UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1 TO
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.
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(Exact name of Registrant as specified in its Charter)
Delaware 82-0184434
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of 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
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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.
Page 1
EXPLANATORY NOTE
Albertson's, Inc. (the "Company") is filing this Amendment No. 1 on Form
10-K/A to its Form 10-K for the fiscal year ended January 29, 2004 SOLELY to
correct a TYPOGRAPHICAL ERROR in the Consolidated Statement of Cash Flows
contained in Item 8. Financial Statements and Supplementary Data. In the process
of converting the document to EDGAR format, the Other long-term liabilities line
item was inadvertently replaced with (11), rather than 11. Although this line
item contained a typographical error, the entirety of the Consolidated Statement
of Cash Flows was accurate, including all subtotals and totals. This amendment
also includes updated Exhibits 31.1 and 31.2 and a currently dated consent of
the Company's independent auditors as required by Rule 12b-15 promulgated under
the Securities Exchange Act of 1934. In all other respects, the Form 10-K filed
as of March 29, 2004 remains unchanged. This Amendment No. 1 continues to speak
as of the date of the original filing of the Form 10-K and the Company has not
updated the disclosures contained therein to reflect any events that occurred at
a later date.
Page 2
Item 8 included in the Form 10-K of Albertson's, Inc. filed as of March 29,
2004 is hereby amended and restated in its entirety as follows.
Item 8. Financial Statements and Supplementary Data.
Albertson's, Inc.
Index to Consolidated Financial Statements
Page
Number
Independent Auditors' Report 4
Consolidated Earnings for the fiscal years ended January 29, 2004, January 30, 2003 and
January 31, 2002 5
Consolidated Balance Sheets at January 29, 2004 and January 30, 2003 6
Consolidated Cash Flows for the fiscal years ended January 29, 2004, January 30, 2003 and
January 31, 2002 7
Consolidated Stockholders' Equity for the fiscal years ended January 29, 2004, January 30,
2003 and January 31, 2002 8
Notes to Consolidated Financial Statements 9
Page 3
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
Page 4
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
Page 5
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
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Total Stockholders' Equity 5,381 5,197
- -------------------------------------------------------------------------- ------------------- ------------------
Total Liabilities and Stockholders' Equity $ 15,394 $ 15,211
========================================================================== =================== ==================
See Notes to Consolidated Financial Statements
Page 6
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
Page 7
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
Page 8
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.
Page 9
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.
Page 10
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.
Page 11
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.
Page 12
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.
Page 13
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.
Page 14
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.
Page 15
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.
Page 16
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.
Page 17
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.
Page 18
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.
Page 19
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.
Page 20
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
=================================== =========== ============= ========== ============= ========== =============
Page 21
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.
Page 22
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.
Page 23
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.
Page 24
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.
Page 25
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).
Page 26
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
==================================================================== ================== =================
Page 27
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.
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.
Page 28
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
Page 29
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.
Page 30
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.
Page 31
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.
Page 32
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 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
- --------------------------------------------------- ---------- ----------- ----------- ------------ -----------
Page 33
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: April 1, 2004
Page 34
Index to Exhibits
Filed with Amendment No. 1 to Annual Report
on Form 10-K/A for the
Year Ended January 29, 2004
Number Description
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.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.