although these lawsuits are subject to uncertainties inherent in the
litigation process, based on the information presently available to the Company,
management does not expect that the ultimate resolution of these actions will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company is also involved in routine legal proceedings incidental to its
operations. Management does not expect that the ultimate resolution of these
legal proceedings will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The statements above reflect management's current expectations based on the
information presently available to the Company. However, predicting the outcomes
of claims and litigation and estimating related costs and exposures involve
substantial uncertainties that could cause actual outcomes, costs and exposures
to vary materially from current expectations. In addition, the Company regularly
monitors its exposure to the loss contingencies associated with these matters
and may from time to time change its predictions with respect to outcomes and
its estimates with respect to related costs and exposures. It is possible that
material differences in actual outcomes, costs and exposures relative to current
predictions and estimates, or material changes in such predictions or estimates,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
23. Commercial Commitments and Guarantees
Commercial Commitments
The Company had outstanding Letters of Credit of $103 as of January 29,
2004, all of which were issued under separate agreements with multiple financial
institutions. These agreements are not associated with the Company's credit
facilities. Of the $103 outstanding at year end, $83 were standby letters of
credit covering primarily workers' compensation or performance obligations. The
remaining $20 were commercial letters of credit supporting the Company's
merchandise import program. The Company paid issuance fees that varied,
depending on type, up to 0.90% of the outstanding balance of the letter of
credit.
Guarantees
The Company provides guarantees, indemnifications and assurances to others
in the ordinary course of its business. The Company has evaluated its agreements
that contain guarantees and indemnification clauses in accordance with the
guidance of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others".
The Company is contingently liable for certain operating leases that were
assigned to third parties in connection with various store closures and
dispositions. If any of these third parties were to fail to perform their
obligations under the lease, the Company could be responsible for the lease
obligations. In 2003, the Company was notified that certain of these third
parties have become insolvent and are seeking bankruptcy protection. At January
29, 2004, approximately 26 store leases for which the Company is contingently
liable were subject to the bankruptcy proceedings of such third parties and 22
of such had been rejected by the applicable third party. The Company recorded
pre-tax charges of $20 in 2003, which represents the remaining minimum lease
payments and other payment obligations under the 22 rejected leases, less
estimated sublease income and discounted at the Company's credit-adjusted risk
free interest rate. As of January 29, 2004, the Company had remaining guarantees
on approximately 192 stores with leases extending through 2026. Assuming that
each respective purchaser became insolvent, an event the Company believes to be
remote because of the wide dispersion among third parties and remedies
available, the minimum future undiscounted payments, exclusive of any potential
sublease income, are $273.
In connection with the merger between the Company and American Stores
Company, the Company was made party to and guaranteed a $200 American Stores
Company bank term note due July 2004; this obligation is reflected in the
Company's Consolidated Balance Sheet as of January 29, 2004 and January 30,
2003.
58
The Company enters into a wide range of indemnification arrangements in the
ordinary course of business. These include tort indemnifications, tax
indemnifications, indemnifications against third party claims arising out of
arrangements to provide services to Albertsons and indemnifications in merger
and acquisition agreements. It is difficult to quantify the maximum potential
liability under these indemnifications; however at January 29, 2004 the Company
was not aware of any material liabilities arising from these indemnifications.
24. Computation of Earnings Per Share
2003 2002 2001
- ---------------------------------------------- ---------------------- ----------------------- ----------------------
Diluted Basic Diluted Basic Diluted Basic
------------ --------- ----------- ----------- ----------- ----------
Earnings (loss) from:
Continuing operations $ 556 $ 556 $ 865 $ 865 $ 496 $ 496
Discontinued operations - - (286) (286) 5 5
Cumulative effect of change in
accounting principle - - (94) (94) - -
------ ------ ------- ------ ------ ------
Net earnings $ 556 $ 556 $ 485 $ 485 $ 501 $ 501
====== ====== ====== ====== ====== ======
Weighted average common shares outstanding 368 368 397 397 406 406
====== ====== ======
Potential common share equivalents - 2 2
------ ------ ------
Weighted average shares outstanding 368 399 408
====== ====== ======
Earnings (loss) per common share and common
share equivalents:
Continuing operations $1.51 $1.51 $2.17 $2.18 $1.22 $1.22
Discontinued operations - - (0.72) (0.72) 0.01 0.01
Cumulative effect of change in
accounting principle - - (0.23) (0.24) - -
------- ------ ------- ------- ------- -------
Net earnings $1.51 $1.51 $1.22 $1.22 $1.23 $1.23
======= ======= ======= ======= ======= =======
Calculation of potential common share equivalents:
Options to purchase potential common
shares 11 10 17
Potential common shares assumed purchased
with potential proceeds (11) (8) (15)
------- ------ -------
Potential common share equivalents - 2 2
======= ====== =======
Calculation of potential common shares
assumed purchased with potential
proceeds:
Potential proceeds from exercise of
options to purchase common shares $ 221 $ 227 $ 455
Common stock price used under treasury
stock method $20.33 $27.77 $31.12
======= ======= ======
Potential common shares assumed purchased
with potential proceeds 11 8 15
======= ======= =======
Outstanding options excluded in 2003, 2002 and 2001 (option price exceeded
the average market price during the period) amounted to 29.4 million shares,
20.2 million shares and 9.4 million shares, respectively.
25. Subsequent Events
Southern California Labor Dispute Settlement
The southern California Labor Dispute continued through the first month of
fiscal year 2004. The Labor Dispute ended with the ratification of a new
collective bargaining agreement on February 28, 2004. Under the terms of the new
collective bargaining agreement, the Company agreed to fund a one-time
contribution to the union health and welfare fund of approximately $36 as well
as to make strike ratification bonus payments of approximately $10. These
amounts will be charged to earnings in the first quarter of fiscal year 2004.
Acquisition of Shaw's
On March 25, 2004, the Company entered into a stock purchase agreement with
J Sainsbury plc and JS USA Holdings Inc. to acquire all of the outstanding
capital stock of the entities which conduct J Sainsbury plc's U.S. retail
grocery store business for approximately $2,100 in cash, as well as the
59
assumption of approximately $368 in capital leases. The Company intends to use a
combination of cash-on-hand and commercial paper to finance a portion of the
purchase price of the acquisition. The commercial paper the Company intends to
issue will be backed by the Company's existing credit facilities and/or a new
senior revolving bridge facility. The Company is also contemplating various
financing alternatives, including the issuance of debt and/or equity, to finance
a portion of the purchase price and/or to repay some of the commercial paper.
The operations to be acquired consists of approximately 200 grocery stores
in the New England area operated under the banners Shaw's and Star Markets. The
operations to be acquired ("Shaw's") had sales of approximately $4,600 for the
fiscal year ended February 28, 2004 and approximately $4,400 for the fiscal year
ended March 1, 2003.
The acquisition is expected to close in the second quarter of 2004
following the satisfaction or waiver of certain closing conditions, including
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Act and Shaw's fiscal year ended February 28, 2004 financial
statement audit reflecting a specified minimum EBITDA. Because of the goodwill
that is expected to be generated as a result of the acquisition, the Company
will have to obtain prospective waivers from the lenders under two of the
Company's existing credit facilities in order to remain in compliance with the
consolidated tangible net worth covenant contained in these agreements. No
amounts were outstanding under these facilities as of January 29, 2004.
26. Quarterly Financial Data (Unaudited)
(Dollars in millions, except per share data -
Unaudited) First Second Third Fourth Year
- --------------------------------------------------- ---------- ----------- ----------- ------------ -----------
2003
Sales $ 8,937 $ 9,053 $ 8,796 $ 8,650 $ 35,436
Gross profit 2,545 2,655 2,526 2,404 10,130
Operating profit 381 369 255 313 1,318
Net earnings 172 162 92 130 556
Earnings per share:
Basic 0.47 0.44 0.25 0.35 1.51
Diluted 0.47 0.44 0.25 0.35 1.51
- --------------------------------------------------- ---------- ----------- ----------- ------------ -----------
2002
Sales $ 8,921 $ 8,941 $ 8,657 $ 9,107 $ 35,626
Gross profit 2,623 2,631 2,529 2,595 10,378
Operating profit 487 520 385 425 1,817
(Loss) earnings from discontinued operations (303) 14 (2) 5 (286)
(Loss) earnings before cumulative effect of
accounting change (71) 257 188 205 579
Cumulative effect of accounting change (94) - - - (94)
Net (loss) earnings (165) 257 188 205 485
(Loss) earnings per share:
Basic (0.41) 0.63 0.47 0.54 1.22
Diluted (0.40) 0.63 0.47 0.54 1.22
- --------------------------------------------------- ---------- ----------- ----------- ------------ -----------
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. Controls and Procedures.
Management of the Company, including the Chief Executive Officer and Chief
Financial Officer of the Company, have evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934) as of January 29, 2004. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission's rules and forms. There
were no changes in the Company's internal control over financial reporting that
occurred during the Company's most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
60
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding directors and nominees for directors of the
Company is presented under the headings "Board of Directors - Corporate
Governance" and "Election of Directors" in the Company's definitive proxy
statement for use in connection with the 2004 Annual Meeting of Shareholders
(the "Proxy Statement") to be filed within 120 days after the Company's fiscal
year ended January 29, 2004. The information contained under this heading is
incorporated herein by this reference thereto. Information regarding the
executive officers of the Company is included in this Annual Report on Form 10-K
as Item 3A of Part I as permitted by Instruction 3 to Item 401(b) of Regulation
S-K.
The Company has adopted a code of ethics that applies to its Chief
Executive Officer, Chief Financial Officer and Controller. This code of ethics
is available on the Company's Web site at www.albertsons.com.
Item 11. Executive Compensation.
Information concerning executive compensation is presented under the
headings "Compensation of Executive Officers - Summary Compensation Table,"
"Compensation of Executive Officers - Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values," "Compensation of Executive Officers -
Option Grants In Last Fiscal Year," and "Compensation of Executive Officers -
Retirement Benefits" in the Proxy Statement. Information concerning director
compensation is presented under the heading "Election of Directors -
Compensation of Directors" in the Proxy Statement. The information contained
under these headings is incorporated herein by this reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners
and management is set forth under the heading "Voting Securities and Principal
Holders Thereof" in the Proxy Statement. Information with respect to equity
compensation plans is set forth under the heading "Compensation of Executive
Officers - Equity Compensation Plan Information" in the Proxy Statement. The
information contained under these headings is incorporated herein by this
reference thereto.
Item 13. Certain Relationships and Related Transactions.
Information concerning related transactions is presented under the heading
"Certain Transactions" in the Proxy Statement. The information contained under
this heading is incorporated herein by this reference thereto.
Item 14. Principal Accountant Fees and Services.
Information concerning principal accountant fees and services is presented
under the heading "Principal Accountant Fees and Services" in the Proxy
Statement. The information contained under this heading is incorporated herein
by this reference thereto.
61
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1) Consolidated Financial Statements: See Index to Consolidated
Financial Statements at Item 8 on page 30 of this report.
2) Financial Statement Schedules: No schedules are required.
3) Exhibits are incorporated herein by reference or are filed
with this report as set forth in the Index to Exhibits on
pages 65 through 73 hereof.
(b) The following reports on Form 8-K were filed or furnished during the
quarter ended January 29, 2004:
1) Current report on Form 8-K dated November 13, 2003 furnished
pursuant to Item 9, Regulation FD Disclosure, regarding the
Company's fiscal year 2003 earnings guidance.
2) Current report on Form 8-K dated December 5, 2003 furnished
pursuant to Item 12, Results of Operations and Financial
Condition, including the Company's press release which
discussed the Company's sales and earnings for the third
quarter of 2003.
62
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALBERTSON'S, INC.
By: \S\ Felicia D. Thornton
------------------------------------
Felicia D. Thornton
(Executive Vice President
and Chief Financial Officer)
Date: March 26, 2004
63
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 26, 2004.
\S\ Lawrence R. Johnston \S\ Felicia D. Thornton
- --------------------------------------------- -----------------------------------------------
Lawrence R. Johnston Felicia D. Thornton
(Chairman of the Board, Chief (Executive Vice President
Executive Officer, President and and Chief Financial Officer)
Director)
\S\ Peter F. Collins \S\ A. Gary Ames
- --------------------------------------------- -----------------------------------------------
Peter F. Collins A. Gary Ames
(Group Vice President (Director)
and Controller)
\S\ Cecil D. Andrus \S\ Pamela G. Bailey
- --------------------------------------------- -----------------------------------------------
Cecil D. Andrus Pamela G. Bailey
(Director) (Director)
\S\ Teresa Beck \S\ Henry I. Bryant
- --------------------------------------------- -----------------------------------------------
Teresa Beck Henry I. Bryant
(Director) (Director)
\S\ Paul I. Corddry \S\ Bonnie G. Hill
- --------------------------------------------- -----------------------------------------------
Paul I. Corddry Bonnie G. Hill
(Director) (Director)
\S\ Jon C. Madonna \S\ Beth M. Pritchard
- --------------------------------------------- -----------------------------------------------
Jon C. Madonna Beth M. Pritchard
(Director) (Director)
\S\ Beatriz Rivera
- --------------------------------------------- -------------------------------------------
Beatriz Rivera J. B. Scott
(Director) (Director)
\S\ Will M. Storey
- ---------------------------------------------
Will M. Storey
(Director)
64
Index to Exhibits
Filed with the Annual Report
on Form 10-K for the
Year Ended January 29, 2004
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation (as amended) is incorporated
herein by reference to Exhibit 3.1 of Form 10-Q for the quarter ended
April 30, 1998.
3.1.1 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock is incorporated herein by reference to
Exhibit 3.1.1 of Form 10-K for the year ended January 30, 1997.
3.1.2 Amendment to Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock is incorporated herein
by reference to Exhibit 3.1.2 of Form 10-K for the year ended January
28, 1999.
3.2 By-Laws amended on March 15, 2001 and December 5, 2003.
4.1 Stockholder Rights Plan Agreement is incorporated herein by reference
to Exhibit 1 of Form 8-A Registration Statement filed with the
Commission on March 4, 1997.
4.1.1 Amendment No. One to Stockholder Rights Plan Agreement (dated
August 2, 1998)is incorporated herein by reference to Exhibit 4.1(b)of
Amendment to Form 8-A Registration Statement filed with the Commission
on August 6, 1998.
4.1.2 Amendment No. Two to Stockholder Rights Plan Agreement (dated
March 16, 1999) is incorporated herein by reference to Exhibit 3 of
Amendment to Form 8-A Registration Statement filed with the Commission
on March 25, 1999.
4.1.3 Amendment No. Three to Stockholder Rights Plan Agreement (dated
September 26, 2003) is incorporated herein by reference to Exhibit 6
of Amendment to Form 8-A Registration Statement filed with the
Commission on September 30, 2003.
4.2 Indenture, dated as of May 1, 1992, between Albertson's, Inc. and
Morgan Guaranty Trust Company of New York as Trustee is incorporated
herein by reference to Exhibit 4.1 of Form S-3 Registration Statement
333-41793 filed with the Commission on December 9, 1997.(1)
4.3 Senior Indenture dated May 1, 1995, between American Stores Company
and the First National Bank of Chicago, as Trustee, is incorporated
herein by reference to Exhibit 4.1 of Form 10-Q filed by American
Stores Company (Commission File Number 1-5392) on June 12, 1995.(1)
10.1 J. A. and Kathryn Albertson Foundation Inc. Stock Agreement (dated May
21, 1997) is incorporated herein by reference to Exhibit 10.1 of Form
10-Q for the quarter ended May 1, 1997.*
10.1.1 Waiver regarding Alscott Limited Partnership #1 Stock Agreement (dated
May 21, 1997) is incorporated herein by reference to Exhibit 10.1.1 of
Form 10-Q for the quarter ended May 1, 1997.*
10.1.2 Waiver regarding Kathryn Albertson Stock Agreement (dated May 21,
1997) is incorporated herein by reference to Exhibit 10.1.2 of Form
10-Q for the quarter ended May 1, 1997.*
10.2 Agreement between the Company and Gary G. Michael dated December 22,
2000 is incorporated herein by reference to Exhibit 10.2 of Form 10-K
for the year ended February 1, 2001.*
65
Number Description
- ------ -----------
10.3 Form of Award of Deferred Stock Units is incorporated herein by
reference to Exhibit 10.3 of Form 10-K for the year ended February 1,
2001.*
10.4 Employment Agreement between the Company and Lawrence R. Johnston
dated April 23, 2001 is incorporated herein by reference to Exhibit
10.4 of Form 8-K filed on April 26, 2001.*
10.4.1 Amendment to Employment Agreement between the Company and Lawrence R.
Johnston dated July 19, 2001 is incorporated herein by reference to
Exhibit 10.4.1 of Form 10-K for the year ended January 31, 2002.*
10.5 Form of Beneficiary Agreement for Key Executive Life Insurance is
incorporated herein by reference to Exhibit 10.5.1 of Form 10-K for
the year ended January 30, 1986.*
10.6 Executive Deferred Compensation Plan (amended and restated February 1,
1989) is incorporated herein by reference to Exhibit 10.6 of Form 10-K
for the year ended February 2, 1989.*
10.6.1 Amendment to Executive Deferred Compensation Plan (dated December 4,
1989) is incorporated herein by reference to Exhibit 10.6.1 of Form
10-Q for the quarter ended November 2, 1989.*
10.6.2 Amendment to Executive Deferred Compensation Plan (dated December 15,
1998) is incorporated herein by reference to Exhibit 10.6.2 of Form
10-K for the year ended February 3, 2000.*
10.6.3 Amendment to Executive Deferred Compensation Plan (dated March 15,
2001) is incorporated herein by reference to Exhibit 10.6.3 of Form
10-K for the year ended February 1, 2001.*
10.6.4 Amendment to Executive Deferred Compensation Plan (dated May 1, 2001)
is incorporated herein by reference to Exhibit 10.6.4 of Form 10-K for
the year ended January 30, 2003.*
10.7 Senior Operations Executive Officer Bonus Plan is incorporated herein
by reference to Exhibit 10.7 of Form 10-K for the year ended January
30, 1997.*
10.8 Form of Consulting Agreement with Special Advisors to the Board of
Directors dated as of March 15, 2001 is incorporated herein by
reference to Exhibit 10.8 of Form 10-K for the year ended February 1,
2001.*
10.9 Albertson's, Inc. Executive Officers' Annual Incentive Compensation
Plan is incorporated herein by reference to Exhibit 10.42 of Form 10-Q
for the quarter ended May 2, 2002.*
10.10 2000 Deferred Compensation Plan (dated January 1, 2000) is
incorporated by reference to Exhibit 10.10 of Form 10-K for the year
ended February 3, 2000.*
10.10.1 First Amendment to the 2000 Deferred Compensation Plan (dated May 25,
2001) is incorporated herein by reference to Exhibit 10.10.1 of Form
10-K for the year ended January 30, 2003.*
10.10.2 Second Amendment to the 2000 Deferred Compensation Plan (dated July
18, 2001) is incorporated herein by reference to Exhibit 10.10.2 of
Form 10-K for the year ended January 30, 2003.*
66
Number Description
- ------ -----------
10.10.3 Third Amendment to the 2000 Deferred Compensation Plan (dated December
31, 2001) is incorporated herein by reference to Exhibit 10.10.3 of
Form 10-K for the year ended January 30, 2003.*
10.10.4 Fourth Amendment to Deferred Compensation Plan (dated December 22,
2003).*
10.11 Employment Agreement between the Company and John R. Sims effective
April 3, 2002 is incorporated by reference to Exhibit 10.11 of Form
10-K for the year ended January 31, 2002.*
10.12 [Intentionally left blank]
10.13 Executive Pension Makeup Plan (amended and restated February 1, 1989)
is incorporated herein by reference to Exhibit 10.13 of Form 10-K for
the year ended February 2, 1989.*
10.13.1 First Amendment to Executive Pension Makeup Plan (dated June 8, 1989)
is incorporated herein by reference to Exhibit 10.13.1 of Form 10-Q
for the quarter ended May 4, 1989.*
10.13.2 Second Amendment to Executive Pension Makeup Plan (dated January 12,
1990) is incorporated herein by reference to Exhibit 10.13.2 of Form
10-K for the year ended February 1, 1990.*
10.13.3 Third Amendment to Executive Pension Makeup Plan (dated January 31,
1990) is incorporated herein by reference to Exhibit 10.13.3 of Form
10-Q for the quarter ended August 2, 1990.*
10.13.4 Fourth Amendment to Executive Pension Makeup Plan (effective January
1, 1995) is incorporated herein by reference to Exhibit 10.13.4 of
Form 10-K for the year ended February 2, 1995.*
10.13.5 Amendment to Executive Pension Makeup Plan (retroactive to January 1,
1990) is incorporated herein by reference to Exhibit 10.13.5 of Form
10-K for the year ended February 1, 1996.*
10.13.6 Amendment to Executive Pension Makeup Plan (retroactive to October 1,
1999) is incorporated herein by reference to Exhibit 10.13.6 of Form
10-K for the year ended February 3, 2000.*
10.13.7 Amendment to Executive Pension Makeup Plan (dated June 1, 2001) is
incorporated herein by reference to Exhibit 10.13.7 of Form 10-K for
the year ended January 30, 2003.*
10.14 Executive ASRE Makeup Plan (dated September 26, 1999) is incorporated
herein by reference to Exhibit 10.14 of Form 10-K for the year ended
February 3, 2000.*
10.14.1 First Amendment to the Executive ASRE Makeup Plan (dated May 25, 2001)
is incorporated herein by reference to Exhibit 10.14.1 of Form 10-K
for the year ended January 30, 2003.*
10.14.2 Second Amendment to the Executive ASRE Makeup Plan (dated December 31,
2001) is incorporated herein by reference to Exhibit 10.14.2 of Form
10-K for the year ended January 30, 2003.*
10.15 Senior Executive Deferred Compensation Plan (amended and restated
February 1, 1989) is incorporated herein by reference to Exhibit 10.15
of Form 10-K for the year ended February 2, 1989.*
67
Number Description
- ------ -----------
10.15.1 Amendment to Senior Executive Deferred Compensation Plan (dated
December 4, 1989) is incorporated herein by reference to Exhibit
10.15.1 of Form 10-Q for quarter ended November 2, 1989.*
10.15.2 Amendment to Senior Executive Deferred Compensation Plan (dated
December 15, 1998) is incorporated herein by reference to Exhibit
10.7.1 of Form 10-K for the year ended February 3, 2000.*
10.15.3 Amendment to Senior Executive Deferred Compensation Plan (dated May 1,
2001) is incorporated herein by reference to Exhibit 10.15.3 of Form
10-K for the year ended January 30, 2003.*
10.16 1986 Nonqualified Stock Option Plan (amended March 4, 1991) is
incorporated herein by reference to Exhibit 10.16 of Form 10-K for the
year ended January 31, 1991. Exhibit 10.16 expired by its terms in
1996. Notwithstanding such expiration, certain agreements for the
options granted under these option plans remain outstanding.*
10.17 Form of 1986 Nonqualified Stock Option Plan Stock Option Agreement
(amended November 30, 1987) is incorporated herein by reference to
Exhibit 10.17 of Form 10-Q for the quarter ended October 29, 1987.*
10.18 Executive Pension Makeup Trust (dated February 1, 1989) is
incorporated herein by reference to Exhibit 10.18 of Form 10-K for the
year ended February 2, 1989.*
10.18.1 Amendment to Executive Pension Makeup Trust (dated July 24, 1998) is
incorporated herein by reference to Exhibit 10.18.1 of Form 10-K for
the year ended February 3, 2000.*
10.18.2 Amendment to Executive Pension Makeup Trust (dated December 1, 1998)
is incorporated herein by reference to Exhibit 10.18.1 of Form 10-Q
for quarter ended October 29, 1998.*
10.18.3 Amendment to Executive Pension Makeup Trust (dated December 1, 1999)
is incorporated herein by reference to Exhibit 10.18.3 of Form 10-K
for year ended February 3, 2000.*
10.18.4 Amendment to Executive Pension Makeup Trust (dated March 31, 2000) is
incorporated herein by reference to Exhibit 10.18.4 of Form 10-K for
year ended February 1, 2001.*
10.19 Executive Deferred Compensation Trust (dated February 1, 1989) is
incorporated herein by reference to Exhibit 10.19 of Form 10-K for
year ended February 2, 1989.*
10.19.1 Amendment to Executive Deferred Compensation Trust (dated July 24,
1998) is incorporated herein by reference to Exhibit 10.19.1 of Form
10-K for year ended February 3, 2000.*
10.19.2 Amendment to Executive Deferred Compensation Trust (dated December 1,
1998) is incorporated herein by reference to Exhibit 10.19.1 of Form
10-Q for quarter ended October 29, 1998.*
10.19.3 Amendment to Executive Deferred Compensation Trust (dated December 1,
1999) is incorporated herein by reference to Exhibit 10.19.3 of Form
10-K for year ended February 3, 2000.*
10.19.4 Amendment to Executive Deferred Compensation Trust (dated March 31,
2000) is incorporated herein by reference to Exhibit 10.19.4 of Form
10-K for year ended February 1, 2001.*
68
Number Description
- ------ -----------
10.20 1990 Deferred Compensation Plan is incorporated herein by reference to
Exhibit 10.20 of Form 10-K for year ended January 31, 1991.*
10.20.1 Amendment to 1990 Deferred Compensation Plan (dated April 12, 1994) is
incorporated herein by reference to Exhibit 10.20.1 of Form 10-Q for
the quarter ended August 4, 1994.*
10.20.2 Amendment to 1990 Deferred Compensation Plan (dated November 5, 1997)
is incorporated herein by reference to Exhibit 10.20.2 of Form 10-K
for the year ended January 29, 1998.*
10.20.3 Amendment to 1990 Deferred Compensation Plan (dated November 1, 1998)
is incorporated herein by reference to Exhibit 10.20.3 of Form 10-Q
for the quarter ended October 29, 1998.*
10.20.4 Termination of 1990 Deferred Compensation Plan (dated December 31,
1999) is incorporated herein by reference to Exhibit 10.20.4 of Form
10-K for the year ended January 30, 2003.*
10.20.5 Amendment to 1990 Deferred Compensation Plan (dated May 1, 2001) is
incorporated herein by reference to Exhibit 10.20.5 of Form 10-K for
the year ended January 30, 2003.*
10.20.6 Amendment to 1990 Deferred Compensation Plan (dated December 31, 2001
to be effective May 1, 2001) is incorporated herein by reference to
Exhibit 10.20.6 of Form 10-K for the year ended January 30, 2003.*
10.21 Non-Employee Directors' Deferred Compensation Plan is incorporated
herein by reference to Exhibit 10.21 of Form 10-K for the year ended
January 31, 1991.*
10.21.1 Amendment to Non-Employee Directors' Deferred Compensation Plan (dated
December 15, 1998) is incorporated herein by reference to Exhibit
10.21.1 of Form 10-K for year ended February 3, 2000.*
10.21.2 Amendment to Non-Employee Directors' Deferred Compensation Plan (dated
March 15, 2001) is incorporated herein by reference to Exhibit 10.21.2
of Form 10-K for the year ended February 1, 2001.*
10.21.3 Amendment to Non-Employee Directors' Deferred Compensation Plan (dated
May 1, 2001) is incorporated herein by reference to Exhibit 10.21.3 of
Form 10-K for the year ended January 30, 2003.*
10.21.4 Amendment to Non-Employee Directors' Deferred Compensation Plan (dated
December 22, 2003).*
10.22 1990 Deferred Compensation Trust (dated November 20, 1990) is
incorporated herein by reference to Exhibit 10.22 of Form 10-K for
year ended January 31, 1991.*
10.22.1 Amendment to 1990 Deferred Compensation Trust (dated July 24, 1998) is
incorporated herein by reference to Exhibit 10.22.1 of Form 10-K for
year ended February 3, 2000.*
10.22.2 Amendment to 1990 Deferred Compensation Trust (dated December 1, 1998)
is incorporated herein by reference to Exhibit 10.22.1 of Form 10-Q
for quarter ended October 29, 1998.*
10.22.3 Amendment to 1990 Deferred Compensation Trust (dated December 1, 1999)
is incorporated herein by reference to Exhibit 10.22.3 of Form 10-K
for year ended February 3, 2000.*
69
Number Description
- ------ ----------
10.22.4 Amendment to 1990 Deferred Compensation Trust (dated March 31, 2000)
is incorporated herein by reference to Exhibit 10.22.4 of Form 10-K
for year ended February 1, 2001.*
10.23 2000 Deferred Compensation Trust (dated January 1, 2000) is
incorporated herein by reference to Exhibit 10.23 of Form 10-K for
year ended February 3, 2000.*
10.23.1 Amendment to the 2000 Deferred Compensation Trust (dated March 31,
2000) is incorporated herein by reference to Exhibit 10.23.1 of Form
10-K for year ended February 1, 2001.*
10.24 1995 Stock-Based Incentive Plan (dated May 26, 1995) is incorporated
herein by reference to Exhibit 10.24 of Form 10-Q for the quarter
ended May 4, 1995.*
10.24.1 Form of 1995 Stock-Based Incentive Plan Stock Option Agreement (dated
December 4, 1995) is incorporated herein by reference to Exhibit
10.24.1 of Form 10-K for the year ended February 1, 1996.*
10.25 1995 Stock Option Plan for Non-Employee Directors (dated May 26, 1995)
is incorporated herein by reference to Exhibit 10.25 of Form 10-Q for
the quarter ended May 4, 1995.*
10.25.1 Form of 1995 Stock Option Plan for Non-Employee Directors Agreement
(dated May 30, 1995) is incorporated herein by reference to Exhibit
10.25.1 of Form 10-Q for the quarter ended May 4, 1995.*
10.25.2 Amendment to 1995 Stock Option Plan for Non-Employee Directors (dated
March 15, 2001) is incorporated herein by reference to Exhibit 10.25.2
of Form 10-K for the year ended February 1, 2001.*
10.26.1 Amendment to Amended and Restated 1995 Stock-Based Incentive Plan
(dated March 15, 2001) is incorporated herein by reference to Exhibit
10.26.1 of Form 10-K for the year ended February 1, 2001.*
10.27 Termination and Consulting Agreement by and among American Stores
Company, Albertson's, Inc. and Victor L. Lund is incorporated herein
by reference to Exhibit 10.27 of Form 10-K for the year ended January
28, 1999.*
10.28 Credit Agreement (5-year) (dated March 22, 2000) is incorporated
herein by reference to Exhibit 10.28 of Form 10-K for the year ended
February 3, 2000.
10.28.1 Amendment to Credit Agreement (5-year) (dated March 15, 2001) is
incorporated by reference to Exhibit 10.28.1 of Form 10-K for the year
ended February 1, 2001.
10.29 Amended and Restated Credit Agreement (364-day) (dated March 7, 2003).
10.29.1 First Amendment to Amended and Restated Credit Agreement (364-day)
(dated February 19, 2004).
10.30 American Stores Company Supplemental Executive Retirement Plan 1998
Restatement is incorporated herein by reference to Exhibit 4.1 of Form
S-8 filed by American Stores Company (Commission File Number 1-5392)
on July 13, 1998.*
10.30.1 Amendment to American Stores Company Supplemental Executive Retirement
Plan 1998 Restatement, dated as of September 15, 1998, is incorporated
herein by reference to Exhibit 10.4 of Form 10-Q filed by American
Stores Company (Commission File Number 1-5392) on December 11, 1998.*
70
Number Description
- ------ -----------
10.31 American Stores Company 1997 Stock Option and Stock Award Plan is
incorporated herein by reference to Exhibit B of the 1997 Proxy
Statement filed by American Stores Company (Commission File Number
1-5392) on May 2, 1997.*
10.31.1 Amendment to American Stores Company 1997 Stock Option and Stock Award
Plan, dated as of October 8, 1998, is incorporated herein by reference
to Exhibit 10.1 of Form 10-Q filed by American Stores Company
(Commission File Number 1-5392) on December 11, 1998.*
10.31.2 Amendment to American Stores Company 1997 Stock Plan for Non-Employee
Directors (dated March 15, 2001) is incorporated by reference to
Exhibit 10.31.2 of Form 10-K for the year ended February 1, 2001.*
10.32 American Stores Company 1997A Stock Option and Stock Award Plan, dated
as of March 27, 1997, is incorporated herein by reference to Exhibit
4.11 of the S-8 Registration Statement (Registration No. 333-82157)
filed by Albertson's, Inc. on July 2, 1999.*
10.33 American Stores Company 1997 Stock Plan for Non-Employee Directors is
incorporated herein by reference to Exhibit C of the 1997 Proxy
Statement filed by American Stores Company (Commission File Number
1-5392) on May 2, 1997.*
10.34 American Stores Company Amended and Restated 1989 Stock Option and
Stock Award Plan is incorporated herein by reference to Exhibit 4.13
of the S-8 Registration Statement (Registration No. 333-82157) filed
by Albertson's, Inc. on July 2, 1999.*
10.35 American Stores Company Amended and Restated 1985 Stock Option and
Stock Award Plan is incorporated herein by reference to Exhibit 4.14
of the S-8 Registration Statement (Registration No. 333-82157) filed
by Albertson's, Inc. on July 2, 1999.*
10.36.2 Letter Agreement between the Company and Peter L. Lynch dated July 24,
2003 is incorporated herein by reference to Exhibit 10.36.2 of Form
10-Q for the quarter ended July 31, 2003.*
10.36 Employment Agreement between the Company and Peter L. Lynch dated
January 26, 2001 is incorporated herein by reference to Exhibit 10.36
to Form 10-Q for the quarter ended August 2, 2001.*
10.36.1 Amendment to Employment Agreement between the Company and Peter L.
Lynch dated April 23, 2001 is incorporated herein by reference to
Exhibit 10.36.1 to Form 10-Q for the quarter ended August 2, 2001.*
10.37 Agreement between the Company and Peter L. Lynch dated June 18, 1999
is incorporated herein by reference to Exhibit 10.37 to Form 10-Q for
the quarter ended August 2, 2001.*
10.38 Albertson's Voluntary Separation Plan for officers effective July 18,
2001 is incorporated herein by reference to Exhibit 10.38 to Form 10-Q
for the quarter ended August 2, 2001.*
10.39 Albertson's Severance Plan for Officers effective July 18, 2001 is
incorporated herein by reference to Exhibit 10.39 to Form 10-Q for the
quarter ended August 2, 2001.*
10.40 Employment Agreement between the Company and Felicia D. Thornton dated
August 6, 2001 is incorporated herein by reference to Exhibit 10.40 to
Form 10-Q for the quarter ended August 2, 2001.*
71
Number Description
- ------ -----------
10.41 Albertson's Amended and Restated 1995 Stock-Based Incentive Plan is
incorporated herein by reference to Exhibit 10.41 to Form 10-Q for the
quarter ended November 1, 2001.*
10.41.1 Form of 1995 Amended and Restated Stock-Based Incentive Plan Stock
Option Agreement is incorporated herein by reference to Exhibit
10.41.1 to Form 10-Q for the quarter ended November 1, 2001.*
10.42 Albertsons Severance Plan for Officers effective October 1, 2002 is
incorporated by reference to Exhibit 10.42 of Form 10-Q for the
quarter ended October 31, 2002.*
10.43 Albertsons Change of Control Severance Agreement for Chief Operating
Officer and Executive Vice President effective November 1, 2002 is
incorporated by reference to Exhibit 10.43 of Form 10-Q for the
quarter ended October 31, 2002.*
10.44 Albertsons Change of Control Severance Agreement for Senior Vice
Presidents and Group Vice Presidents effective November 1, 2002 is
incorporated by reference to Exhibit 10.44 of Form 10-Q for the
quarter ended October 31, 2002.*
10.45 Albertsons Change of Control Severance Agreement for Vice Presidents
effective November 1, 2002 is incorporated by reference to Exhibit
10.45 of Form 10-Q for the quarter ended October 31, 2002.*
10.46 Albertsons Amended and Restated 1995 Stock-Based Incentive Plan as
amended effective December 9, 2002 is incorporated by reference to
Exhibit 10.46 of Form 10-Q for the quarter ended October 31, 2002.*
10.46.1 Form of Award of Stock Option is incorporated by reference to Exhibit
10.46.1 of Form 10-Q for the quarter ended October 31, 2002.*
10.46.2 Form of Award of Deferred Stock Units is incorporated by reference to
Exhibit 10.46.2 of Form 10-Q for the quarter ended October 31, 2002.*
10.47 Long-term Incentive Plan (effective as of February 1, 2003) is
incorporated by reference to Exhibit 10.47 of Form 10-Q for the
quarter ended May 1, 2003.*
10.48 Form of Director Indemnification Agreement is incorporated herein by
reference to Exhibit 10.47 of Form 10-Q for the quarter ended October
30, 2003.*
10.49 Credit Agreement (364-day) (dated February 13, 2004).
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent - Deloitte & Touche LLP
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
72
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto.
(1) In reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K, various
other instruments defining the rights of holders of long-term debt of
the Registrant and its subsidiaries are not being filed herewith,
because the total amount of securities authorized under each such
instrument does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant hereby
agrees to furnish a copy of any such instrument to the Commission upon
request.
73