Events in 2003
Ahold Annual Report 2003
Operating and Financial Review and Prospects
35
competition in this highly fragmented industry. USF's
profitability is highly dependent on vendor allowances.
In addition, our planned restoration of USF's profitability
will depend on restoring USF's procurement leverage.
We expect increasing fuel costs and food commodity
prices to have a negative effect on our profitability if we
are unable to pass along increases to our customers
in a timely manner. We will continue to focus on
restoring the value of USF to recover from the events
in 2003 and to restore profitability and cash flow.
Our operations in the U.S. represented
approximately 71% of our consolidated net sales in
2003. As a result, our results of operations are
significantly affected by fluctuations in the value of the
US dollar against the Euro. In 2003, our net sales
declined by 10.5% mainly as a result of the weakening
US dollar against the Euro. Our net sales would have
increased by 2.7% excluding the impact of currency
exchange rates.
Our results of operations are also significantly
affected by non-cash accounting charges including
goodwill impairment charges. In 2003, our operating
income increased by 200.4% to EUR 718 million,
primarily because the amount of goodwill impairment
charges recorded was reduced to EUR 45 million in
2003 from EUR 1.3 billion in 2002.
We will continue our divestment program. We
intend to raise by the end of 2005 at least EUR 2.5
billion of proceeds from our divestments, including those
that were completed in 2003 and those already
announced. We intend to reduce indebtedness by the
same amount. Our divestment program will affect our
results of operations. In particular, it will result in
reduced net sales. In addition, cumulative currency
exchange rate differences related to the translation of
the financial of our foreign subsidiaries that were
divested are recognized as foreign currency translation
adjustments in our statements of operations. As a result,
we recognized cumulative foreign currency translation
adjustments of EUR 96 million as part of our total losses
on divestments of EUR 136 million in 2003 related to
the recognition of accumulated foreign currency
translation adjustments. We expect further divestments
to lead to further foreign currency translation
adjustments in 2004.
We have substantial indebtedness outstanding.
However, we concluded 2003 with an improved balance
sheet. We completed a rights offering in December 2003
and a concurrent offering of preferred financing shares.
We used a portion of the EUR 2.9 billion in net proceeds
from the offerings to repay and cancel the March 2003
credit facility (other than letters of credit). We intend to
apply the expected EUR 2.5 billion of proceeds from our
divestitures to further reduce indebtedness.
We are still recovering from the events leading up
to and following our February 24, 2003 announcement.
Our three-year financing plan and "Road to Recovery"
strategy is currently under way. In connection with the
events in 2003, we expect to continue to incur
substantial expenses as a result of various ongoing legal
proceedings and governmental and regulatory
investigations. Depending on the outcomes of these
legal proceedings and investigations, we may be
required to pay substantial fines or damages, consent to
injunctions on future conduct or lose the ability to
conduct business with some of our customers. We will
continue to commit substantial resources to improve our
internal accounting systems and controls. We also will
continue our divestment program, which will continue to
have an effect on our results of operations. In addition,
we are focused on growth in our profitable core business
es in the U.S. and Europe.
Set forth below is a summary of the matters we
announced on February 24, 2003 and subsequently,
the resulting restatements in our 2002 annual report of
our financial position and results for 2001 and 2000,
and the remedial actions we took and will continue to
take to restore the value of our Company.
Background
On February 24, 2003, we announced that our net
earnings and earnings per share for 2002 would be
significantly lower than previously indicated and that we
would be restating our comparative consolidated
financial statements for 2001 and 2000. We indicated
that these restatements were primarily related to
overstatements of vendor allowance income at USF and
the deconsolidation of five current or former joint
ventures (ICA, Bompreqo S.A. Supermercados do
Nordeste ("Bompreqo"), DAIH, JMR-Gestao de
Empresas de Ratalho, SGPS, S.A. ("JMR") and Paiz
Ahold). We also announced forensic investigations into
accounting irregularities at USF and into the legality and
accounting treatment of certain questionable
transactions uncovered at Disco.
The USF investigation identified accounting fraud
relating to fictitious and overstated vendor allowance
receivables and improper or premature recognition of
vendor allowances and an understatement of cost of
goods sold. The investigation found that certain senior
officers of USF and other employees were involved in
the fraud. It was also found that inappropriate vendor
allowance accounting had existed at the date of the
acquisition of USF. The investigation also identified or
confirmed numerous material weaknesses in internal
controls.
The Disco investigation found a series of
suspicious transactions, some of which involved the use
of fictitious invoices to conceal or mischaracterize
payments, or payments that were otherwise improperly
documented. In addition, in some instances these
payments were improperly capitalized rather than
expensed. Significant internal control issues were also
found.
In addition to the USF and Disco investigations, we
commenced investigations into the facts and
circumstances surrounding certain letters that were the
basis for the historical consolidation of four of the five
