Albertson's, Inc.
250 Parkcenter Boulevard
Boise, Idaho 83706
November 15, 2005
Donna Di Silvio
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Albertson's, Inc.
Form 10-K for the Fiscal Year Ended February 3, 2005
Forms 10-Q for the Periods Ended May 5, 2005 and August 4, 2005
File No. 001-06187
Dear Ms. Di Silvio:
Thank you for your letter dated November 1, 2005, providing comments by
the staff of the Securities and Exchange Commission with respect to the
above-mentioned Form 10-K (the "Form 10-K") and Form 10-Qs (the "Form 10-Qs") of
Albertson's, Inc. ("Albertsons" or the "Company"). We appreciate your review and
comments, which are helpful to us in improving our future disclosures. This
letter is submitted in response to each of the comments in your letter. For ease
of reference, each comment and the corresponding response has been set forth
below.
FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2005
LIQUIDITY AND CAPITAL RESOURCES, PAGE 19
CRITICAL ACCOUNTING POLICIES, PAGE 23
1. Reference is made to your discussion of pension plans here and in your
quarterly reports. Please expand your discussion of your employee
benefit plans to address your funding obligations including the amounts,
timing and effect on future cash flows of the company. Please show us
what your disclosure will look like in future filings revised.
Response: The Company supplementally advises the Staff that there are no
funding obligations in its defined benefit plans other than obligations
based in law and/or the Company's own funding policies. To clarify this
point, in future filings
Securities and Exchange Commission
November 15, 2005
Page 2
we will add the following disclosures (or substantially similar
disclosures) under a "Pension Plan Contingencies" subheading in Item 7.
- Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources:
"The Company's funding policy for its defined benefit plans is to
contribute the minimum contribution required under the Employee
Retirement Income Security Act, with consideration given to
contributing larger amounts in order to be exempt from Pension
Benefit Guaranty Corporation variable rate premiums and/or
participant notices of underfunding. The Company determines
expected funding levels annually. Funding of the Company's
defined benefit pension plans is expected to be $[ ] for the
fiscal year ending February 2, 2006."
The Company anticipates making this disclosure annually in the Form
10-K, with disclosure in the Form 10-Q only to the extent of a material
change in our expectations.
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE 35
CASH AND CASH EQUIVALENTS, PAGE 35
RECLASSIFICATIONS, PAGE 38
2. We note cash book overdrafts previously reported in cash and cash
equivalents are now reported in accounts payable beginning with the
third quarter of 2004. Please tell us and disclose in future filings the
line item that includes the net change in overdrafts in the statements
of cash flows.
Response: The Company is aware that AICPA Technical Practice Aid (TIS
Section 1300.15), "Presentation of Cash Overdraft on Statement of Cash
Flows", provides that a net change in overdrafts should be classified as
a financing activity in the statement of cash flows. This guidance
appears to address only bank overdrafts (i.e., a negative bank account
balance resulting from the bank covering cleared checks as presented or
covering rejected deposits). Therefore, in all cases, a company that is
in a bank overdraft position must show the net change in liability
related to the bank overdraft as a financing activity.
However, if a company is in a cash book overdraft position (i.e., a
credit balance exists in the general ledger as a result of issuing
checks in excess of the bank account balance), but has a positive bank
account balance, we understand from discussions that our independent
registered public accounting firm has had with
Securities and Exchange Commission
November 15, 2005
Page 3
the FASB staff that it is acceptable to show the net change during the
period as either an operating activity or a financing activity in the
cash flow statement. This position is supported by the fact that at the
time of the book overdraft, a company has no financing activity with
the bank (i.e., the bank has not extended credit as would be the case
if the bank account were overdrawn). Therefore, the Company believes
the presentation of cash book overdrafts as either operating or
financing activities is an accounting policy decision that should be
applied consistently.
The net change in cash book overdrafts is reported in the change in
Accounts payable line item within the "Cash Flows from Operating
Activities" section of the Company's consolidated cash flow statements.
In the Company's upcoming Form 10-Q for the third quarter ended
November 3, 2005, we will add the following disclosures (or
substantially similar disclosures) under a "Cash and Cash Equivalents"
subheading in Note 2. - Summary of Significant Accounting Policies:
"The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to be
cash equivalents. The Company's banking arrangements allow the
Company to fund outstanding checks when presented to the
financial institution for payment. This cash management practice
frequently results in a net cash book overdraft position, which
occurs when total issued checks exceed available cash balances at
a single financial institution. The Company records its cash
disbursement accounts with a net cash book overdraft position in
Accounts payable in the Company's Consolidated Balance Sheets,
and the net change in cash book overdrafts in the Accounts
payable line item within the "Cash Flows from Operating
Activities" section of the Company's Consolidated Cash Flow
Statements. At November 3, 2005 and February 3, 2005, the Company
had net cash book overdrafts of $[ ] and $294, respectively,
classified in Accounts payable."
We also will include this revised disclosure in the Company's Form 10-K
for the fiscal year ending February 2, 2006.
SEGMENT INFORMATION, PAGE 35
3. Please tell us what consideration you gave to providing revenue
disclosures by product group such as pharmacy, grocery, floral, health
and beauty or other categories as deemed appropriate. See paragraph 37
of SFAS 131.
Response: The Company considers all of the products that it sells to be
part of the same group of similar products for purposes of compliance
with paragraph 37 of
Securities and Exchange Commission
November 15, 2005
Page 4
FASB Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("FASB 131"). Important to this determination
is the consideration that product decisions are made at the region,
division, and ultimately the retail store levels of the Company (i.e.,
those closest to our customers) using product category information. A
product category is an aggregation of individual products (e.g., soft
drinks, coffee, dairy, and so forth). The Company has over 500 product
categories. Product category decisions, such as individual product
selection, are determined based on division and individual retail store
level criteria, and the physical characteristics (i.e., size and
layout) of the Company's retail stores. The components of a particular
product category also can be slightly different across the retail
stores, and the volume and placement of a product category in any
particular retail store is driven by local customer preferences and
competitive factors. Because of the significant number of product
categories, the Company does not consider the disclosure of revenue
information by product category helpful to the users of the Company's
financial statements.
The Company also considered the aggregation criteria in paragraph 17 of
FASB 131, which is as follows:
(a) The nature of the products - The nature of the products sold in
the Company's retail stores are substantially the same. However,
some adjustments are made for customer demographic and economic
considerations. For example, product selection is demographically
adjusted in markets where organic products are desired, or
economically adjusted in markets where lower cost, generic
branded products are desired. Therefore, the Company views the
nature of its products to be similar across its retail stores.
(b) The nature of the production processes - The Company performs
ancillary manufacturing type activities only on a limited number
of products prior to resale. For example, bananas are ripened at
the Company's distribution centers prior to shipping to the
retail stores. The Company does not view these activities to be
significant to its business. Therefore, the Company views this
criterion as not applicable to its assessment.
(c) The type or class of customer for our products - Because the
products sold in the Company's retail stores are substantially
the same, the Company does not market or promote its products to
a particular type or class of customer. Rather, the Company's
products are marketed and promoted across all product categories
or by individual product to the local customer base. For example,
a mailing circular will include a mix of dairy, fresh or frozen
foods, general merchandise, and other products depending on the
local customer demographics. Therefore, the Company views its
customers as similar.
Securities and Exchange Commission
November 15, 2005
Page 5
(d) The methods used to distribute our products - The Company uses
the same distribution methods for its products across its retail
stores. All of the products sold in the Company's retail stores
are distributed from one of the Company's distribution centers or
delivered directly to the retail stores by the Company's vendors.
(e) If applicable, the nature of the regulatory environment - Most
products sold by the Company generally are regulated to ensure
safety, cleanliness, and healthiness. The Company does not view
the impact of regulation on any of its products to be significant
to its business. Therefore, the Company views this criterion as
not applicable to its assessment.
Based on the considerations of paragraph 17 described above, the
Company considers all of the products that it sells to be part of the
same group of similar products for purposes of compliance with
paragraph 37 of FASB 131.
NOTE 11. INDEBTEDNESS, PAGE 44
MANDATORY CONVERTIBLE SECURITY OFFERING, PAGE 44
4. Please advise us of the specific factors you considered and the
accounting literature relied upon in determining how to account for the
Corporate Units and the method used in calculating diluted earnings per
share. We may have further comment.
Response: In May 2004, the Company issued Corporate Units, which
consist of two separate components: (a) a variable forward stock
purchase contract (the "purchase contracts") and (b) a 2.5 percent
ownership interest in one of the Company's senior notes with a
principal amount of $1,000, which corresponds to a $25 dollar principal
amount of the senior notes.
Account for as Separate Financial Instruments
In accordance with APB Opinion No. 14, "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants" ("APB 14"), the Company
considered whether the Corporate Units are a single financial
instrument, or whether the purchase contracts are freestanding
contracts separate and distinct from the senior notes. Although the two
financial instruments are linked together for sale, the Company
concluded that the financial instruments are two distinct securities
and should be separated for accounting purposes. Two important
characteristics exist to ensure that the financial instruments can be
separated and traded independently after the original issuance.
Securities and Exchange Commission
November 15, 2005
Page 6
First, the senior notes can be separated from the purchase contracts if
the holder provides substitute collateral to the collateral agent to
secure the purchase contracts, or upon a remarketing of the senior notes
in 2007. The cash received through this remarketing will be available
for use by the holders to purchase the Company's common stock under the
purchase contracts. Upon remarketing, the senior notes will remain
outstanding and the purchase contracts will be settled. Second, the
Company's obligations to issue its common stock under the purchase
contracts and to repay the principal under the senior notes arise
approximately two years apart. The term of the purchase contracts is
three years, and the term of the senior notes is approximately five
years.
Also in accordance with APB 14, the proceeds from the issuance of the
Corporate Units were allocated between the senior notes and the purchase
contracts based on the relative fair values of each. The Company
determined that the fair value of the purchase contracts was zero at the
date of issuance based upon the aggregation of the separate fair values
of (a) the embedded purchased put option allowing the Company to sell to
the holder 1.0841 shares at a strike price of $23.06 per share, (b) the
embedded written call option allowing the holders the right to purchase
0.8675 shares at a strike price of $28.82 per share, and (c) the
Company's obligations to make contract adjustment payments to the
holders. The Company determined that the excess of the fair value of the
purchased put option over the fair value of the written call option
(i.e., a net option asset) was equal to the fair value of the contract
adjustment payment obligations and, therefore, the aggregate fair value
was zero as these amounts offset. The Company also determined that the
fair value of the senior notes was equal to the principal amount of the
senior notes. Accordingly, the entire proceeds from the issuance of the
Corporate Units were allocated to the senior notes at the issuance date.
Accounting for Senior Notes
The aggregate face value of the senior notes issued is $1,150,000,000
and initially bear an annual interest rate of 3.75 percent, payable
quarterly. As noted above, the entire proceeds from the issuance of the
Corporate Units were allocated to the senior notes and recorded as cash
received with the recognition of a liability. The senior notes are
presented in long-term debt in our consolidated balance sheet, and the
quarterly interest payments are reported as interest expense in our
consolidated earnings statements.
Accounting for Variable Forward Stock Purchase Contracts
The Company concluded that the purchase contracts should be measured
initially at fair value and classified in permanent equity in our
consolidated balance sheet, and that subsequent changes in fair value
should not be recognized based on
Securities and Exchange Commission
November 15, 2005
Page 7
paragraphs 8-9 of EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" ("EITF 00-19"). Our conclusion considers the fact
that the Company is obligated to physically deliver shares of its common
stock to the holders upon settlement of the purchase contracts,
regardless of whether the holders choose to settle their obligations in
cash or through the remarketing of the senior notes. There is no
mechanism for net settlement under the terms of the Corporate Units. In
addition, the Company analyzed the conditions set forth in paragraphs
12-32 of EITF 00-19 for permanent equity classification and concluded
that all such conditions have been met. To date, these conditions
continue to be met and, therefore, the Company continues to classify the
purchase contracts as permanent equity without recognizing changes in
fair value.
The Company also considered whether the purchase contracts are
derivatives under the provisions of FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities, as amended" ("FASB
133"). After analyzing the purchase contracts, the Company concluded
that they meet the exception to derivative accounting outlined in
paragraph 11(a) of FASB 133 and, as such, should not be considered a
derivative for the following reasons: (a) the purchase contracts qualify
for permanent equity classification under paragraphs 8-9 and 12-32 of
EITF 00-19, discussed above, and (b) the purchase contracts are indexed
to the Company's common stock.
Accounting for Contract Adjustment Payments
As consideration for assuming all the downside market risk without
participating in all of the potential upside appreciation of the
Company's common stock the holders of the Corporate Units receive
additional payments, which represents a premium paid for the net options
embedded in the purchase contracts (i.e., the net of the purchased put
option and the written call option). These payments, which the Company
refers to as contract adjustment payments, are payable quarterly at an
annual rate of 3.5 percent of the stated amount of $25 per Corporate
Unit.
The contract adjustment payments were initially measured at a fair value
of $114 million (calculated as the present value of the aggregate amount
of the contract adjustment payments over the term of the purchase
contracts) and recorded in our consolidated balance sheet as a reduction
of paid-in-capital and as an equivalent liability in accordance with APB
Opinion No. 21, "Interest on Receivables and Payables" ("APB 21"). The
initial reduction of paid-in-capital represents the premium that would
have been recorded as a reduction of paid-in-capital had it been paid at
the inception of the purchase contracts. Because the contract adjustment
payments are being paid over the term of the purchase contracts, rather
than at inception, the Company must record an obligation (liability)
with
Securities and Exchange Commission
November 15, 2005
Page 8
the same corresponding reduction of paid-in-capital. Subsequently,
as the contract adjustment payments are made, the liability is reduced
and interest expense is recorded in our consolidated earnings statements
for the amortization of the difference between the aggregate amount of
the contract adjustment payments and the present value thereof over the
term of the purchase contracts in accordance with APB 21.
Calculation of Dilutive Earnings Per Share
Paragraphs 51-53 of FASB Statement No. 128, "Earnings Per Share" ("FASB
128"), specify that where options or warrants may permit or require the
tendering of debt or other securities of the issuer in payment of all or
a portion of the exercise price, it should be assumed that the
if-converted method applies, unless tendering cash would be more
advantageous to the holder and the contract permits tendering cash. In
the latter case, the treasury stock method would be applied.
The Company concluded that the treasury stock method should be used
because the holders are required to tender cash or tender the cash
proceeds received through the remarketing of the senior notes to settle
their obligations under the purchase contracts. Additionally, from the
holder's perspective, it may be more advantageous to tender the cash
received through the remarketing of the senior notes as the holder
potentially may receive consideration in excess of 100 percent of the
aggregate principal amount of the senior notes if the remarketing price
exceeds 100.25 percent of the principal amount of the senior notes. Upon
a successful remarketing, the senior notes remain outstanding and will
mature approximately two years after the remarketing. Only after a
failed remarketing of the senior notes can the holders put the senior
notes to the Company to satisfy their obligations under the purchase
contracts. However, as of and subsequent to the issuance date of the
Corporate Units, the Company views the likelihood of a failed
remarketing occurring as remote and, therefore, continues to apply the
treasury stock method.
5. We note your disclosure in the last paragraph that there can be no
assurance that the method in which the Corporate Units are reflected in
the company's diluted earnings per share will not change in the future
if interpretations evolve. As such, please tell us what consideration
you gave to providing diluted earnings per share based on the
if-converted method.
Response: As discussed in our response to Comment 4, the Company
believes the treasury stock method is the appropriate method for
calculating dilutive earnings per share. We included the cautionary
disclosure primarily because we cannot anticipate the affects, if any,
that the proposed revisions to FASB 128 might have on the dilutive
earnings per share calculation in the future for the Corporate Units.
Securities and Exchange Commission
November 15, 2005
Page 9
We also are aware that the accounting guidance and interpretations in
other areas continues to evolve. For example, the recent change to the
accounting guidance and interpretations for calculating dilutive
earnings per share for convertible instruments and similar instruments.
Because of these uncertainties, we believe this cautionary disclosure is
important and relevant to our investors.
6. Reference is made to the second paragraph. Please expand your disclosure
to clarify what the purchase contract adjustment represents and why a
charge was made to stockholders' equity. In addition, please revise to
clarify that the stated amount of $25 to be received on the purchase
contracts will be non-cash to the extent the senior notes are put to the
company. Show us what your disclosures will look like revised.
Response: In future filings we will revise the next to the last sentence
of the first paragraph of Note. 11 - Indebtedness - Mandatory
Convertible Security Offering with the following disclosures:
"If the senior notes are not successfully remarketed, the holders
will have the right to put the senior notes to the Company to
satisfy their obligations under the purchase contract in a
non-cash transaction."
We also will revise the third paragraph of Note. 11 with the following
disclosures (or substantially similar disclosures):
"As consideration for assuming the downside market risk without
participating in all of the potential appreciation of the
Company's common stock, the holders of the Corporate Units receive
a quarterly purchase contract adjustment payment equal to 3.5
percent of the value of the Corporate Units. Upon issuance, a
liability for the present value of the aggregate amount of the
purchase contract adjustment payments of $114 was recorded as a
reduction of stockholders' equity, with an offsetting increase to
other long-term liabilities and current liabilities. The initial
reduction of stockholders' equity represents the fair value of the
contract adjustment payments. Subsequent contract adjustment
payments will reduce the liabilities, with a portion of the
payments recognized as interest expense for the amortization of
the difference between the aggregate amount of the contract
adjustment payments and the present value thereof. Upon settlement
of each purchase contract, the Company will receive the stated
amount of twenty-five dollars on the purchase contract and will
issue the requisite number of shares of common stock. The stated
amount received will be recorded as an increase to stockholders'
equity."
*******
Securities and Exchange Commission
November 15, 2005
Page 10
Albertsons acknowledges that:
- the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
- staff comments or changes to disclosure in response to any staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
- the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Please contact the undersigned at (208) 395-6284 if you have any
questions regarding these responses or any further questions concerning this
filing. Please direct any future written communications on this matter to the
undersigned via facsimile at (208) 395-6225. Thank you for your attention to
this matter.
Sincerely,
ALBERTSON'S, INC.
\S\ Felicia D. Thornton
------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer