SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For 13 Weeks Ended: April 29, 2004 Commission File Number: 1-6187
ALBERTSON'S, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 82-0184434
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
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(Address of principal executive offices) (Zip Code)
(208) 395-6200
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(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No
The number of shares of the registrant's common stock, $1.00 par value,
outstanding at June 1, 2004 was 367.8 million.
Page 1
ALBERTSON'S INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Earnings Statements for the 13 weeks ended April 29, 2004
and May 1, 2003 3
Condensed Consolidated Balance Sheets as of April 29, 2004 and January 29, 2004 4
Condensed Consolidated Cash Flow Statements for the 13 weeks ended April 29, 2004
and May 1, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Report of Independent Registered Public Accounting Firm 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Cautionary Statement 19
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED EARNINGS STATEMENTS
(in millions, except per share data)
(unaudited)
13 weeks ended
------------------------------------------
April 29, May 1,
2004 2003
------------------- -------------------
Sales $ 8,688 $ 8,910
Cost of sales 6,240 6,372
------------------- -------------------
Gross Profit 2,448 2,538
Selling, general and administrative expenses 2,255 2,162
Restructuring credits - (7)
------------------- -------------------
Operating profit 193 383
Other expenses (income):
Interest, net 103 103
Other, net - (1)
------------------- -------------------
Earnings from continuing operations before income taxes 90 281
Income tax expense 34 108
------------------- -------------------
Earnings from continuing operations 56 173
Discontinued operations:
Operating loss (2) (2)
Loss on disposal (30) -
Income tax benefit 12 1
------------------- -------------------
Loss from discontinued operations (20) (1)
------------------- -------------------
Net earnings $ 36 $ 172
=================== ===================
Earnings (loss) per share:
Basic
Continuing operations $ 0.15 $ 0.47
Discontinued operations (0.05) -
------------------- -------------------
Net earnings $ 0.10 $ 0.47
=================== ===================
Diluted
Continuing operations $ 0.15 $ 0.47
Discontinued operations (0.05) -
------------------- -------------------
Net earnings $ 0.10 $ 0.47
=================== ===================
Weighted average common shares outstanding:
Basic 369 368
Diluted 371 369
See Notes to Condensed Consolidated Financial Statements
Page 3
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value data)
(unaudited)
April 29, January 29,
2004 2004
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,033 $ 289
Accounts and notes receivable, net 746 683
Inventories 2,971 3,035
Assets held for sale 82 69
Prepaid and other 258 343
---------------- ----------------
Total Current Assets 6,090 4,419
Land, buildings and equipment (net of accumulated depreciation and
amortization of $7,039 and $6,845, respectively) 9,063 9,145
Goodwill 1,400 1,400
Intangibles, net 125 130
Other assets 299 300
---------------- ----------------
Total Assets $ 16,977 $ 15,394
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,828 $ 1,774
Salaries and related liabilities 533 659
Self-insurance 266 262
Current maturities of long-term debt and capital lease obligations 521 520
Other current liabilities 532 470
---------------- ----------------
Total Current Liabilities 3,680 3,685
Long-term debt 6,055 4,452
Capital lease obligations 362 352
Self-insurance 481 469
Other long-term liabilities and deferred credits 1,041 1,055
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 368 shares, respectively 368 368
Capital in excess of par 165 155
Accumulated other comprehensive loss (109) (109)
Retained earnings 4,934 4,967
---------------- ----------------
Total Stockholders' Equity 5,358 5,381
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 16,977 $ 15,394
================ ================
See Notes to Condensed Consolidated Financial Statements
Page 4
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in millions)
(unaudited)
13 weeks ended
--------------------------------------------
April 29, May 1,
2004 2003
------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 36 $ 172
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 246 239
Net deferred income taxes 90 7
Discontinued operations noncash charges 33 -
Other noncash charges 15 13
Stock-based compensation 5 6
Net loss (gain) on asset disposals 2 (9)
Restructuring credits - (7)
Changes in operating assets and liabilities:
Receivables and prepaid expenses (70) 63
Inventories 60 29
Accounts payable 54 (46)
Other current liabilities (102) (98)
Self-insurance 15 13
Unearned income 1 (8)
Other long-term liabilities 22 6
------------------- ---------------------
Net cash provided by operating activities 407 380
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (220) (330)
Proceeds from disposal of land, buildings and equipment 5 9
Proceeds from disposal of assets held for sale 27 30
Other (9) (8)
------------------- ---------------------
Net cash used in investing activities (197) (299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from commercial paper borrowings 1,603 50
Cash dividends paid (70) (71)
Payments on long-term borrowings (5) (7)
Proceeds from stock options exercised 6 -
Stock purchases and retirements - (108)
------------------- ---------------------
Net cash provided by (used in) financing activities 1,534 (136)
Net Increase (Decrease) in Cash and Cash Equivalents 1,744 (55)
Cash and Cash Equivalents at Beginning of Period 289 162
------------------- ---------------------
Cash and Cash Equivalents at End of Period $ 2,033 $ 107
=================== =====================
See Notes to Condensed Consolidated Financial Statements
Page 5
ALBERTSON'S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per share data)
(unaudited)
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 April 29, 2004, the Company operated 2,307 stores in 31 states. The
Company also operated 232 fuel centers near existing stores. Retail operations
are supported by 17 major Company distribution operations, strategically located
in the Company's operating markets.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include
the results of operations, financial position and cash flows of the Company and
its subsidiaries. All material intercompany balances have been eliminated.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments necessary to present fairly, in all
material respects, the results of operations of the Company for the periods
presented. These condensed consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and accompanying notes included in the Company's 2003
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the 13 weeks ended April 29, 2004, are not
necessarily indicative of results for a full year.
The Company's Condensed Consolidated Balance Sheet as of January 29, 2004, has
been derived from the audited Consolidated Balance Sheet as of that date.
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.
Inventory
Net earnings reflect the application of the LIFO method of valuing certain
inventories. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the year and the rate
of inflation for the year. Albertsons recorded pre-tax LIFO expense of $6 for
the 13 week period ended April 29, 2004 and $4 for the 13 week period ended May
1, 2003.
The amount of vendor funds reducing the Company's inventory ("inventory offset")
as of April 29, 2004 was $130, a decrease of $25 from January 29, 2004. The
vendor funds inventory offset as of May 1, 2003 was $146, a decrease of $6 from
January 30, 2003. 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.
Page 6
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, expense associated with 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. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - An Amendment to 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:
13 weeks ended
---------------------------------------
April 29, May 1,
2004 2003
------------------ ----------------
Net Earnings as reported $ 36 $ 172
Add: Stock-based compensation expense included in
reported net earnings, net of related tax effects 3 4
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (11) (11)
------------------ ----------------
Pro Forma Net Earnings $ 28 $ 165
================== ================
Basic Earnings Per Share:
As Reported $ 0.10 $ 0.47
Pro Forma 0.08 0.45
================== ================
Diluted Earnings Per Share:
As Reported $ 0.10 $ 0.47
Pro Forma 0.08 0.45
================== ================
The 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. To
calculate pro forma stock-based compensation expense under SFAS No. 123, the
Company estimated the fair value of each option grant on the date of grant,
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2004 and 2003: risk-free interest rate of 3.01%
and 3.56%, respectively, expected dividend yield of 3.35% and 3.74%,
respectively, expected lives of 6.0 and 5.7 years, respectively, and expected
stock price volatility of 38.9% and 39.4%, respectively.
Reclassifications
Certain reclassifications have been made in prior periods' financial statements
to conform to classifications used in the current year.
NOTE 2 - NEW AND RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2003 the Emerging Issues Task Force ("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 did not impact the Company's
existing accounting and reporting policies for manufacturers' coupons that can
be presented at any retailer that accepts coupons. Under EITF 03-10, vendor
coupons that provide for direct reimbursement, are negotiated between the
retailer and the vendor and which can only be redeemed at a specific retailer's
store are recorded as a reduction of cost of sales (instead of sales). This
modification to the Company's accounting and reporting policies, adopted in
Company's first quarter of 2004, did not have a material impact on sales or cost
of sales.
Page 7
In December 2003 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 Company adopted SFAS No. 132(R) in January
2004. The newly required quarterly disclosures are included in Note 6 to the
Condensed Consolidated Financial Statements - Employee Benefit Plans.
In March 2004 the FASB issued Staff Position No. FAS 106-b, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("SFAS No. 106-b"). SFAS No. 106-b supersedes
SFAS No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" and provides
guidance on the accounting and disclosure related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act"), which was signed
into law in December 2003. SFAS No. 106-b is expected to be effective beginning
in the third fiscal quarter of 2005. The Company is in the process of evaluating
the impact, if any, of the Act and SFAS No. 106-b on the Company.
NOTE 3 - DISCONTINUED OPERATIONS
In April 2004 the Company announced its plan to sell, close or otherwise dispose
of its operations in the New Orleans market, which consist of seven operating
stores and three non-operating properties. Results of operations for those
stores and properties have been reclassified and presented as discontinued
operations for the 13 week periods ended April 29, 2004 and May 1, 2003.
The discontinued operations generated sales of $24 and $27 for the 13 week
periods ended April 29, 2004 and May 1, 2003, respectively. The loss from
discontinued operations of $20 for the 13 week period ended April 29, 2004
consisted of a loss from operations of $2, a write down of fixed assets and
lease settlements of $30, and an income tax benefit of $12. The loss from
discontinued operations of $1 for the 13 week period ended May 1, 2003 consisted
of a loss from operations of $2 and an income tax benefit of $1. A reserve
balance of $7 as of April 29, 2004 is included in "Other current liabilities" in
the accompanying Condensed Consolidated Balance Sheet related to lease liability
adjustments.
Assets related to discontinued operations are recorded at their estimated fair
value, less selling costs, of $24 as of April 29, 2004 and are reported in
"Assets held for sale" in the accompanying Condensed Consolidated Balance Sheet.
These include four operating properties and one non-operating property for which
definitive agreements for sale have been entered into and three operating
properties and two non-operating properties that are being actively marketed.
NOTE 4 - RESERVES FOR 2001 RESTRUCTURING ACTIVITIES, 2002 MARKET EXITS AND
CLOSED STORES
In 2001 the Company recorded a pre-tax charge to earnings of $107 primarily for
lease settlements and severance costs in connection with the closure of 165
stores and the reduction of overhead functions. As of January 29, 2004, an
accrual of $19 remained for these settlements and costs. During the 13 week
period ended April 29, 2004, the Company paid $1, leaving a balance of $18 as of
April 29, 2004.
In 2002 the Company recorded a pre-tax charge to earnings of $51 primarily for
lease settlements and severance costs in connection with the exit from four
underperforming markets. As of January 29, 2004, an accrual of $8 remained for
these settlements and costs. During the 13 week period ended April 29, 2004, the
Company paid $2 and recorded charges related to the exit of the New Orleans
markets of $7, leaving a balance of $13 as of April 29, 2004.
As of January 29, 2004, the Company had an accrual of $20 for closed store lease
termination costs. During the 13 week period ended April 29, 2004, the Company
recorded additional reserves of $4, had favorable lease termination settlements
of $3 and paid $1, leaving a balance of $20 as of April 29, 2004.
Page 8
NOTE 5 - INTANGIBLES
The carrying amount of intangibles was as follows:
April 29, January 29,
2004 2004
-------------------- --------------------
Amortizing:
Favorable acquired operating leases $217 $221
Customer lists and other contracts 57 56
-------------------- --------------------
274 277
Accumulated amortization (189) (186)
-------------------- --------------------
85 91
Non-Amortizing:
Liquor licenses 40 39
-------------------- --------------------
40 39
-------------------- --------------------
$125 $130
==================== ====================
NOTE 6 - EMPLOYEE BENEFIT PLANS
The following represents the components of net periodic pension and
postretirement benefit costs in accordance with SFAS No. 132(R) (see Note 2 -
New and Recently Adopted Accounting Standards to the Condensed Consolidated
Financial Statements):
Pension Benefits Other Benefits
13 weeks ended 13 weeks ended
------------------------------ -----------------------------
April 29, May 1, April 29, May 1,
2004 2003 2004 2003
-------------- ------------ ------------- -----------
Service cost - benefits earned during the period $ 4 $ 3 $ - $ 1
Interest cost on projected benefit obligations 11 10 - 1
Expected return on assets (10) (8) - -
Amortization of prior service cost (credit) (2) (2) - -
Recognized net actuarial loss 4 6 - -
Curtailment gain - (7) - -
-------------- ------------ ------------- -----------
Net periodic benefit expense $ 7 $ 2 $ - $ 2
============== ============ ============= ===========
In April 2004 the President of the United States signed new pension relief
legislation that allows companies to use a corporate bond index rate specified
by the U.S. Treasury Department for purposes of calculating required minimum
contributions. Under the new legislation, the Company's estimated required
minimum contributions for 2004 remained unchanged from January 29, 2004, at $65,
which the Company expects to contribute during the remainder of 2004.
NOTE 7 - INDEBTEDNESS
At April 29, 2004, the Company had four revolving credit facilities totaling
$2,800. The first agreement, a 364-Day revolving credit facility with total
availability of $100, will expire in February 2005. The second agreement, a
revolving credit facility with total availability of $350, was extended through
July 2004. The third agreement, a five-year facility for $950, expires March
2005. The fourth agreement, an interim credit facility totaling $1,400, was
entered into in April 2004 to finance the acquisition of Shaw's (see Note 10 -
Subsequent Events to the Condensed Consolidated Financial Statements - Shaw's
Acquisition). These agreements contain certain covenants, the most restrictive
of which requires the Company to maintain consolidated tangible net worth, as
defined, of at least $2,100, a fixed charge coverage, as defined, of no less
than 2.7 times and a consolidated leverage ratio, as defined, of no more than
4.5 times. As of April 29, 2004, the Company was in compliance with these
requirements (see Note 10 - Subsequent Events to the Condensed Consolidated
Financial Statements - Shaw's Acquisition). No borrowings were outstanding under
these credit facilities as of April 29, 2004. On May 12, 2004, the Company
terminated its $1,400 interim credit facility upon the close of the offering of
$1,000 of Hybrid Income Term Security Units (HITS) (see Note 10 - Subsequent
Events to the Condensed Consolidated Financial Statements - HITS Offering). The
Company is in the process of renewing its remaining $1,400 senior revolving
credit facilities. The renewal is expected to be completed in early June.
Page 9
NOTE 8 - CONTINGENCIES
Lawsuits, Claims and Other Legal Matters
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 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 ("Gardner/Petersen case") and in
August 2002 a class action with respect to the consolidated case was certified
by the court. On May 26, 2004 Albertsons entered into an agreement in principle
to settle the consolidated Gardner/Petersen case. The settlement agreement is
subject to approval by the California Superior Court. Based on the information
presently available to the Company, management does not expect that the payments
under this settlement 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
California Supreme Court heard oral arguments on June 1, 2004. 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.
Page 10
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.
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(s) by picketing such
Retailer(s) but not the other Retailer(s), violate California's Cartwright Act
and the Unfair Competition Law. The lawsuit sought unspecified monetary damages
and injunctive relief. This lawsuit was dismissed on April 21, 2004.
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 this lawsuit and is vigorously
defending it. Although this lawsuit is 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 this action will have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
In March 2004 a lawsuit seeking class action status was filed against Albertsons
in the Superior Court of the State of California in and for the County of
Alameda, California (Dunbar, et al. v. Albertsons) by grocery managers seeking
recovery including overtime pay based upon plaintiffs' allegation that they were
improperly classified as exempt under California law. This case is currently in
discovery; however the Company has strong defenses against this lawsuit and is
vigorously defending it. Although this lawsuit is subject to the uncertainties
inherent in the litigation process, based on the information presently available
to the Company, management does not expect that the ultimate resolution of this
lawsuit 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.
Page 11
NOTE 9 - COMPUTATION OF EARNINGS PER SHARE
13 weeks ended
-------------------------------------------------------------------
April 29, 2004 May 1, 2003
Basic Diluted Basic Diluted
------------- ------------- --------------- -------------
Earnings (loss) from:
Continuing operations $ 56 $ 56 $ 173 $ 173
Discontinued operations (20) (20) (1) (1)
------------- ------------- --------------- -------------
Net earnings $ 36 $ 36 $ 172 $ 172
============= ============= =============== =============
Weighted average common shares outstanding 369 369 368 368
============= ===============
Potential common share equivalents 2 1
------------- -------------
Weighted average shares outstanding 371 369
============= =============
Earnings (loss) per common share and common
share equivalents:
Continuing operations $0.15 $0.15 $0.47 $0.47
Discontinued operations (0.05) (0.05) (0.00) (0.00)
------------- ------------- --------------- -------------
Net earnings $0.10 $0.10 $0.47 $0.47
============= ============= =============== =============
Calculation of potential common share equivalents:
Options to purchase potential common shares 20 2
Potential common shares assumed purchased
with potential proceeds (18) (1)
------------- -------------
Potential common share equivalents 2 1
============= =============
Calculation of potential common shares
assumed purchased with potential proceeds:
Potential proceeds from exercise of options
to purchase common shares $407 $29
Common stock price used under treasury
stock method $23.19 $19.31
------------- -------------
Potential common shares assumed
purchased with potential proceeds 18 1
============= =============
Outstanding options excluded for the 13 week periods ended April 29, 2004 and
May 1, 2003, because the option price exceeded the average market price during
the period, amounted to 17.9 million shares and 30.1 million shares,
respectively.
NOTE 10 - SUBSEQUENT EVENTS
Shaw's Acquisition
On April 30, 2004, the Company acquired all of the outstanding capital stock of
the entity which conducts J Sainsbury plc's U.S. retail grocery store business
("Shaw's") for $2,100 in cash, as well as the assumption of approximately $368
in capital leases. The Company used a combination of cash-on-hand and the
proceeds of the issuance of $1,603 of commercial paper to finance the
acquisition. The Company used the proceeds from a subsequent offering (see "HITS
Offering" below) to repay $1,119 of such commercial paper. The outstanding
commercial paper is currently backed by the Company's existing credit
facilities.
The operations acquired consist of approximately 200 grocery stores in the New
England area operated under the banners of Shaw's and Star Markets. These stores
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.
Page 12
As a result of the goodwill generated from the acquisition, the Company obtained
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 underlying these facilities. No
amounts were outstanding under these facilities as of April 29, 2004.
Hybrid Income Term Security Units ("HITS") Offering
In May 2004 the Company completed a public offering of 40,000,000 of 7.25%
Hybrid Income Term Security Units ("HITS" or "Corporate Units"), yielding net
proceeds of $973. In June 2004 the underwriters purchased an additional
6,000,000 Corporate Units pursuant to an overallotment option, yielding net
proceeds of $146. Each Corporate Unit consists of a purchase contract and,
initially, a 2.5% ownership interest in one of the Company's senior notes with a
principal amount of one thousand dollars, which corresponds to a twenty-five
dollar principal amount of the Company's senior notes. The ownership interest in
the senior notes is initially pledged to secure the Corporate Unit holder's
obligation to purchase Company common stock under the related purchase contract.
The senior notes are scheduled to mature in February 2009 and bear interest at a
rate of 3.75% per year. The purchase contracts bear interest at a rate of 3.5%
per year on the stated amount of twenty-five dollars.
Each purchase contract obligates the holder to purchase, and the Company to
sell, at a purchase price of twenty-five dollars in cash, shares of the
Company's common stock on or before May 16, 2007 (the "Purchase Contract
Settlement Date"). Generally, the number of shares each holder of the Corporate
Units is obligated to purchase depends on the average closing price per share of
Company's common stock over a 20-day trading period ending on the third trading
day immediately preceding the Purchase Contract Settlement Date, subject to
anti-dilution adjustments. If the average closing price is equal to or greater
than $28.82 per share, the settlement rate will be 0.8675 shares of common
stock. If the average closing price is less than $28.82 per share but greater
than $23.06 per share, the settlement rate is equal to twenty-five dollars
divided by the average closing price of the Company's common stock. If the
average closing price is less than $23.06 per share, the settlement rate will be
1.0841 shares of common stock. The holders of Corporate Units have the option to
settle their obligations under the purchase contracts at any time on or prior to
the fifth business day immediately preceding the Purchase Contract Settlement
Date. Prior to the Purchase Contract Settlement Date, the senior notes will be
remarketed. If the remarketing is successful, the interest rate on the senior
notes will increase to a rate selected by the remarketing agent, and the
maturity of the senior notes will be extended to a date selected by the Company
that is either two or three years from the date such interest rate is increased.
If the remarketing of the senior notes is not successful, the maturity and
interest rate of the senior notes will not change and holders of the Corporate
Units will have the option of putting their senior notes to the Company to
satisfy their obligations under the purchase contracts.
The purchase contracts are forward transactions in the Company's common stock.
Upon issuance, a liability for the present value of the purchase contract
adjustment payments of $113 was recorded as a reduction (charge) to
stockholders' equity, with an offsetting increase (credit) to other long-term
liabilities. Subsequent contract adjustment payments will reduce this liability.
Upon settlement of each purchase contract, the Company will receive the stated
amount of twenty-five dollars on the purchase contract and will issue the
requisite number of shares of common stock. The stated amount received will be
recorded as an increase (credit) to stockholders' equity.
Before the issuance of common stock upon settlement of the purchase contracts,
the Corporate Units will be reflected in diluted earnings per share calculations
using the treasury stock method. Under this method, the number of shares of
common stock used in calculating diluted earnings per share (based on the
settlement formula applied at the end of the reporting period) is deemed to be
increased by the excess, if any, of the number of shares that would be issued
upon settlement of the purchase contracts less the number of shares that could
be purchased by the Company in the market (at the average market price during
the period) using the proceeds receivable upon settlement. Consequently, the
Company anticipates that there will be some dilutive effect on earnings per
share for periods when the average market price of the Company's common stock
for the reporting period is above $28.82, but no dilutive effect in the
Company's earnings per share for periods when the average market price is equal
to or below $28.82.
Page 13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Albertson's, Inc.
Boise, Idaho
We have reviewed the accompanying condensed consolidated balance sheet of
Albertson's, Inc. and subsidiaries ("Albertsons") as of April 29, 2004, and the
related condensed consolidated earnings statements and cash flow statements for
the thirteen-week periods ended April 29, 2004 and May 1, 2003. These interim
financial statements are the responsibility of Albertsons management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Albertsons as of January 29, 2004, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 25, 2004, we expressed an
unqualified opinion and included explanatory paragraphs related to changes in
the methods of accounting for goodwill, closed stores and vendor funds, and to
the agreement to purchase all of the outstanding capital stock of JS USA
Holdings Inc. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of January 29, 2004, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/S/ DELOITTE & TOUCHE LLP
Boise, Idaho
June 3, 2004
Page 14
ALBERTSON'S, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Results of operations for the 13 week period ended April 29, 2004 were
unfavorably impacted by the labor dispute in southern California (the "Labor
Dispute"). Although the Labor Dispute ended with the ratification of new
collective bargaining agreements on February 28, 2004, the impact on operating
results for the 13 week period ended April 29, 2004 extended through the first
quarter and continues to impact operating results. Sales for the quarter in the
Company's southern California combination food and drug and conventional food
stores decreased as did margins for the 13 week period ended April 29, 2004 as
compared to the 13 week period ended May 1, 2003. The Company incurred
additional costs as part of the Labor Dispute settlement and is making
significant investments to win back and acquire customers in southern California
in the form of pricing promotions and advertising. These impacts were partially
offset by reduced labor expenses in the affected stores during the Labor Dispute
and the benefit from certain multi-employer bargaining agreements discussed
below.
Southern California Labor Dispute
As previously disclosed, in connection with the decision of the Company, The
Kroger Co. and Safeway Inc. (the "Retailers") to engage in multi-employer
bargaining with the United Food and Commercial Workers in connection with the
southern California labor dispute, the Retailers entered into agreements ("Labor
Dispute Agreements") which, among other things, were designed to prevent the
union from placing disproportionate pressure on one or more Retailer. The Labor
Dispute Agreements provided for payments from any of the Retailers who gained
from such disproportionate pressure to any of the Retailers who suffered from
such disproportionate pressure. Amounts earned by the Company under the terms of
the Labor Dispute Agreements totaled $17, $43 and $3 in the 13 week periods
ended April 29, 2004, January 29, 2004 and October 30, 2003, respectively.
Amounts earned were recorded as a reduction to selling, general and
administrative costs in each of the respective periods and all amounts were
collected subsequent to April 29, 2004.
In November 2003 three consumers filed an action in California state court
claiming that the Labor Dispute Agreements violate antitrust and consumer
protection laws. This lawsuit was dismissed on April 21, 2004. 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 this proceeding.
Shaw's Acquisition
On April 30, 2004, the Company acquired all of the outstanding capital stock of
the entity which conducts J Sainsbury plc's U.S. retail grocery store business
("Shaw's") for $2,100 in cash, as well as the assumption of approximately $368
in capital leases. The Company used a combination of cash-on-hand and the
proceeds from the issuance of $1,603 of commercial paper to finance the
acquisition. The Company used the proceeds from a subsequent offering (see Note
10 - Subsequent Events to the Condensed Consolidated Financial Statements - HITS
Offering) to repay $1,119 of such commercial paper. The outstanding commercial
paper is currently backed by the Company's existing credit facilities.
The operations acquired consist of approximately 200 grocery stores in the New
England area operated under the banners of Shaw's and Star Markets. These stores
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.
As a result of the goodwill generated from the acquisition, the Company obtained
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 underlying these facilities. No
amounts were outstanding under these facilities as of April 29, 2004.
Page 15
Results of Operations
Results of operations for the 13 week period ended April 29, 2004 were
unfavorably impacted by the Labor Dispute. The Labor Dispute resulted in
decreased sales in the Company's southern California combination food and drug
and conventional stores and decreased gross margin as a result of decreased
volume, increased inventory shrink, sales mix changes and increased distribution
costs. Additional costs incurred in connection with the terms of the new
collective bargaining agreements included funding a one-time contribution to the
union health and welfare fund of $36 and strike ratification bonus payments of
$10. These amounts were charged to earnings in the 13 week period ended April
29, 2004.
Sales were $8,688 and $8,910 for the 13 week periods ended April 29, 2004 and
May 1, 2003, respectively. The decrease in sales was due to decreased sales in
southern California as a result of the Labor Dispute. Identical store sales
decreased 4.1% for the 13 week period ended April 29, 2004 compared to the 13
week period ended May 1, 2003. Identical stores are defined as stores that have
been in operation for both full fiscal periods. Comparable store sales, which
uses the same store base as the identical store sales computation except it
includes sales at replacement stores, decreased 3.7%. Excluding food stores in
the Company's Southern California Division for the 13 week periods ended April
29, 2004 and May 1, 2003, identical store sales decreased 0.1% and comparable
store sales increased 0.3%. Management estimates that overall inflation in
products the Company sells was approximately 0.8% and 0.2% in the twelve months
ended April 29, 2004 and May 1, 2003, respectively.
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 13 weeks ended April 29, 2004,
including the portion of the period the Labor Dispute was ongoing and the weeks
following its resolution.
Actual Labor Adjusted
Identical Dispute Identical
Store Sales Adjustment Store Sales
------------------ --------------- ------------------
13 weeks ended April 29, 2004 $ 8,333 $ (953) (1) $ 7,380
13 weeks ended May 1, 2003 8,691 (1,302) (2) 7,389
------------------ ------------------
Year to year change (358) (9)
13 weeks ended May 1, 2003 8,691 7,389
------------------ ------------------
Identical store sales percentage change (4.1)% (0.1)%
================== ==================
Actual Labor Adjusted
Comparable Dispute Comparable
Store Sales Adjustment Store Sales
------------------ --------------- -- ------------------
13 weeks ended April 29, 2004 $ 8,443 $ (962) (3) $ 7,481
13 weeks ended May 1, 2003 8,771 (1,309) (4) 7,462
------------------ ------------------
Year to year change (328) 19
13 weeks ended May 1, 2003 8,771 7,462
------------------ ------------------
Comparable store sales percentage change (3.7)% 0.3%
================== ==================
(1) Represents the identical Southern California Division food store sales
during the 13 weeks ended April 29, 2004.
(2) Represents the identical Southern California Division food store sales
during the 13 weeks ended May 1, 2003.
(3) Represents the comparable Southern California Division food store sales
during the 13 weeks ended April 29, 2004.
(4) Represents the comparable Southern California Division food store sales
during the 13 weeks ended May 1, 2003.
During the 13 week period ended April 29, 2004, the Company opened 19
combination food and drug stores, three stand-alone drugstores and four fuel
centers, while closing six combination food and drug stores, six conventional
stores, two warehouse stores and six stand-alone drugstores.
Gross profit, as a percentage of sales, for the 13 week period ended April 29,
2004 decreased to 28.2% from 28.5% for the 13 week period ended May 1, 2003.
This was a result of 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
Company-sourced generic substitution and increased private label sales growth.
Page 16
Selling, general and administrative expenses, as a percent of sales, increased
to 26.0% for the 13 week period ended April 29, 2004, as compared to 24.3% for
the 13 week period ended May 1, 2003. This increase was primarily attributable
to increased employee compensation and benefits costs primarily as the result of
a one-time contribution to the union health and welfare fund of $36 and strike
ratification bonus payments of $10 paid under the terms of the new collective
bargaining agreements in southern California; lack of sales leverage as a result
of the Labor Dispute; increased legal costs related to California but unrelated
to the Labor Dispute; higher depreciation costs associated with continued
investment in infrastructure, particularly in information technology; and
increased workers compensation costs, which were partially offset by amounts
earned under the Labor Dispute Agreements.
Restructuring credits during the 13 week period ended May 1, 2003 of $7 were
primarily related to gains on disposition of assets and an adjustment for a
pension curtailment related to the Company's restructuring activities in 2001.
Earnings from continuing operations were $56 for the 13 week period ended April
29, 2004 compared to $173 for the 13 week period ended May 1, 2003. This
decrease was primarily due to a reduction in identical store sales of 4.1% and a
decrease in gross margin as a result of the Labor Dispute, increased employee
salaries and benefits costs primarily as the result of a one-time contribution
to the union health and welfare fund of $36 and strike ratification bonus
payments of $10 paid under the terms of the new collective bargaining agreements
in southern California, increased legal costs related to California but
unrelated to the Labor Dispute, higher depreciation and increased workers
compensation costs.
The Company's effective tax rate from continuing operations for the 13 week
period ended April 29, 2004 was 37.5% as compared to 38.4% for the 13 week
period ended May 1, 2003. For the 13 week period ended April 29, 2004, the rate
decreased as compared to the prior year as a result of implementation of tax
saving initiatives resulting in lower estimated federal and state income tax.
Net earnings were $36 or $0.10 per diluted share for the 13 week period ended
April 29, 2004, compared to net earnings of $172 or $0.47 per diluted share for
the 13 week period ended May 1, 2003. This decline was the result of the
decrease in earnings from continuing operations and the loss from discontinued
operations as a result of the Company's decision to exit the New Orleans market.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The
accompanying condensed consolidated financial statements are prepared using the
same critical accounting policies discussed in the Company's 2003 Annual Report
on Form 10-K.
Liquidity and Capital Resources
Cash provided by operating activities during the 13 week period ended April 29,
2004 was $407, compared to $380 for the same period in the prior year. The
increase in cash provided by operations in the first quarter of 2004 as compared
to 2003 was due primarily to decreasing inventory levels as a result of normal
seasonal purchasing patterns and supply chain initiatives, a reduction in the
Company tax accounts due to lower earnings and implementation of tax planning
initiatives in 2003 and 2004 and higher levels of accounts payable due to
increased purchases in southern California as a result of the resolution of the
Labor Dispute. These sources of cash were partially offset by increases in
accounts receivable related to the Labor Dispute Agreements.
Cash flow used in investing activities during the 13 week period ended April 29,
2004 decreased to $197 compared to $299 for the 13 week period ended May 1,
2003. This decrease was a result of lower capital expenditures in 2004. The
Company is continuing to implement its 2004 capital expenditure plan, which
includes outlays for new stores, store remodels and information technology. The
Company's capital expenditure budget for 2004 is approximately $1,600 and
includes approximately $100 in new capital and operating leases and $300 for the
recently acquired Shaw's operations.
Cash flows provided by financing activities during the 13 week period ended
April 29, 2004 were $1,534 as compared to cash flows used in financing
activities of $136 during the 13 week period ended May 1, 2003. The change is
due to commercial paper borrowings of $1,603 during the 13 week period ended
April 29, 2004 in anticipation of the closing of the Shaw's acquisition on April
30, 2004 and cash used for the purchase and retirement of the Company's common
stock in the 13 week period ended May 1, 2003.
Page 17
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. Proceeds from the
issuance of commercial paper backed by a $1,400 interim revolving credit
facility and the Company's existing revolving credit facilities were used to
finance the Shaw's acquisition, which closed on April 30, 2004. Proceeds from a
subsequent offering (see Note 10 - Subsequent Events to the Condensed
Consolidated Financial Statements - HITS Offering) were used to repay a portion
of such commercial paper. The Company had $1,603 in commercial paper borrowings
outstanding at April 29, 2004, and no outstanding commercial paper borrowings
outstanding at January 29, 2004.
At April 29, 2004, the Company had four revolving credit facilities totaling
$2,800. The first agreement, a 364-Day revolving credit facility with total
availability of $100, will expire in February 2005. The second agreement, a
revolving credit facility with total availability of $350, was extended through
July 2004. The third agreement, a five-year facility for $950, expires March
2005. The fourth agreement, an interim credit facility totaling $1,400, was
entered into in April 2004 to finance the acquisition of Shaw's (see Note 10 -
Subsequent Events to the Condensed Consolidated Financial Statements - Shaw's
Acquisition). These agreements contain certain covenants, the most restrictive
of which requires the Company to maintain consolidated tangible net worth, as
defined, of at least $2,100, a fixed charge coverage, as defined, of no less
than 2.7 times and a consolidated leverage ratio, as defined, of no more than
4.5 times. As of April 29, 2004, the Company was in compliance with these
requirements (see Note 10 - Subsequent Events to the Condensed Consolidated
Financial Statements - Shaw's Acquisition). No borrowings were outstanding under
these credit facilities as of April 29, 2004. On May 12, 2004, the Company
terminated its $1,400 interim credit facility upon the close of the offering of
$1,000 of Hybrid Income Term Security Units (HITS) (see Note 10 - Subsequent
Events to the Condensed Consolidated Financial Statements - HITS Offering). The
Company is in the process of renewing its remaining $1,400 senior revolving
credit facilities. The renewal is expected to be completed in early June.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective on February 13, 2001 ("2001
Registration Statement"), to authorize the issuance of up to $3,000 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes, including the potential purchase of outstanding shares of
Albertsons common stock. As of April 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.
The Company filed a registration statement with the Securities and Exchange
Commission, which became effective on March 29, 2004 ("2004 Registration
Statement"), to authorize the issuance of $1,150 in Hybrid Income Term Security
Units ("HITS") (see Note 10 - Subsequent Events to the Condensed Consolidated
Financial Statements - HITS Offering). On May 7, 2004, the Company issued $1,000
of HITS under the 2004 Registration Statement and used the net proceeds to
reduce a portion of the outstanding commercial paper borrowings incurred in
connection with the Shaw's acquisition. On June 2, 2004, the underwriters
purchased an additional $150 of HITS, pursuant to an overallotment option,
yielding net proceeds of $146 which were used to further reduce outstanding
commercial paper borrowings.
During the 13 week period ended May 1, 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 its discretion, to purchase and retire up to
$500 of the Company's common stock through December 31, 2004. No shares of
common stock were repurchased during the 13 weeks ended April 29, 2004. The
Company may continue, or from time to time suspend, purchasing shares under its
stock purchase program.
Contractual Obligations, Commercial Commitments and Guarantees
Contractual Obligations and Guarantees
For information on contractual obligations and guarantees, see the Company's
2003 Annual Report on Form 10-K. At April 29, 2004, there have been no material
changes regarding the Company's contractual obligations outside the ordinary
course of business or material changes to guarantees from the information
disclosed in the Company's 2003 Annual Report on Form 10-K except for the
issuance of $1,603 of commercial paper used to acquire the operations of Shaw's.
In May 2004 and June 2004, the Company successfully issued HITS yielding net
proceeds of $973 and $146, respectively. The senior notes that comprise the HITS
are initially due in 2009 (see Note 10 - Subsequent Events to the Condensed
Consolidated Financial Statements - HITS Offering). The net proceeds from the
HITS offering were used to pay down a portion of the commercial paper
outstanding at April 29, 2004.
Page 18
Commercial Commitments
The Company had outstanding letters of credit of $90 as of April 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 $90 outstanding at April 29, 2004, $81 were standby letters
of credit covering primarily workers' compensation or performance obligations.
The remaining $9 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.
Off Balance Sheet Arrangements
At April 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 April 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.
Related Party Transactions
There were no material related party transactions during the 13 week period
ended April 29, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes regarding the Company's market risk position
from the information provided under the caption "Quantitative and Qualitative
Disclosures About Market Risk" in the Company's 2003 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Management of the Company, including the Chief Executive Officer and the Chief
Financial Officer of the Company, have evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) of
the Securities Exchange Act of 1934) as of April 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.
In February 2004 the Company implemented several new modules to complement its
new general ledger system, including modules related to property and equipment,
accounts payable and procurement. This implementation included new hardware and
software. This is the second phase of a multi-year effort to upgrade the
technology supporting the Company's financial systems. These implementations
have resulted in certain changes to business processes and internal controls
impacting financial reporting. Management is taking the necessary steps to
monitor and maintain appropriate internal controls during this period of change.
These steps include deploying resources to mitigate internal control risks and
performing multiple levels of reconciliations.
Other than as described above, 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.
PART II. OTHER INFORMATION
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 Shaw's; 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.
Page 19
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; 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 Shaw's; 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. 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 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 ("Gardner/Peterson case") and in
August 2002 a class action with respect to the consolidated case was certified
by the court. On May 26, 2004 Albertsons entered into an agreement in principle
to settle the consolidated Gardner/Petersen case. The settlement agreement is
subject to approval by the California Superior Court. Based on the information
presently available to the Company, management does not expect that the payments
under this settlement 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
California Supreme Court heard oral arguments on June 1, 2004. 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.
Page 20
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.
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(s) by picketing such
Retailer(s) but not the other Retailer(s), violate California's Cartwright Act
and the Unfair Competition Law. The lawsuit sought unspecified monetary damages
and injunctive relief. This lawsuit was dismissed on April 21, 2004.
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 this lawsuit and is vigorously
defending it. Although this lawsuit is 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 this action will have
a material adverse effect on the Company's financial condition, results of
operations or cash flows.
In March 2004 a lawsuit seeking class action status was filed against Albertsons
in the Superior Court of the State of California in and for the County of
Alameda, California (Dunbar, et al. v. Albertsons) by grocery managers seeking
recovery including overtime pay based upon plaintiffs' allegation that they were
improperly classified as exempt under California law. This case is currently in
discovery; however the Company has strong defenses against this lawsuit and is
vigorously defending it. Although this lawsuit is subject to the uncertainties
inherent in the litigation process, based on the information presently available
to the Company, management does not expect that the ultimate resolution of this
lawsuit 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.
Page 21
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.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On December 5, 2003, the Board of Directors reauthorized a program authorizing
management, at its discretion, to purchase and retire up to $500 of the
Company's common stock through December 31, 2004. No shares of common stock
have been repurchased through April 29, 2004 under this program. The Company
may continue, or from time to time suspend, purchasing shares under its stock
purchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
15 Letter re: Unaudited Interim Financial Statements
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. The following reports on Form 8-K were filed or furnished during the 13
week period ended April 29, 2004:
Current report on Form 8-K dated March 9, 2004 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 2003 fourth quarter and full fiscal year.
Page 22
SIGNATURE
Pursuant to the requirements 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.
---------------------------------------------------------
(Registrant)
Date: June 4, 2004 /S/ Felicia D. Thornton
------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
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