Ahold Annual Report 2003 81
Operating and Financial Review and Prospects
consist of corporate guarantees of EUR 128 million
and letters of assurance, comfort letters, real estate
guarantee and buy-back guarantees with a nominal
value of EUR 139 million. We grant letters of assurance
and comfort letters to vendors and banks to
acknowledge our awareness and support of transactions
or relationships into which our subsidiaries are entering.
We have also granted letters of assurance and
comfort letters to banks and other stakeholders of assets
which we are exploring for possible sale to acknowledge
our support of those assets and their present and future
commitments in the normal course of business until
such time as they are either sold or a decision is made
to retain ownership.
In addition, during 2003 USF had product
purchasing arrangements with five entities, commonly
referred to as value-added service providers (VASPs),
that provided varying degrees of support to USF
primarily in the procurement of private label and
signature brand products. As part of its normal business
practice, USF had guaranteed some of the obligations
of the VASPs to vendors relating to purchases made on
behalf of USF. The amount of future payments that USF
would have been required to make under the
guarantees depended on outstanding accounts payable
to vendors for purchases made by the VASPs on behalf
of USF. Since year-end 2003, USF has ended its
relationship with four of the five VASPs and is not
incurring any new guaranteed obligations with respect
to these prior arrangements. The fifth VASP continues
to incur obligations which are guaranteed by USF for
the reasons and purposes described above.
During the third quarter of 2003, management
of USF reached a decision to cease doing business
with the VASPs in 2004 through a phased transition
of services timeline. That decision was communicated
to the VASPs prior to December 28, 2003 and resulted
in claims made by the VASPs for reimbursement
by USF of certain costs they would incur as a result
of this decision, principally employee severance and
unavoidable lease commitments.
USF has assumed and expects to assume certain
liabilities and obligations of the VASPs in connection with
the phase out, and does not expect to be able to fully
collect the amounts owed to USF by the VASPs. During
the third quarter of 2003 and subsequently, the VASPs
quantified and reduced those claims in writing and
USF accrued a EUR 8 million liability representing the
probable minimum costs incurred as a result of those
claims. In December 2003, we entered into a
Termination and Settlement Agreement relating to four of
the five VASPs. On December 28, 2003, USF adjusted
the accrual to approximately USD 20 million, reflecting
the effects of the changes to previously estimated costs
resulting from the settlement reached with four of the five
VASPs, from the anticipated settlement with the
remaining VASP entity and related costs.
For a further discussion on guarantees, please see
Notes 24, 25 and 30 to our consolidated financial
statements included in this annual report.
Accounts receivable securitization programs
Our wholly owned subsidiaries, USF
and Alliant, participate in separate receivables sale
agreements ("Receivable Agreements"). Under the
Receivable Agreements these subsidiaries sell, on a
revolving basis, their eligible trade receivables to two
companies, which are wholly owned, special purpose,
bankruptcy remote subsidiaries of us ("Receivables
Companies"). Simultaneously, the Receivables
Companies transfer, assign and convey all of their
present and future right, title and interest in the
receivables to two qualifying special purpose entities
(the "Master Trusts").
In return for the accounts receivables transferred,
the Receivables Companies receive cash and
certificates representing fractional, undivided interests
in the accounts receivable held in the Master Trusts.
Certain certificates representing fractional, undivided
interests in the accounts receivable held by the Master
Trusts, are sold to third-party investors in exchange for
cash. The Receivables Companies hold other
certificates which are subordinate to the interest of the
third-party investors. The interests purchased by third-
party investors include both variable investment
certificates, which may be increased up to a maximum
purchase limit of USD 490 million (EUR 394 million),
and USD 300 million (EUR 241 million) term
investment certificates, aggregating to a maximum
purchase limit of USD 790 million (EUR 636 million).
The purchasers of the variable certificates are generally
either commercial paper conduits, which may choose
to increase the amount invested in a certificate,
or banks or other financial institutions that commit,
subject to certain conditions, to fund increases
in respect of the certificates for a committed period
of time. The transferable term certificates were sold in
reliance on Rule 144A to qualified institutional buyers
in July 2000 and are scheduled to expire in May 2005.
As of year-end 2003 and year-end 2002, the
Receivables Companies sold USD 732 million
(EUR 539 million) and USD 862 million (EUR 693
million), respectively, of their interests under the
Receivables Agreements to third-party certificate
holders. The costs associated with the sale of accounts
receivable interests in the Master Trusts are based on
existing markets for A-1/P-1 asset backed commercial
paper rates in respect of sales to commercial paper
conduits, which ranged between 1.07% and 1.40%
during 2003, plus fees and expenses. In respect of
purchasers other than the commercial paper conduits
the costs associated with the sale of accounts receivable
interests in the Master Trusts are based on LIBOR plus
fees and expenses. Because commercial paper conduit
purchasers of variable certificates have no commitment
to maintain the funding of their purchases of interests in
the Master Trusts, in the event these purchasers refuse
or are unable to fund the purchase of the Master Trusts
interest with commercial paper, the costs associated
with the sale of such interests to the alternative
committed purchasers will be based upon the sum of
