00 Ahold ANNUAL REPORT 2002 85
BOARD GOVERNANCE HIGHLIGHTS OPERATING REVIEW FINANCIAL INVESTOR REL AT IONS
During fiscal 2003, we have continued our integration of Alliant and other smaller acquisitions into USF. The main
components of the integration, including the integration of operations, the consolidation of distribution centers that operate
in overlapping markets and the integration of product offerings, are substantially complete. However, due to our focus on
the accounting and related issues discussed above, completion of the remaining portions of USF's integration plan, which
includes the further integration of distribution routes, the re-focus of USF's sales force and the roll-out of centralized
procurement, has been delayed. As a result, we have not yet been able to fully recognize synergies from USF's recent
acquisitions. We have also continued our efforts to consolidate and standardize information technology systems. Although
we have accomplished a number of computer system conversions, substantial system conversion projects, including the
complete implementation of the SIS vendor allowance tracking system, remain. With the exception of a few vendors, we
expect to be able to track all vendor allowances by mid-fiscal 2004.
USF has instituted a new methodology on the accounting for and recognition of vendor prepayments in response to
accounting and control issues raised during the internal investigations. While the SIS vendor allowance tracking system
is under development and testing, USF has initiated a manual vendor allowance tracking system. This manual system
aggregates information including a detailed review of vendor purchasing contracts, reporting provided by vendors on
purchases made, information developed within USF on purchasing activities, cash collections of purchase allowances, and
regular reconciliations of the information with vendors. USF has instituted having its purchasing department, accounting
department and its senior management regularly review this information so as to verify it and the recognition of vendor
allowances.
In fiscal 2003, we expect net sales for our food service operations in the United States to increase marginally from fiscal
2002 because of the completion in early fiscal 2003 of the consolidation of distribution centers discussed above and the
recovery of sales lost during those consolidation efforts. We expect that gross profit at USF will decrease in fiscal 2003 as
a result of the company's focus on controlling inventory and purchases from vendors. As a result of the latter, volume
allowances, which are based on purchases from vendors and which are an offset against cost of goods sold, will be
reduced. Therefore, USF's cost of goods sold will be higher as a percentage of its net sales, thereby negatively affecting
gross profit. Gross profit also will be negatively affected by actions taken by the USF sales force subsequent to the
February 24, 2003 announcement to retain customers and respond to the increase in competitors' efforts to increase sales
to USF customers. In addition, USF's gross profit margins currently are substantially lower than its major competitors,
primarily because of competitors' significantly better purchasing programs, a higher ratio of higher-margin street customers
to lower-margin chain customers and higher level of private label product sales. To address this, beginning in late fiscal
2003, USF will enter into discussions with its vendors to negotiate more favorable product costs. We are also aiming to
improve USF's future profitability by increasing USF's relative level of street sales and the sale of its private and signature
brands, which have higher margins. We also are increasing training and focusing on management of USF's sales force,
instituting a rigorous customer profitability review and implementing strong cost controls consistent with our increased
internal control environment.
Food service in Europe: fiscal 2003
We expect net sales in fiscal 2003 for our Deli XL food service operations in Europe, located in The Netherlands and
Belgium, to be slightly lower than in fiscal 2002, particularly due to the continuing unfavorable economic circumstances.
We are introducing a cost-savings program intended to take advantage of synergies in administrative processes, especially
in the area of logistics. As part of this program, which we announced in August 2003, we intend to restructure our
operations at Deli XL in order to gain more efficiencies and to maintain and strengthen our competitive position in the
Dutch and Belgian food service markets. The restructuring program includes reductions of 200 staff jobs in the Dutch
operations. We experienced pressure on gross margin in our European food service operations in fiscal 2003.
Our share in income of joint ventures and equity investees: fiscal 2003
In addition to our consolidated subsidiaries, we also have interests in retail trade operations through our joint ventures with
respect to which we do not have majority voting power. The income or losses generated by these joint ventures is included
in our income or loss from unconsolidated joint ventures and equity investees. As of fiscal year-end 2002, we had interests
in several entities that we accounted for as unconsolidated joint ventures. The three most significant entities are ICA, JMR
and Paiz Ahold, which holds a 66 2/3% interest in CARHCO.
We expect that our share in income of joint ventures and equity investees, excluding the effects of currency exchange rates,
will be slightly higher in fiscal 2003 than in fiscal 2002. The expected increase is due to the fact that DAIH will no longer
affect our share in income of joint ventures and equity investees because DAIH is no longer an unconsolidated entity. We
began consolidating the results of DAIH in our financial statements in the third quarter of fiscal 2002. In fiscal 2002,
DAIH had a significant negative impact on our share in income of joint ventures and equity investees.
