As filed with the Securities and Exchange Commission on August 26, 2015
Registration No. 333205546
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Albertsons Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 5411 | 47-4376911 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
250 Parkcenter Blvd.
Boise, ID 83706
208-395-6200
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Robert A. Gordon, Esq.
Executive Vice President and General Counsel
Albertsons Companies, Inc.
250 Parkcenter Blvd.
Boise, ID 83706
(208) 395-6200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Stuart D. Freedman, Esq. Michael R. Littenberg, Esq. Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Phone: (212) 756-2000 Fax: (212) 593-5955 |
William M. Hartnett, Esq. Jonathan A. Schaffzin, Esq. William J. Miller, Esq. Cahill Gordon & Reindel LLP 80 Pine Street New York, NY 10005 Phone: (212) 701-3000 Fax: (212) 378-2500 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
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Title Of Each Class Of Securities To Be Registered |
Proposed Maximum
Aggregate
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Amount Of
Registration Fee(3) |
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Common Stock |
$100,000,000 | $11,620(4) | ||
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(1) | Includes shares of common stock issuable upon exercise of an option to purchase additional shares granted to the underwriters. |
(2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 of the Securities Act. |
(3) | Calculated pursuant to Rule 457(o) under the Securities Act. |
(4) | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
Subject to completion. Dated August 26, 2015
Shares
Albertsons Companies, Inc.
Common Stock
This is an initial public offering of our common stock. We are offering shares of our common stock. All of the shares of common stock are being sold by us.
We expect the initial public offering price to be between $ and $ per share. Currently, no public market exists for our common stock. We intend to apply for listing of our common stock on the New York Stock Exchange (NYSE) under the symbol ABS.
Investing in our common stock involves a high degree of risk. See Risk Factors beginning on page 21 of this prospectus to read the factors you should consider before buying shares of the common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discount(1) |
$ | $ | ||||||
Proceeds, before expenses, to us |
$ | $ |
(1) | The underwriters will also be reimbursed for certain expenses incurred in the offering. See Underwriting for additional information regarding underwriting compensation. |
The underwriters may also purchase up to an additional shares of common stock from us at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus.
The underwriters expect to deliver the shares of our common stock to investors against payment on or about , 2015 through the book-entry facilities of The Depository Trust Company.
Goldman, Sachs & Co. | BofA Merrill Lynch | Citigroup | Morgan Stanley |
Lazard |
The date of this prospectus is , 2015.
Prospectus
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Supplemental Selected Historical Financial Information of Safeway |
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Unaudited Pro Forma Condensed Consolidated Financial Information |
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Supplemental Managements Discussion and Analysis of Results of Operations of Safeway |
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Certain U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders |
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F-1 |
Until , 2015 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.
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EXPLANATORY NOTE
Albertsons Companies, Inc., the registrant whose name appears on the cover of this registration statement, is a newly formed Delaware corporation. Shares of common stock of Albertsons Companies, Inc. are being offered by the prospectus that forms a part of this registration statement. AB Acquisition LLC (AB Acquisition) is a Delaware limited liability company. Albertsons Companies, Inc. was formed solely for the purpose of reorganizing the organizational structure of AB Acquisition and its direct and indirect consolidated subsidiaries in order for the registrant to be a corporation rather than a limited liability company. In connection with, and prior to and/or concurrently with the closing of, this offering, each member of AB Acquisition will directly or indirectly contribute all of its equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for shares of common stock of Albertsons Companies, Inc. As a result, AB Acquisition and its direct and indirect consolidated subsidiaries will become wholly-owned subsidiaries of Albertsons Companies, Inc. See IPO-Related Transactions and Organizational Structure for additional information.
As used in this prospectus, unless the context otherwise requires, references to (i) the terms company, AB Acquisition, Albertsons Companies, Inc., we, us and our refer to AB Acquisition LLC and its consolidated subsidiaries for periods prior to the consummation of the IPO-Related Transactions (as defined herein), and, for periods as of and following the consummation of the IPO-Related Transactions, to Albertsons Companies, Inc. and its consolidated subsidiaries, (ii) the terms Albertsons and Albertsons Holdings refer to Albertsons LLC and Albertsons Holdings LLC, and, where appropriate, their subsidiaries, (iii) the term NAI refers to New Albertsons, Inc., and, where appropriate, its subsidiaries, (iv) the term NAI Holdings refers to NAI Holdings LLC, and, where appropriate, its subsidiaries, (v) the term United refers to United Supermarkets, LLC, (vi) the term Safeway refers to Safeway Inc. and, where appropriate, its subsidiaries, and (vii) references to our Sponsors or the Cerberus-led Consortium refer to, collectively, Cerberus Capital Management, L.P. (Cerberus), Kimco Realty Corporation (Kimco Realty), Klaff Realty, LP (Klaff Realty), Lubert-Adler Partners, L.P. (Lubert-Adler), Schottenstein Stores Corporation (Schottenstein Stores) and their respective controlled affiliates and investment funds. For the convenience of the reader, except as the context otherwise requires, all information included in this prospectus is presented giving effect to the consummation of the IPO-Related Transactions.
BASIS OF PRESENTATION
Prior to or concurrently with this offering, we will effect the IPO-Related Transactions described under IPO-Related Transactions and Organizational Structure. The consolidated financial statements and consolidated financial data included in the prospectus are those of AB Acquisition and its consolidated subsidiaries and do not give effect to the IPO-Related Transactions. Other than the audited balance sheet, dated as of June 23, 2015, the historical information of Albertsons Companies, Inc. has not been included in this prospectus as it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus.
We acquired Safeway on January 30, 2015, United on December 29, 2013 and NAI on March 21, 2013. Accordingly, this prospectus also includes the following historical financial statements:
| Audited balance sheets of Safeway as of January 3, 2015 and December 28, 2013 and audited consolidated statements of income, comprehensive income (loss), stockholders equity and cash flows of Safeway for the 53 weeks ended January 3, 2015 and the 52 weeks ended December 28, 2013 and December 29, 2012; |
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| Audited balance sheets of NAI as of February 21, 2013 and February 23, 2012 and combined statements of operations and comprehensive income (loss), parent company deficit and cash flows of NAI for the 52 weeks ended February 21, 2013, February 23, 2012 and February 24, 2011; and |
| Audited balance sheets of United as of December 28, 2013 and January 26, 2013 and statements of comprehensive income, members equity and cash flows of United for the 48 weeks ended December 28, 2013 and the year ended January 26, 2013. |
We use a 52 or 53 week fiscal year ending on the last Saturday in February each year. Prior to fiscal year 2014, we used a 52 or 53 week fiscal year ending on the closest Thursday before the last Saturday in February each year. For ease of reference, unless the context otherwise indicates, we identify our fiscal years in this prospectus by reference to the calendar year of the first day of such fiscal year. For example, fiscal 2014 refers to our fiscal year ended February 28, 2015 and fiscal 2015 refers to our fiscal year ending February 27, 2016. Our first quarter consists of 16 weeks, and our second, third and fourth quarters generally consist of 12 weeks. For the fiscal year ended February 28, 2015, the fourth quarter included 13 weeks, and the fiscal year included 53 weeks. The fiscal years ended February 20, 2014, February 21, 2013, February 23, 2012 and February 24, 2011 included 52 weeks. Safeways last three fiscal years prior to the Safeway acquisition consisted of the 53-week period ended January 3, 2015, the 52-week period ended December 28, 2013 and the 52-week period ended December 29, 2012.
IDENTICAL STORE SALES
As used in this prospectus, the term identical store sales is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Fuel sales are excluded from identical store sales, and internet sales are included in identical store sales of the store from which the products are sourced. Fiscal 2014 is compared with the 53-week period ending February 27, 2014. Acquired stores become identical on the one-year anniversary date of their acquisition. Stores that are open during remodeling are included in identical store sales. The stores divested in order to secure Federal Trade Commission (FTC) clearance of the Safeway acquisition are excluded from the identical store sales calculation beginning on December 19, 2014, the announcement date of the divestitures. Also included in this prospectus, where noted, are supplemental identical store sales measures for acquired stores calculated irrespective of their acquisition dates.
PRO FORMA INFORMATION
This prospectus contains unaudited pro forma financial information prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2014 gives pro forma effect to:
| Our January 2015 acquisition of Safeway and the related financing, including the effects of FTC-mandated divestitures and the sale of Property Development Centers, LLC (PDC) (collectively, the Safeway Transactions); |
| The IPO-Related Transactions; and |
| The issuance of shares of common stock in this offering and the application of the estimated net proceeds from the sale of such shares to repay certain existing debt, to pay fees and expenses related to this offering and for general corporate purposes, as described in Use of Proceeds, |
in each case as if such transactions had been consummated on February 21, 2014, the first day of fiscal 2014. The unaudited pro forma condensed consolidated statement of operations for the first
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quarter of fiscal 2014 gives pro forma effect to the Safeway Transactions as if they had been consummated on February 21, 2014, the first day of fiscal 2014. The unaudited pro forma condensed consolidated statement of operations for the first quarter of fiscal 2015 gives pro forma effect to the IPO-Related Transactions and this offering as if such transactions had occurred on February 21, 2014, the first day of fiscal 2014. The unaudited pro forma condensed consolidated balance sheet as of June 20, 2015 gives pro forma effect to the IPO-Related Transactions and this offering as if such transactions had occurred on June 20, 2015. See Unaudited Pro Forma Condensed Consolidated Financial Information.
TRADEMARKS AND TRADE NAMES
This prospectus includes our trademarks and service marks, including ALBERTSONS ® , SAFEWAY ® , ACME ® , AMIGOS ® , CARRS ® , JEWEL-OSCO ® , MARKET STREET ® , PAVILIONS ® , RANDALLS ® , SAV-ON ® , SHAWS ® , STAR MARKET ® , TOM THUMB ® , UNITED EXPRESS ® , UNITED SUPERMARKETS ® , VONS ® , EATING RIGHT ® , LUCERNE ® , O ORGANICS ® , OPEN NATURE ® , MyMixx ® and just for U ® , which are protected under applicable intellectual property laws and are the property of our company and its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
MARKET, INDUSTRY AND OTHER DATA
This prospectus includes market and industry data and outlook, which are based on publicly available information, reports from government agencies, reports by market research firms and/or our own estimates based on our managements knowledge of and experience in the markets and businesses in which we operate. We believe this information to be reasonable based on the information available to us as of the date of this prospectus. However, we have not independently verified market and industry data from third-party sources. Historical information regarding supermarket and grocery industry revenues, including online grocery revenues, was obtained from IBISWorld. Forecasts regarding Food-at-Home inflation was obtained from the U.S. Department of Agriculture. Information with respect to our market share was obtained from Nielsen ACView All Outlets Combined (Food, Mass and Dollar but excluding Drug) for the first quarter of 2015. This information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. In addition, market conditions, customer preferences and the competitive landscape can and do change significantly. As a result, you should be aware that the market and industry data included in this prospectus and our estimates and beliefs based on such data may not be reliable. We do not make any representations as to the accuracy of such industry and market data.
In addition, the market value reported in the appraisals of the properties described herein are an estimate of value, as of the date stated in each appraisal. The appraisals were subject to the following assumption: The estimate of market value as is, is based on the assumption that the existing occupant/user remains in occupancy in the foreseeable future, commensurate with the typical tenure of a user of this type, and is paying market rent as of the effective date of appraisal. Changes since the appraisal date in external and market factors or in the property itself can significantly affect the conclusions. As
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an opinion, the reported values are not necessarily a measure of current market value and may not reflect the amount which would be received if the property were sold today. While we and the underwriters are not aware of any misstatements regarding any appraisals, market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the sections entitled Special Note Regarding Forward-Looking Statements and Risk Factors in this prospectus.
NON-GAAP FINANCIAL MEASURES
We define EBITDA as generally accepted accounting principles (GAAP) earnings (net income (loss)) before interest, income taxes, depreciation, and amortization. We define Adjusted EBITDA as earnings (net income (loss)) before interest, income taxes, depreciation, and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing performance. We define Adjusted Net Income as GAAP net income (loss) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. See Prospectus SummarySummary Consolidated Historical and Pro Forma Financial and Other Data for further discussion and a reconciliation of Adjusted EBITDA and Adjusted Net Income.
EBITDA, Adjusted EBITDA and Adjusted Net Income (collectively, the Non-GAAP Measures) are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA and Adjusted Net Income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Non-GAAP Measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations are:
| Non-GAAP Measures do not reflect the anticipated synergies associated with the Safeway acquisition; |
| Non-GAAP Measures do not reflect certain one-time or non-recurring cash costs to achieve the anticipated synergies associated with the Safeway acquisition; |
| Non-GAAP Measures do not reflect changes in, or cash requirements for, our working capital needs; |
| EBITDA and Adjusted EBITDA do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; |
| Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA and, with respect to acquired intangible assets, Adjusted Net Income, do not reflect any cash requirements for such replacements; |
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| Non-GAAP Measures are adjusted for certain non-recurring and non-cash income or expense items that are reflected in our statements of operations; |
| Non-GAAP Measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; and |
| Other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures. |
Because of these limitations, Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes. Please see our consolidated financial statements contained in this prospectus.
Pro Forma Adjusted EBITDA and Pro Forma Adjusted Net Income, as presented in this prospectus, are also supplemental measures of our performance that are not required by or presented in accordance with GAAP. See Prospectus SummarySummary Consolidated Historical and Pro Forma Financial and Other Data for additional information.
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This summary highlights the information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you or that you should consider before buying shares of our common stock. You should read the entire prospectus carefully. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. In particular, you should read the sections entitled Risk Factors, Unaudited Pro Forma Condensed Consolidated Financial Information, Managements Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition and Supplemental Managements Discussion and Analysis of Results of Operations of Safeway included elsewhere in this prospectus and our consolidated financial statements and the related notes.
OUR COMPANY
We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. As of June 20, 2015, we operated 2,205 stores across 33 states under 18 well-known banners, including Albertsons , Safeway , Vons , Jewel - Osco , Shaws , Acme , Tom Thumb , Randalls , United Supermarkets , Pavilions , Star Market and Carrs . We operate in 121 Metropolitan Statistical Areas in the United States (MSAs) and are ranked #1 or #2 by market share in 68% of them. We provide our customers with a service-oriented shopping experience, including convenient and value-added services through 1,698 pharmacies and 378 adjacent fuel centers. We have approximately 254,000 talented and dedicated employees serving on average more than 33 million customers each week.
Our operating philosophy is simple: we run great stores with a relentless focus on driving sales growth. We believe that our management team, with decades of collective experience in the food and drug retail industry, has developed a proven and successful operating playbook that differentiates us from our competitors.
We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to create a superior customer experience and deliver outstanding operating performance. These leadership teams are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending in the local communities and neighborhoods they serve. Our store directors are responsible for implementing our operating playbook on a daily basis and ensuring that our employees remain focused on delivering outstanding service to our customers.
We believe that the execution of our operating playbook, among other factors, including improved economic conditions and consumer confidence, has enabled us to grow sales, profitability and free cash flow across our business. During fiscal 2014 and the first quarter of fiscal 2015, excluding Safeway, our identical store sales grew at 7.2% and 5.1%, respectively. At Safeway, prior to our acquisition, the rate of identical store sales growth was 3.0% in fiscal 2014 and accelerated in the first quarter of fiscal 2015 to 3.8%. We believe that the implementation of our playbook, together with other factors, including improved economic conditions and consumer confidence, will enable us to further accelerate this rate at Safeway. We are currently executing on an annual synergy plan of approximately $800 million related to the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018. We expect to deliver annual run-rate synergies of approximately $440 million by the end of fiscal 2015.
For fiscal 2014 on a pro forma basis, we would have generated net sales of $57.5 billion, Adjusted EBITDA of $2.4 billion and free cash flow (which we define as Adjusted EBITDA less capital
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expenditures) of $1.5 billion. For the 12 months ended June 20, 2015, on a pro forma basis, we would have generated net sales of $57.9 billion, Adjusted EBITDA of $2.5 billion and free cash flow of $1.7 billion. For the first quarter of fiscal 2015, we generated net sales of $18.1 billion, Adjusted EBITDA of $728 million and free cash flow of $513 million. In addition to realizing increased sales, profitability and free cash flow through the implementation of our operating playbook, we expect synergies from the Safeway acquisition to enhance our profitability and free cash flow over the next few years.
OUR INTEGRATION HISTORY
Over the past nine years, we have completed a series of acquisitions, beginning with our purchase of Albertsons LLC in 2006 (the Legacy Albertsons Stores). This was followed in March 2013 by our acquisition of NAI from SUPERVALU INC. (SuperValu), which included the Albertsons stores that we did not already own (the SVU Albertsons Stores and, together with the Legacy Albertsons Stores, the Albertsons Stores) and stores operating under the Acme , Jewel - Osco , Shaws and Star Market banners (the NAI Stores). In December 2013, we acquired United, a regional grocery chain in North and West Texas. In January 2015, we acquired Safeway in a transaction that significantly increased our scale and geographic reach. We have also completed the divestiture of 168 stores required by the FTC in connection with the Safeway acquisition.
OUR OPERATING PLAYBOOK
Our operating playbook covers every major facet of store-level operations and is executed by local leadership under the supervision of our executive management team. Our playbook is based on the following key concepts:
| Operate Our Stores to the Highest Standards. We ensure that our stores are always full, fresh, friendly and clean. Our efforts are driven through our rigorous G.O.L.D. (Grand Opening Look Daily) program that is focused on delivering fresh offerings, well-stocked shelves, and clean and brightly lit departments. |
| Deliver Superior Customer Service . We focus on providing superior customer service. We consistently invest in store labor and training, and our simple and well-understood sales- and EBITDA-based bonus structure ensures that our employees are properly incentivized. We measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our improving customer satisfaction scores and identical store sales growth. |
| Provide a Compelling Product Offering . We focus on providing the highest quality fresh, natural and organic assortments to meet the demands of our customers, including through our private label brands, which we refer to as our own brands, such as Open Nature and O Organics . In addition, we offer high-volume, high-quality and differentiated signature products, including fresh fruit and vegetables cut in-store, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly baked bread. Our decentralized operating structure enables our divisions to offer products that are responsive to local tastes and preferences. |
| Offer an Attractive Value Proposition to Our Customers . We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our loyalty programs, including just for U , MyMixx and our fuel-based rewards programs, as well as our strong own brand assortment, to improve customer perception of our value proposition. |
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| Drive Innovation Across our Network of Stores . We focus on innovation to enhance our customers in-store experience, generate customer loyalty and drive traffic and sales growth. We ensure that our stores benefit from modern décor, fixtures and store layout. We systematically monitor emerging trends in food and source new and innovative products to offer in our stores. In addition, we are focused on continuing to deliver personalized and promotional offers to further develop our relationship with our customers and on expanding our online and home delivery options. |
| Make Disciplined Capital Investments . We believe that our store base is modern and in excellent condition. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. Our capital budgets are subject to approval at the corporate level, but we empower our division leadership to prudently allocate capital to projects that will generate the highest return. |
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IDENTICAL STORES SALES
We believe that the execution of our operating playbook has been an important factor in the acceleration of identical store sales growth across our SVU Albertsons Stores and NAI Stores. Identical store sales growth across our Safeway stores has also accelerated, and we believe that the implementation of our operating playbook to the Safeway stores, together with other factors, including improved economic conditions and consumer confidence, will enable us to further accelerate this rate. The charts below illustrate historical identical store sales growth across the Albertsons Stores, the NAI Stores and the Safeway stores:
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The following map represents our regional banners and combined store network as of June 20, 2015. We also operate 30 strategically located distribution centers and 21 manufacturing facilities. Approximately 48% of our operating stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $10.5 billion.
OUR COMPETITIVE STRENGTHS
We believe the following strengths differentiate us from our competitors and contribute to our ongoing success:
Powerful Combination of Strong Local Presence and National Scale . We operate a portfolio of well-known banners with both strong local presence and national scale. We have leading positions in many of the largest and fastest-growing MSAs in the United States. Given the long operating history of our banners, many of our stores form an important part of the local communities and neighborhoods in which they operate and occupy First-and-Main locations. We believe that our combination of local presence and national scale provides us with competitive advantages in brand recognition, customer loyalty and purchasing, marketing and advertising and distribution efficiencies.
Best-in-Class Management Team with a Proven Track Record . We have assembled a best-in-class management team with decades of operating experience in the food and drug retail industry. Our Chairman and Chief Executive Officer, Bob Miller, has over 50 years of food and drug retail experience, including serving as Chairman and CEO of Fred Meyer and Rite Aid and Vice Chairman of Kroger. We have created an Office of the CEO to set long-term strategy and annual objectives for our 14 divisions. The Office of the CEO is comprised of Bob Miller, Wayne Denningham (Chief Operating Officer), Justin Dye (Chief Administrative Officer) and Shane Sampson (Chief Marketing and Merchandising Officer), each of whom brings significant leadership and operational experience with long tenures at our company and within the industry. Our Executive and Senior Vice Presidents and
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our division, district and store-level leadership teams are also critical to the success of our business. Our nine Executive Vice Presidents, 15 Senior Vice Presidents and 14 division Presidents have an average of almost 23, 24 and 32 years of service, respectively, with our company.
Proven Operating Playbook . We believe that the execution of our operating playbook has been an important factor in enabling us to accelerate identical store sales growth. The Legacy Albertsons Stores have delivered positive identical store sales growth in each of the past 17 fiscal quarters. In fiscal 2014, we delivered identical store sales growth of 8.2% across the SVU Albertsons Stores, and 9.1% across the NAI Stores, compared with negative 4.8% for each of them in fiscal 2012 (prior to their acquisition). In the first quarter of fiscal 2015, we delivered identical store sales growth of 9.5% across the SVU Albertsons Stores, and 4.1% across the NAI Stores, compared to positive identical store sales growth of 8.7% and 12.2% for them, respectively, in the first quarter of fiscal 2014. Our Safeway stores delivered identical store sales growth of 3.0% in fiscal 2014, and 3.8% identical store sales growth in the first quarter of fiscal 2015, and we believe that implementation of our playbook, together with other factors, including improved economic conditions and consumer confidence, will enable us to further accelerate our sales growth.
Strong Free Cash Flow Generation . Our strong operating results, in combination with our disciplined approach to capital allocation, have resulted in the generation of strong free cash flow. On a pro forma basis, we would have generated free cash flow of approximately $1.5 billion in fiscal 2014. Our ability to grow free cash flow will be enhanced by the synergies we expect to achieve from our acquisition of Safeway. We expect to deliver approximately $800 million of annual synergies by the end of fiscal 2018, including approximately $440 million on an annual run-rate basis by the end of fiscal 2015.
Significant Acquisition and Integration Expertise . Growth through acquisition is an important component of our strategy, both to enhance our competitiveness in existing markets (as with recent acquisitions for our Jewel-Osco banner) and to expand our footprint into new markets (as with the United acquisition). On July 19, 2015, we entered into an agreement to acquire 76 stores from The Great Atlantic & Pacific Tea Company, Inc. (A&P) for our Acme banner. We have developed a proprietary and repeatable blueprint for integration, including a clearly defined plan for the first 100 days. We believe that our ability to integrate acquisitions is significantly enhanced by our decentralized approach, which allows us to leverage the expertise of incumbent local management teams. We have also developed significant expertise in synergy planning and delivery. We believe that the acquisition and integration experience of our management team, together with the considerable transactional expertise of our equity sponsors, positions us well for future acquisitions as the food and drug retail industry continues to consolidate.
OUR STRATEGY
Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and free cash flow through execution of the following strategies:
Continue to Drive Identical Store Sales Growth . Consistent with our operating playbook, we plan to deliver identical store sales growth by implementing the following initiatives:
| Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products . We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth. |
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| Expanding Our Own Brand Offerings . We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature , Eating Right and Lucerne . |
| Leveraging Our Effective and Scalable Loyalty Programs . We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U , MyMixx and fuel-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, and through the expansion of our online and home delivery options. |
| Capitalizing on Demand for Health and Wellness Services . We intend to leverage our portfolio of pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to patients. We believe that these efforts will drive sales growth and generate customer loyalty. |
| Continuously Evaluating and Upgrading Our Store Portfolio . We plan to pursue a disciplined capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. |
| Driving Innovation . We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We will also seek to build new, and enhance existing, customer relationships through our digital capabilities. |
| Sharing Best Practices Across Divisions . Our division leaders collaborate to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons fresh fruit and vegetables cut in-store and a broader assortment and new fixtures for our wine and floral shops, implementing Safeways successful strategy across many of our banners. |
We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under BusinessOur Industry, will continue to drive identical store sales growth.
Enhance Our Operating Margin . Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. In addition, we maintain a disciplined approach to expense management and budgeting.
Implement Our Synergy Realization Plan . We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $690 million (net of estimated synergy-related asset sale proceeds). Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeways information technology systems will support all of our
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stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons , Acme , Jewel-Osco , Shaws and Star Market banners with SuperValu on a store-by-store basis. We anticipate extending the expansive and high-quality own brand program developed at Safeway across all of our banners. We believe our increased scale will help us to optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale. We expect to achieve synergies from the Safeway acquisition of approximately $200 million during fiscal 2015, or $440 million on an annual run-rate basis, by the end of fiscal 2015. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of achieving our target.
Selectively Grow Our Store Base Organically and Through Acquisition . We intend to continue to grow our store base organically through disciplined investment in new stores. We believe our healthy balance sheet and decentralized structure also provide us with strategic flexibility and a strong platform to make further acquisitions. We evaluate strategic acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe selected acquisitions and our successful track record of integration and synergy delivery provide us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and free cash flow.
OUR INDUSTRY
We operate in the $584 billion U.S. food and drug retail industry, a highly fragmented sector with a large number of companies competing locally and a limited number of companies with a national footprint. From 2010 through 2014, food and drug retail industry revenues increased at an average annual rate of 1.3%, driven in part by improving macroeconomic factors, including gross domestic product, household disposable income, consumer confidence and employment. Food-at-Home inflation is forecasted to be 1.75% to 2.75% in 2015, which should also benefit industry sales. In addition to macroeconomic factors, the following trends, in particular, are expected to drive sales growth across the industry:
| Customer Focus on Fresh, Natural and Organic Offerings . Evolving customer tastes and preferences have caused food retailers to improve the breadth and quality of their fresh, natural, and organic offerings. This, in turn, has resulted in the increasing convergence of product selections between conventional and alternative format food retailers. |
| Converging Approach to Health and Wellness . Customers increasingly view their food shopping experience as part of a broader approach to health and wellness. As a result, food retailers are seeking to drive sales growth and customer loyalty by incorporating pharmacy and wellness clinic offerings in their stores. |
| Increased Customer Acceptance of Own Brand Offerings . Increased customer acceptance has driven growth in demand for own brand offerings, including the introduction of premium store brands. In general, own brand offerings have a higher gross margin than similarly positioned products of national brands. |
| Loyalty Programs and Personalization . To remain competitive and generate customer loyalty, food retailers are increasing their focus on loyalty programs that target the delivery of personalized offers to their customers. |
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| Convenience as a Differentiator . Industry participants are addressing customers desire for convenience through in-store amenities, including store-within-store sites such as coffee bars, banks and ATMs. |
RISKS RELATED TO OUR BUSINESS AND THIS OFFERING
An investment in our common stock involves a high degree of risk. You should carefully consider the risks highlighted in the section entitled Risk Factors following this prospectus summary before making an investment decision. These risks include, among others, the following:
| Various operating factors and general economic conditions affecting the food retail industry may adversely affect our business and operating results. |
| Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations. |
| Increased commodity prices may adversely impact our profitability. |
| Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows. |
| We may be adversely affected by risks related to our dependence on information technology (IT) systems. Any future intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results. |
| We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition. |
| Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness. |
| Our debt instruments limit our flexibility in operating our business. |
| There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If our stock price fluctuates after this offering, you could lose a significant part of your investment. |
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OUR CORPORATE STRUCTURE
Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by entities affiliated with our Sponsors and certain current and former members of our management, whom we refer to as our Existing Owners. Albertsons Companies, Inc. is a newly formed entity.
In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering that will result in the reorganization of our business so that it is owned by Albertsons Companies, Inc. Specifically, (i) our Existing Owners, other than KRS AB Acquisition, LLC and KRS ABS, LLC (collectively, Kimco) and Albertsons Management Holdco, LLC (Management Holdco), will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor Holdings LLC (Albertsons Investor), including their interests in NAI Group Holdings Inc. (NAI Group Holdings) and Safeway Group Holdings Inc. (Safeway Group Holdings), (ii) Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc., (iii) NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers and (iv) certain stores owned by Albertsons LLC will be contributed to a newly formed subsidiary, Albertsons Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in Albertsons Holdings LLC and NAI Holdings LLC to Albertsons Companies, Inc., and Albertsons Holdings LLC and NAI Holdings LLC will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers. As a result of the foregoing transactions, an aggregate of , and shares of our common stock will be owned by Albertsons Investor, Kimco and Management Holdco, respectively.
The chart below summarizes our corporate structure after giving effect to this offering and the IPO-Related Transactions:
For a further discussion of the IPO-Related Transactions, see IPO-Related Transactions and Organizational Structure.
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RECENT DEVELOPMENTS
A&P Transaction
On July 19, 2015, we entered into an asset purchase agreement, pursuant to which our wholly owned subsidiary, Acme Markets, Inc. (Acme Markets) agreed to acquire 76 stores operated by A&P pursuant to Section 363 of Chapter 11 of the United States Bankruptcy Code. The purchase price is approximately $335 million, including the cost of acquired inventory. In addition, we will assume certain lease obligations. The acquired stores, which are principally located in the northern New York City suburbs, northern New Jersey and the greater Philadelphia area, are complementary to Acme Markets existing store and distribution base and will be re-bannered as Acme stores. The stores had sales of $1.5 billion during A&Ps last fiscal year ended April 30, 2015. We expect to incur approximately $170 million of one-time opening and transition costs and capital expenditures to remodel and remerchandise the stores and to invest in price and labor. We anticipate achieving synergies of approximately $51 million within four years of completion of the acquisition. We intend to finance the purchase price with long-term debt. We refer to this potential acquisition in this prospectus as the A&P Transaction.
The A&P Transaction is subject to approval by the United States Bankruptcy Court for the Southern District of New York. We entered into the purchase agreement as a stalking horse bidder, and the A&P Transaction is subject to A&Ps solicitation of higher or otherwise better offers pursuant to specified bidding procedures and an auction process to be conducted under supervision of the bankruptcy court. We funded an initial deposit of approximately $64 million into an escrow account on July 20 , 2015. On August 10, 2015, the bankruptcy court approved the bidding procedures and granted certain benefits and bid protections to us in our role as a stalking horse bidder, including a break-up fee of approximately $3.8 million and reimbursement of up to $4.5 million of expenses.
The A&P Transaction is also subject to the satisfaction of various conditions, including the termination or expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). On August 12, 2015, we and A&P made the filings required under the HSR Act. We and A&P have been engaged in discussions with the FTC.
We expect the A&P Transaction to be completed in the third quarter of fiscal 2015 if Acme Markets remains the highest bidder, but there can be no assurance that the A&P Transaction will be completed in that time frame or at all. The A&P Transaction involves certain risks associated with integrating this acquisition with our business and the achievement of expected synergies. See Risk FactorsRisks Related to the A&P Transaction.
CORPORATE INFORMATION
Albertsons Companies, Inc. is a Delaware corporation that was incorporated on June 23, 2015 to undertake this offering. Our principal executive offices are located at 250 Parkcenter Blvd., Boise, ID 83706. Our telephone number is (208) 395-6200 and our internet address is www.albertsons.com. Our website and the information contained thereon are not part of this prospectus and should not be relied upon by prospective investors in connection with any decision to purchase our common shares.
OUR EQUITY SPONSORS
We believe that one of our strengths is our relationship with our Sponsors. We believe we will benefit from our Sponsors experience in the retail industry, their expertise in mergers and acquisitions and real estate, and their support on various near-term and long-term strategic initiatives.
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Cerberus . Established in 1992, Cerberus and its affiliated group of funds and companies comprise one of the worlds leading private investment firms with approximately $29 billion of capital under management in four primary strategies: control and non-control private equity investments, distressed securities and assets, commercial mid-market lending, and real estate-related investments. In addition to its New York headquarters, Cerberus has offices throughout the United States, Europe and Asia.
Kimco Realty . Kimco Realty is a real estate investment trust headquartered in New Hyde Park, New York that owns and operates North Americas largest publicly traded portfolio of neighborhood and community shopping centers. As of March 31, 2015, Kimco Realty owned interests in 745 shopping centers comprising 108 million square feet of leasable space across 39 states, Puerto Rico, Canada, Mexico and Chile. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco Realty has specialized in shopping center acquisitions, development and management for more than 50 years.
Klaff Realty . Klaff Realty is a privately-owned real estate investment company based in Chicago, Illinois that engages in the acquisition, redevelopment and management of commercial real estate throughout the United States and South America, with a primary focus on retail and office. Klaff Realty has established a leadership position in the acquisition of distressed retail space. To date, Klaff Realty affiliates have acquired properties and invested in operating entities that control in excess of 200 million square feet with a value in excess of $17 billion.
Lubert-Adler . Lubert-Adler was co-founded in 1997 by Ira Lubert and Dean Adler, who collectively have over 60 years of experience in underwriting, acquiring, repositioning, refinancing and disposing of real estate assets. Lubert-Adler has more than 20 investment professionals and has invested $7.5 billion of equity into assets valued at over $17 billion.
Schottenstein Stores . Schottenstein Stores, together with its affiliate Schottenstein Property Group, is a privately-owned operator, acquirer and redeveloper of high quality power/big box, community and neighborhood shopping centers located throughout the United States predominantly anchored by national retailers.
Our Sponsors will indirectly control us through their respective ownership of Albertsons Investor and Kimco and will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Following the completion of the IPO-Related Transactions and this offering, our Sponsors will indirectly own approximately % of our common stock, or % if the underwriters exercise their option to purchase additional shares in full. As a result, we expect to be a controlled company within the meaning of the corporate governance standards of the NYSE on which we intend to apply for our shares to be listed and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, our stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements. Following the completion of the IPO-Related Transactions and this offering, we will be required to appoint to our board of directors individuals designated by Albertsons Investor. Furthermore, if we cease to be a controlled company under the applicable rules of the NYSE, but Albertsons Investor, Kimco and Management Holdco collectively own at least 35% of our then-outstanding common stock, Albertsons Investor shall have the right to designate a number of members of our board of directors equal to one director fewer than 50% of our board of directors and Albertsons Investor shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board. In connection with this offering,
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Albertsons Companies, Inc. will enter into a stockholders agreement with Albertsons Investor, Kimco and Management Holdco (the Stockholders Agreement), and if a permitted transferee or assignee of such party that succeeds to such partys rights under the Stockholders Agreement (each transferee or assignee, a Holder and, collectively, the Holders) has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate a number of members of our board of directors equal to the greater of (a) three or (b) 25% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate a number of directors equal to the greater of (a) two or (b) 15% of the size of our board of directors (rounded up to the next whole number). If a Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one director to our board of directors.
The limited liability company agreement of AB Acquisition provides for the Cerberus-led Consortium to receive annual management fees of $13.75 million from our company over a 48-month period beginning on January 30, 2015, the date of the consummation of the Safeway acquisition. We paid the Cerberus-led Consortium management fees totaling $15 million for fiscal 2014, $6 million of which was paid under the previous limited liability company agreement of AB Acquisition and $9 million of which was paid upon the closing of the Safeway acquisition. We have paid management fees to the Cerberus-led Consortium totaling $13.75 million for fiscal 2015. In exchange for the management fees, the Cerberus-led Consortium has provided strategic advice to management, including with respect to acquisitions and financings. As of June 20, 2015, management fees over the remainder of the 48-month period total $41.25 million. Consistent with the terms of the limited liability company agreement of AB Acquisition, the remaining management fees will be paid in full upon the closing of this offering. We do not expect to pay any further management fees to the Cerberus-led Consortium following the completion of this offering.
The interests of our Sponsors may not coincide with the interests of other holders of our common stock. Additionally, our Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant transactions.
See Risk FactorsRisks Related to This Offering and Owning Our Common Stock.
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THE OFFERING
Issuer |
Albertsons Companies, Inc. |
Common stock outstanding immediately before this offering |
shares. |
Common stock offered by us |
shares. |
Common stock to be outstanding immediately after this offering |
shares. |
Option to purchase additional shares |
We have granted to the underwriters a 30-day option to purchase up to additional shares of our common stock at the initial public offering price less the underwriting discount and commissions. |
Use of proceeds |
We estimate that our net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $ million, assuming the shares are offered at $ per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus. |
We intend to use the net proceeds from this offering to repay certain existing debt, to pay fees and expenses related to this offering and for general corporate purposes. |
See Use of Proceeds. |
Dividend policy |
We do not intend to pay dividends for the foreseeable future. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, and other considerations that our board of directors deems relevant. |
See Dividend Policy. |
Proposed NYSE symbol |
ABS. |
Risk factors |
For a discussion of risks relating to our company, our business and an investment in our common |
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stock, see Risk Factors and all other information set forth in this prospectus before investing in our common stock. |
Directed Share Program |
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale within the United States to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. |
Unless otherwise indicated, all information in this prospectus excludes up to shares of our common stock that may be sold by us if the underwriters exercise in full their option to purchase additional shares of our common stock.
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following tables summarize our consolidated historical and pro forma financial and other data and should be read together with Selected Historical Financial Information of AB Acquisition, Supplemental Selected Historical Financial Information of Safeway, Unaudited Pro Forma Condensed Consolidated Financial Information, Managements Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition, Supplemental Managements Discussion and Analysis of Results of Operations of Safeway and our consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary balance sheet data as of June 20, 2015 and the consolidated statement of operations data for the first quarter of fiscal 2015 and the first quarter of fiscal 2014 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and our consolidated statements of operations data for fiscal 2014, fiscal 2013 and fiscal 2012 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.
Our consolidated financial statements for fiscal 2012 and for the period from February 22, 2013 to March 20, 2013 reflect only the historic results of the Legacy Albertsons Stores prior to the 2013 acquisition of NAI. Commencing on March 21, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of NAI. In December 2013, we acquired United. Commencing on December 29, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of United. In addition, on January 30, 2015, we acquired Safeway. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway.
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The Safeway acquisition had a material impact on our results of operations. Accordingly, we have included in this prospectus pro forma information which gives effect to the Safeway acquisition, this offering and the IPO-Related Transactions, as more fully described in the notes below. See Unaudited Pro Forma Condensed Consolidated Financial Information for additional information (dollars in millions, except per share amounts).
First Quarter 2015 | First Quarter 2014 |
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Ended June 20, 2015 |
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Results of Operations: |
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Sales and other revenue |
$ | 17,607 | $ | 18,051 | $ | 17,220 | $ | 7,212 | $ | 57,884 | $ | 57,497 | $ | 27,199 | $ | 20,055 | $ | 3,712 | ||||||||||||||||||
Gross profit |
$ | 4,784 | $ | 4,918 | $ | 4,525 | $ | 1,991 | $ | 15,742 | 15,483 | 7,503 | 5,399 | 938 | ||||||||||||||||||||||
Selling & administrative expenses |
4,710 | 4,821 | 4,425 | 1,959 | 15,476 | 15,191 | 8,152 | 5,874 | 899 | |||||||||||||||||||||||||||
Bargain purchase gain |
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Operating income (loss) |
74 | 97 | 100 | 32 | 266 | 292 | (649 | ) | 1,530 | 39 | ||||||||||||||||||||||||||
Interest expense |
284 | 284 | 283 | 140 | 940 | 939 | 633 | 390 | 7 | |||||||||||||||||||||||||||
Other (income) expense, net |
(5 | ) | (5 | ) | (23 | ) | 23 | (1 | ) | (19 | ) | 96 | | | ||||||||||||||||||||||
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(Loss) income before income taxes |
(205 | ) | (182 | ) | (160 | ) | (131 | ) | (673 | ) | (628 | ) | (1,378 | ) | 1,140 | 32 | ||||||||||||||||||||
Income tax (benefit) expense |
(79 | ) | (29 | ) | (62 | ) | (14 | ) | (260 | ) | (243 | ) | (153 | ) | (573 | ) | 2 | |||||||||||||||||||
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(Loss) income from continuing operations, net of tax |
(126 | ) | (153 | ) | (98 | ) | (117 | ) | (413 | ) | (385 | ) | (1,225 | ) | 1,713 | 30 | ||||||||||||||||||||
Income from discontinued operations, net of tax |
| | | | | | | 20 | 49 | |||||||||||||||||||||||||||
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Net (loss) income |
$ | (126 | ) | $ | (153 | ) | $ | (98 | ) | $ | (117 | ) | $ | (413 | ) | $ | (385 | ) | $ | (1,225 | ) | $ | 1,733 | $ | 79 | |||||||||||
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Per Share Data: |
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Net income (loss) per sharebasic and diluted(4) |
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Weighted average shares outstandingbasic and diluted(4) |
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Other Financial Data: |
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Adjusted EBITDA(5) |
$ | 704 | $ | 728 | $ | 608 | $ | 253 | $ | 2,463 | $ | 2,367 | $ | 1,099 | $ | 586 | $ | 65 | ||||||||||||||||||
Adjusted Net Income(5) |
44 | 55 | (19 | ) | (14 | ) | 247 | 184 | 58 | 174 | 39 | |||||||||||||||||||||||||
Adjusted Net Income per sharebasic and diluted(5) |
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Capital expenditures |
215 | 215 | 285 | 97 | 778 | 848 | 328 | 128 | 29 | |||||||||||||||||||||||||||
Free cash flow(6) |
489 | 513 | 323 | 156 | 1,685 | 1,519 | 771 | 458 | 36 | |||||||||||||||||||||||||||
Other Operating Data: |
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Identical store sales |
4.3% | 5.1% | 4.8% | 8.4% | 4.5% | 4.6% | 7.2% | 1.6% | 1.9% | |||||||||||||||||||||||||||
Store count (at end of fiscal period) |
2,205 | 2,205 | 2,234 | 1,076 | 2,205 | 2,229 | 2,382 | 1,075 | 192 | |||||||||||||||||||||||||||
Gross square footage (at end of fiscal period) (in millions) |
110 | 110 | 111 | 56 | 110 | 111 | 118 | 56 | 11 | |||||||||||||||||||||||||||
Fuel sales |
$ | 1,008 | $ | 1,010 | $ | 1,360 | $ | 67 | $ | 3,617 | $ | 3,969 | $ | 387 | $ | 47 | $ | | ||||||||||||||||||
Balance Sheet Data (at end of period): |
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Cash and equivalents |
$ | 989 | $ | 989 | $ | 260 | $ | 989 | $ | 1,126 | $ | 307 | $ | 37 | ||||||||||||||||||||||
Total assets |
24,469 | 24,469 | 9,062 | 24,469 | 25,762 | 9,359 | 586 | |||||||||||||||||||||||||||||
Total members equity (deficit) |
2,064 | 2,064 | 1,634 | 2,064 | 2,169 | 1,760 | (247 | ) | ||||||||||||||||||||||||||||
Total debt |
12,145 | 12,145 | 3,623 | 12,145 | 12,569 | 3,694 | 120 |
Fiscal
2015 |
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||
Identical Store Sales(a) |
Q115 | Q414 | Q314 | Q214 | Q114 | Q413 | Q313 | Q213 | Q113 | Q412 | Q312 | Q212 | Q112 | |||||||||||||||||||||||||||||||||||||||
Legacy Albertsons Stores |
2.1 | % | 3.1 | % | 2.6 | % | 3.4 | % | 1.3 | % | 1.4 | % | 3.3 | % | 0.1 | % | 1.2 | % | 1.4 | % | 2.2 | % | 2.7 | % | 1.6 | % | ||||||||||||||||||||||||||
SVU Albertsons Stores |
9.5 | % | 8.5 | % | 8.0 | % | 7.5 | % | 8.7 | % | 5.8 | % | 5.6 | % | (0.4 | )% | (2.5 | )% | (5.6 | )% | (5.0 | )% | (4.0 | )% | (4.5 | )% | ||||||||||||||||||||||||||
NAI Stores |
4.1 | % | 3.6 | % | 8.5 | % | 11.9 | % | 12.2 | % | 10.4 | % | 4.9 | % | 0.6 | % | (2.9 | )% | (5.7 | )% | (4.6 | )% | (5.1 | )% | (4.0 | )% | ||||||||||||||||||||||||||
Safeway(b) |
3.8 | % | 3.5 | % | 3.2 | % | 3.1 | % | 2.2 | % | 1.1 | % | 1.8 | % | 1.8 | % | 1.1 | % | 1.4 | % | 1.3 | % | 0.1 | % | 1.0 | % |
(a) | Actuals include acquired stores irrespective of date of acquisition and exclude United. |
(b) | Includes Safeways Eastern Division, now owned by NAI. |
17
(1) | For the period from February 21, 2014 to January 30, 2015, our consolidated financial statements include the financial position, results of operations and cash flows of Albertsons, NAI and United. Commencing on January 31, 2015, our consolidated financial statements also include the financial position, results of operations and cash flows of Safeway. |
(2) | The pro forma information for fiscal 2014, the first quarter of fiscal 2014 and the 12 months ended June 20, 2015 includes the pre-combination results of operations of Safeway and pro forma adjustments for the effects of the Safeway Transactions, as if the Safeway Transactions had been consummated on the first day of fiscal 2014. Additionally, the pro forma information for fiscal 2014, the first quarter of fiscal 2014, the first quarter of fiscal 2015 and the 12 months ended June 20, 2015 reflects the IPO-Related Transactions and the issuance of shares of our common stock in this offering and the application of the estimated net proceeds thereof (as described in Use of Proceeds), as if these events had occurred on the first day of fiscal 2014. This assumes net proceeds of this offering to us of $ million (assuming no exercise of the underwriters option to purchase additional shares), based on an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. See Unaudited Pro Forma Condensed Consolidated Financial Information for a presentation of such pro forma financial data for fiscal 2014. |
For the first quarter of fiscal 2015, a $1.00 increase in the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , and a $1.00 decrease in the assumed initial public offering price of $ per share would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover of this prospectus, would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , assuming the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, assuming no change in the assumed initial public offering price of $ per share, would have resulted in pro forma net income of $ million and pro forma net income per sharebasic of $ . The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.
For fiscal 2014, a $1.00 increase in the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , and a $1.00 decrease in the assumed initial public offering price of $ per share would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , in each case, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a decrease of one million shares in the number of shares offered by us, as set forth on the cover of this prospectus, would have resulted in pro forma net income of $ million and pro forma net income per share-basic of $ , assuming the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated expenses. An increase of one million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, assuming no change in the assumed initial public offering price of $ per share, would have resulted in pro forma net income of $ million and pro forma net income per sharebasic of $ . The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness.
(3) | The results of operations for fiscal 2012 and the period from February 22, 2013 through March 20, 2013 reflect the financial position, results of operations and cash flows of the Legacy Albertsons Stores acquired on June 2, 2006. Commencing on March 21, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of NAI. Commencing on December 29, 2013, our consolidated financial statements also include the financial position, results of operations and cash flows of United. |
(4) | Gives effect to the items described in note 2 above as if they had occurred on the first day of fiscal 2014. See Unaudited Pro Forma Condensed Consolidated Financial Information for a presentation of such pro forma financial data. |
(5) | Adjusted EBITDA is a non-GAAP measure defined as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Adjusted Net Income is a non-GAAP measure defined as (net income (loss)) adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. Pro forma amounts give effect to the items described in note 2 above, as applicable, as if they had occurred on the first day of our fiscal 2014. |
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Adjusted EBITDA and Adjusted Net Income are non-GAAP performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These non-GAAP measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe Adjusted EBITDA and Adjusted Net Income provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. Set forth below is a reconciliation of Adjusted Net Income and Adjusted EBITDA to net income (in millions):
First Quarter 2015 | First Quarter 2014 |
12 Months
Ended June 20, 2015 |
Fiscal 2014 | |||||||||||||||||||||||||||||||||
Pro
Forma |
Actual |
Pro
Forma |
Actual |
Pro
Forma |
Pro
Forma |
Actual |
Fiscal
2013 |
Fiscal
2012 |
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Net (Loss) Income |
$ | (126 | ) | $ | (153 | ) | $ | (98 | ) | $ | (117 | ) | $ | (413 | ) | $ | (385 | ) | $ | (1,225 | ) | $ | 1,733 | $ | 79 | |||||||||||
Adjustments: |
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Bargain purchase gain |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | (2,005 | ) | $ | | |||||||||||||||||
(Gain) loss on interest rate and commodity swaps, net |
(1 | ) | (1 | ) | | 23 | 1 | 2 | 98 | | | |||||||||||||||||||||||||
Store transition and related costs(a) |
| | | | | | | 167 | | |||||||||||||||||||||||||||
Acquisition and integration costs(b) |
73 | 73 | 3 | 21 | 183 | 113 | 352 | 174 | 7 | |||||||||||||||||||||||||||
Termination of long-term incentive plan |
| | | | 78 | 78 | 78 | | | |||||||||||||||||||||||||||
Non-cash equity-based compensation expense |
56 | 56 | (7 | ) | 2 | 231 | 168 | 344 | 6 | | ||||||||||||||||||||||||||
Net (gain) loss on property dispositions, asset impairments and lease exit costs |
(6 | ) | (6 | ) | (2 | ) | (12 | ) | 9 | 13 | 228 | (2 | ) | (46 | ) | |||||||||||||||||||||
LIFO expense |
6 | 6 | 7 | 7 | 37 | 38 | 43 | 12 | 2 | |||||||||||||||||||||||||||
Amortization and write-off of debt discount, deferred financing costs and loss on extinguishment of debt |
19 | 19 | 19 | 27 | 62 | 62 | 72 | 75 | 1 | |||||||||||||||||||||||||||
Non-cash pension and post-retirement expense (income), net(c) |
5 | 5 | 15 | (1 | ) | 42 | 52 | (3 | ) | (8 | ) | | ||||||||||||||||||||||||
Amortization of intangible assets resulting from acquisitions |
110 | 110 | 113 | 40 | 371 | 374 | 149 | 116 | | |||||||||||||||||||||||||||
Other(d) |
15 | 15 | (19 | ) | (4 | ) | 62 | 28 | (14 | ) | 12 | (4 | ) | |||||||||||||||||||||||
Tax impact of adjustments to Adjusted Net Income(e) |
(107 | ) | (69 | ) | (50 | ) | | (416 | ) | (359 | ) | (64 | ) | (106 | ) | | ||||||||||||||||||||
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Adjusted Net Income |
$ | 44 | $ | 55 | $ | (19 | ) | $ | (14 | ) | $ | 247 | $ | 184 | $ | 58 | $ | 174 | $ | 39 | ||||||||||||||||
Adjustments: |
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Tax impact of adjustments to Adjusted Net Income(e) |
$ | 107 | $ | 69 | $ | 50 | $ | | 416 | $ | 359 | $ | 64 | $ | 106 | $ | | |||||||||||||||||||
Income tax (benefit)
|
(80 | ) | (29 | ) | (62 | ) | (14 | ) | (261 | ) | (243 | ) | (153 | ) | (573 | ) | 2 | |||||||||||||||||||
Amortization and write-off of original issue discount, deferred financing costs and loss on extinguishment of debt |
(19 | ) | (19 | ) | (19 | ) | (27 | ) | (62 | ) | (62 | ) | (72 | ) | (75 | ) | (1 | ) | ||||||||||||||||||
Interest expense continued operations |
284 | 284 | 283 | 140 | 940 | 939 | 633 | 390 | 7 | |||||||||||||||||||||||||||
Interest expense discontinued operations |
| | | | | | | 4 | 1 | |||||||||||||||||||||||||||
Amortization of intangible assets resulting from acquisitions |
(110 | ) | (110 | ) | (113 | ) | (40 | ) | (371 | ) | (374 | ) | (149 | ) | (116 | ) | | |||||||||||||||||||
Depreciation and amortization |
478 | 478 | 488 | 208 | 1,554 | 1,564 | 718 | 676 | 17 | |||||||||||||||||||||||||||
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Adjusted EBITDA |
$ | 704 | $ | 728 | $ | 608 | $ | 253 | $ | 2,463 | $ | 2,367 | $ | 1,099 | $ | 586 | $ | 65 | ||||||||||||||||||
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(a) | Includes costs related to the transition of stores acquired in the NAI acquisition by improving store conditions and enhancing product offerings. |
(b) | Includes costs related to the Safeway acquisition (including the charge associated with the settlement of appraisal rights litigation) and the NAI and United acquisitions. |
(c) | Excludes the companys one-time cash contribution of $260 million to the Safeway Employee Retirement Plan (ERP) under a settlement with the Pension Benefit Guaranty Corporation (the PBGC) in connection with the closing of the Safeway acquisition. |
(d) | Primarily includes non-cash lease adjustments related to deferred rents and deferred gains on lease expenses related to closed stores and discontinued operations. Fiscal 2014 Pro Forma also includes amortization of unfavorable leases on acquired Safeway surplus properties. |
(e) | The tax impact was determined based on the taxable status of the subsidiary to which each of the above adjustments relates. |
(6) | We define Free cash flow as Adjusted EBITDA less capital expenditures. See Managements Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition, included elsewhere in this prospectus, for a reconciliation of cash flow from operating activities to free cash flow. |
(7) | The pro forma balance sheet data as of June 20, 2015 gives effect to pro forma adjustments to reflect the IPO-Related Transactions and the issuance of shares of common stock in this offering (excluding the remaining shares of common stock being issued in this offering, which are deemed to have been used to pay underwriting discounts and offering expenses) and the application of $ million of the proceeds to us from the sale of such shares by us to repay certain existing debt, pay fees and expenses related to this offering and for general corporate purposes, as described in Use of Proceeds, as if these events had occurred on June 20, 2015. This assumes net proceeds from this offering to us of $ million (assuming no exercise of the underwriters option to purchase additional shares), based on an initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriter discounts and commissions and estimated offering expenses. See Unaudited Pro Forma Condensed Consolidated Financial Information for a presentation of such unaudited pro forma condensed consolidated balance sheet data. |
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the front cover of this prospectus) would not result in a change in cash and cash equivalents and would increase (decrease) total assets by $ , total long-term debt by ($ ) million and total stockholders equity by $ million, in each case assuming no exercise of the underwriters option to purchase additional shares and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the front cover of this prospectus, would not result in a change in cash and cash equivalents and would increase (decrease) total assets by an insignificant amount, total long-term debt by ($ ) million and total stockholders equity by $ million, in each case assuming no exercise of the underwriters option to purchase additional shares and assuming the initial public offering price of $ per share (the midpoint of the price range set forth on the front cover page of this prospectus) remained the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness. |
20
An investment in our common stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially adversely affected. Additional risks or uncertainties not currently known to us, or that we deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. In that case, the market price of our common stock could decline and you may lose all or a part of your investment.
Risks Related to Our Business and Industry
Various operating factors and general economic conditions affecting the food retail industry may affect our business and may adversely affect our business and operating results.
Our operations and financial performance are affected by economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the economy does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales. In addition, consumers perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. We are unable to predict if the economy will continue to improve or predict the rate at which the economy may improve or the direction of gasoline prices. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and operating results could be adversely affected.
Competition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations.
The food and drug retail industry is large and dynamic, characterized by intense competition among a collection of local, regional and national participants. We face strong competition from other food and/or drug retailers, supercenters, club stores, discount stores, online providers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, convenience stores and restaurants. Shifts in the competitive landscape, consumer preference or market share may have an adverse effect on our profitability and results of operations.
As a result of consumers growing desire to shop online, we also face increasing competition from both our existing competitors who have incorporated the internet as a direct-to-consumer channel and internet-only providers that sell grocery products. Although we have a growing internet presence and offer our customers the ability to shop online for both home delivery and in-store pick-up, there is no assurance that these online initiatives will be successful. In addition, these initiatives may have an adverse impact on our profitability as a result of lower gross profits or greater operating costs to compete.
Our ability to attract customers is dependent, in large part, upon a combination of channel preference, location, store conditions, quality, price, service and selection. In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract our customers to their stores by matching or exceeding what we offer. In recent years, many of our competitors have
21
added locations and adopted a multi-channel approach to marketing and advertising. Our responses to competitive pressures, such as additional promotions, increased advertising, additional capital investment and the development of our internet offerings, could adversely affect our profitability and cash flow. We cannot guarantee that our competitive response will succeed in increasing or maintaining our share of retail food sales.
An increasingly competitive industry and a low level of inflation in food prices have made it difficult for food retailers to achieve positive identical store sales growth on a consistent basis. Our competitors have attempted to maintain or grow their share of retail food sales through capital and price investment, increased promotional activity and new store growth, creating a more difficult environment to consistently increase year-over-year sales. Several of our primary competitors are larger than we are or have greater financial resources available to them and, therefore, may be able to devote greater resources to invest in price, promotional activity and new or remodeled stores in order to grow their share of retail food sales. Price investment by our competitors has also, from time to time, adversely affected our operating margins. In recent years, we have invested in price in order to remain competitive and generate sales growth; however, there can be no assurance this strategy will continue to be successful.
Because we face intense competition, we need to anticipate and respond to changing consumer preferences and demands more effectively than our competitors. We devote significant resources to differentiating our banners in the local markets where we operate and invest in loyalty programs to drive traffic. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. In addition, we strive to achieve and maintain favorable recognition of our own brands and offerings, and market these offerings to consumers and maintain and enhance a perception of value for consumers. While we seek to continuously respond to changing consumer preferences, there is no assurances that our responses will be successful.
Our continued success is dependent upon our ability to control operating expenses, including managing health care and pension costs stipulated by our collective bargaining agreements to effectively compete in the food retail industry. Several of our primary competitors are larger than we are, or are not subject to collective bargaining agreements, allowing them to more effectively leverage their fixed costs or more easily reduce operating expenses. Finally, we need to source, market and merchandise efficiently. Changes in our product mix also may negatively affect our profitability. Failure to accomplish our objectives could impair our ability to compete successfully and adversely affect our profitability.
Profit margins in the food retail industry are low. In order to increase or maintain our profit margins, we develop operating strategies to increase revenues, increase gross margins and reduce costs, such as new marketing programs, new advertising campaigns, productivity improvements, shrink reduction initiatives, distribution center efficiencies, manufacturing efficiencies, energy efficiency programs and other similar strategies. Our failure to achieve forecasted revenue growth, gross margin improvement or cost reductions could have a material adverse effect on our profitability and operating results.
Increased commodity prices may adversely impact our profitability.
Many of our own and sourced products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been volatile. Any increase in commodity prices may cause an increase in our input costs or the prices our vendors seek from us. Although we typically are able to pass on modest commodity price increases or mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part, if commodity prices increase materially. If we are forced to increase prices, our customers may reduce their purchases at our stores or trade down to less profitable products. Both may adversely impact our profitability as a result of reduced revenue or reduced margins.
22
Fuel prices and availability may adversely affect our results of operations.
We currently operate 378 fuel centers that are adjacent to many of our store locations. As a result, we sell a significant amount of gasoline. Increased regulation or significant increases in wholesale fuel costs could result in lower gross profit on fuel sales, and demand could be affected by retail price increases as well as by concerns about the effect of emissions on the environment. We are unable to predict future regulations, environmental effects, political unrest, acts of terrorism and other matters that may affect the cost and availability of fuel, and how our customers will react, which could adversely affect our results of operations.
Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.
Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 40.6% of our total sales in fiscal 2014. We rely on various suppliers and vendors to provide and deliver our perishable product inventory on a continuous basis. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences.
Severe weather and natural disasters may adversely affect our business.
Severe weather conditions such as hurricanes, earthquakes, floods, extended winter storms, heat waves or tornadoes, as well as other natural disasters, in areas in which we have stores or distribution centers or from which we source or obtain products may cause physical damage to our properties, closure of one or more of our stores, manufacturing facilities or distribution centers, lack of an adequate work force in a market, temporary disruption in the manufacture of products, temporary disruption in the supply of products, disruption in the transport of goods, delays in the delivery of goods to our distribution centers or stores, a reduction in customer traffic and a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops yielded by food producers may adversely affect the availability or cost of certain products within the grocery supply chain. Any of these factors may disrupt our business and adversely affect our business.
Threats or potential threats to security of food and drug safety, the occurrence of a widespread health epidemic or regulatory concerns in our supply chain may adversely affect our business.
Acts or threats, whether perceived or real, of war or terror or other criminal activity directed at the food or drug store industry or the transportation industry, whether or not directly involving our stores, could increase our operating costs and operations, or impact general consumer behavior and consumer spending. Other events that give rise to actual or potential food contamination, drug contamination or food-borne illnesses, or a widespread regional, national or global health epidemic, such as pandemic flu, could have an adverse effect on our operating results or disrupt production and delivery of our products, our ability to appropriately staff our stores and potentially cause customers to avoid public gathering places or otherwise change their shopping behaviors.
We source our products from vendors and suppliers and related networks across the globe who may be subject to regulatory actions or face criticism due to actual or perceived social injustices, including human trafficking, child labor or environmental, health and safety violations. A disruption in our supply chain due to any regulatory action or social injustice could have an adverse impact on our supply chain and ultimately our business, including potential harm to our reputation.
23
We could be affected if consumers lose confidence in the food supply chain or the quality and safety of our products.
We could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying our products or cause production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims, a loss of consumer confidence and product recalls, which could have a material adverse effect on our business.
Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.
We currently operate 1,698 in-store pharmacies, and, as a result, we are exposed to risks inherent in the packaging, dispensing, distribution, and disposal of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers, as well as increased regulatory risks and related costs. Although we maintain insurance, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.
We are subject to numerous federal and state regulations. Each of our in-store pharmacies must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the U.S. Drug Enforcement Administration (DEA), and, in some states, a separate controlled substance license must be obtained to dispense controlled substances. In addition, pharmacies selling controlled substances are required to maintain extensive records and often report information to state and federal agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations.
In 2014, Safeway received two subpoenas from the DEA concerning its record keeping, reporting and related practices associated with the loss or theft of controlled substances. We are cooperating with the DEA on these matters. Application of federal and state laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our pharmacy business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.
Integrating acquisitions may be time-consuming and create costs that could reduce our net income and cash flows.
Part of our strategy includes pursuing acquisitions that we believe will be accretive to our business. If we consummate an acquisition, the process of integrating the acquired business may be complex and time consuming, may be disruptive to the business and may cause an interruption of, or a distraction of managements attention from, the business as a result of a number of obstacles, including but not limited to:
| a failure of our due diligence process to identify significant risks or issues; |
| the loss of customers of the acquired company or our company; |
| negative impact on the brands or banners of the acquired company or our company; |
24
| a failure to maintain or improve the quality of customer service; |
| difficulties assimilating the operations and personnel of the acquired company; |
| our inability to retain key personnel of the acquired company; |
| the incurrence of unexpected expenses and working capital requirements; |
| our inability to achieve the financial and strategic goals, including synergies, for the combined businesses; and |
| difficulty in maintaining internal controls, procedures and policies. |
Any of the foregoing obstacles, or a combination of them, could decrease gross profit margins or increase selling, general and administrative expenses in absolute terms and/or as a percentage of net sales, which could in turn negatively impact our net income and cash flows.
We may not be able to consummate acquisitions in the future on terms acceptable to us, or at all. In addition, future acquisitions are accompanied by the risk that the obligations and liabilities of an acquired company may not be adequately reflected in the historical financial statements of that company and the risk that those historical financial statements may be based on assumptions which are incorrect or inconsistent with our assumptions or approach to accounting policies. Any of these material obligations, liabilities or incorrect or inconsistent assumptions could adversely impact our results of operations and financial condition.
A significant majority of our employees are unionized, and our relationship with unions, including labor disputes or work stoppages, could have an adverse impact on our operations and financial results.
As of February 28, 2015, approximately 174,000 of our employees were covered by collective bargaining agreements. During fiscal 2014, collective bargaining agreements covering approximately 50,000 employees were renegotiated. During fiscal 2015, collective bargaining agreements covering approximately 73,000 employees are scheduled to expire. In future negotiations with labor unions, we expect that health care, pension costs and/or contributions and wage costs, among other issues, will be important topics for negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations. As part of our collective bargaining agreements, we may need to fund additional pension contributions, which would negatively impact our free cash flow. Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs and an adverse impact on our financial results.
Increased pension expenses, contributions and surcharges may have an adverse impact on our financial results.
In connection with the Safeway acquisition, we assumed Safeways defined benefit retirement plans for substantially all Safeway employees not participating in multiemployer pension plans. We also assumed defined benefit retirement plans in connection with the United and NAI acquisitions. The funded status of these plans (the difference between the fair value of the plan assets and the projected benefit obligation) is a significant factor in determining annual pension expense and cash contributions to fund the plans. In recent years, cash contributions have declined due to improved market conditions and the impact of the pension funding stabilization legislation, which increased the discount rate used to determine pension funding. However, in the fourth quarter of fiscal 2014, under a settlement agreement with the PBGC in connection with the closing of the Safeway acquisition, Safeway contributed $260 million to its largest pension plan. As a result, we do not expect to make additional contributions to this plan until 2018.
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If financial markets do not continue to improve or if financial markets decline, increased pension expense and cash contributions may have an adverse impact on our financial results. Under the Employee Retirement Income Security Act of 1974, as amended (ERISA), the PBGC has the authority to petition a court to terminate an underfunded pension plan under limited circumstances. In the event that our defined benefit pension plans are terminated for any reason, we could be liable to the PBGC for the entire amount of the underfunding, as calculated by the PBGC based on its own assumptions (which likely would result in a larger obligation than that based on the actuarial assumptions used to fund such plans). Under ERISA and the Internal Revenue Code of 1986, as amended (the Code), the liability under these defined benefit plans is joint and several with all members of the control group, such that each member of the control group would be liable for the defined benefit plans of each other member of the control group.
In addition, we participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. Under the Pension Protection Act of 2006 (the PPA), contributions in addition to those made pursuant to a collective bargaining agreement may be required in limited circumstances in the form of a surcharge that is equal to 5% of the contributions due in the first year and 10% each year thereafter until the applicable bargaining agreement expires.
Pension expenses for multiemployer pension plans are recognized by us as contributions are made. Benefits generally are based on a fixed amount for each year of service. Our contributions to multiemployer plans were $33.1 million, $74.2 million and $351.7 million during fiscal 2012, fiscal 2013 and, on a pro forma basis, fiscal 2014, respectively. In fiscal 2015, we expect to contribute approximately $370.0 million to multiemployer pension plans, subject to collective bargaining conditions, exclusive of additional amounts we may be required to contribute relating to A&P.
Based on an assessment of the most recent information available, the company believes that most of the multiemployer plans to which it contributes are underfunded. The company is only one of a number of employers contributing to these plans, and the underfunding is not a direct obligation or liability of the company. However, the company has attempted, as of February 28, 2015, to estimate its share of the underfunding of multiemployer plans to which the company contributes, based on the ratio of its contributions to the total of all contributions to these plans in a year. As of February 28, 2015, our estimate of the companys share of the underfunding of multiemployer plans to which it contributes was $3.0 billion. The companys share of underfunding described above is an estimate and could change based on the results of collective bargaining efforts, investment returns on the assets held in the plans, actions taken by trustees who manage the plans benefit payments, interest rates, if the employers currently contributing to these plans cease participation, and requirements under the PPA, the Multiemployer Pension Reform Act of 2014 and applicable provisions of the Code.
Additionally, underfunding of the multiemployer plans means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we could trigger a substantial withdrawal liability. Any accrual for withdrawal liability will be recorded when a withdrawal is probable and can be reasonably estimated, in accordance with GAAP. All trades or businesses in the employers control group are jointly and severally liable for the employers withdrawal liability.
In 2013, Safeway sold or closed all stores in its Dominicks division, which resulted in withdrawal liabilities owed to the multiemployer pension plans in which it participated. Generally, withdrawal liability may be paid in installment payments subject to a 20-year payment cap, but may extend into perpetuity if a mass withdrawal from the plan occurs. In 2014, Safeway received demand letters from three of the plans. Safeway requested a review by the plans trustees of the demands made by the three plans. We are disputing the calculations used to determine the installment payment schedules set forth in these demand letters. At the end of fiscal 2014, we have a total withdrawal liability recorded
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of $219 million. It is reasonably possible the final amount of the withdrawal liability may be greater than or less than the amount recorded, and this difference could be material. Also, we have been advised by counsel to the UFCW Unions and Employers Midwest Pension Fund, one of the multiemployer pension plans in which Dominicks participated, that the plan may undergo a mass withdrawal that would encompass us. This may have the effect of increasing the amount of our withdrawal liability and the length of our payment schedule and the amount of such increase could be material.
On July 19, 2015, A&P filed a Chapter 11 petition in the United States Bankruptcy Court. Our company and A&P participate in four of the same multiemployer pension plans. The bankruptcy of A&P is expected to adversely affect the funding of these pension plans. Our subsidiary, Acme Markets, entered into a definitive agreement to purchase 76 A&P stores. We are purchasing some but not all of the A&P stores that have contribution obligations to the four plans. Our bid also includes some of the A&P stores that contribute to five plans to which we do not contribute. We estimate that our share of the unfunded actuarial accrued liability in the four plans to which we and A&P both contribute would increase by approximately $62 million for the stores we intend to acquire, and that our share of the unfunded actuarial accrued liability in the additional five plans would be approximately $25 million. If the A&P stores we do not purchase withdraw from the four plans in which we participate because no entity purchases them or the stores are sold to a buyer who is not obligated to contribute to the plans, our contingent liability for the underfunding of these plans will increase further because liability for the plans underfunding will be shifted to the remaining employers in each of the plans.
See Note 14Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.
Unfavorable changes in government regulation may have a material adverse effect on our business.
Our stores are subject to various federal, state, local and foreign laws, regulations and administrative practices. We must comply with numerous provisions regulating health and sanitation standards, food labeling, energy, environmental, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. We cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government laws, regulations or administrative procedures, when and if promulgated, or disparate federal, state, local and foreign regulatory schemes would have on our future business. In addition, regulatory changes could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on our business.
The minimum wage continues to increase and is subject to factors outside of our control.
A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the states minimum wage. The current California minimum wage was recently increased to $9.00 per hour, and will increase to $10.00 per hour effective January 1, 2016. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington was recently increased to $11.00 per hour, and will increase to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.
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The food retail industry is labor intensive. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of qualified persons in the workforce in the local markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics and health and other insurance costs. In the event of increasing wage rates, if we fail to increase our wages competitively, the quality of our workforce could decline, causing our customer service to suffer, while increasing wages for our employees could cause our profit margins to decrease. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.
Our historical financial statements may not be indicative of future performance.
In light of our acquisitions of NAI in March 2013, United in December 2013, and Safeway in January 2015, our operating results only reflect the impact of those acquisitions from those respective dates, and therefore comparisons with prior periods are difficult. As a result, our limited historical financial performance as owners of NAI, United and Safeway may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. Furthermore, given the nature of the assets acquired, our recent operating history has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations.
In addition, Safeway completed the distribution of its remaining shares of Blackhawk Network Holdings, Inc. (Blackhawk) in April 2014, the sale of the net assets of Canada Safeway Limited (CSL) in November 2013 and closed or sold its Dominicks stores in the fourth quarter of 2013. In addition, PDC was sold in December 2014, and Safeways 49% interest (the Casa Ley Interest) in Casa Ley, S.A. de C.V. (Casa Ley), a Mexico-based food and general merchandise retailer, is expected to be divested, with the net proceeds being paid to Safeways former stockholders.
As a result of the foregoing transactions and the implementation of new business initiatives and strategies, our historical results of operations are not necessarily indicative of our ongoing operations and the operating results to be expected in the future.
Our unaudited pro forma condensed consolidated pro forma financial information may not be representative of our future results.
The pro forma financial information included in this prospectus is constructed from our consolidated financial statements and the historical consolidated financial statements of Safeway prior to the Safeway acquisition and does not purport to be indicative of the financial information that will result from our future operations. In addition, the pro forma financial information presented in this prospectus is based in part on certain assumptions that we believe are reasonable. We cannot assure you that our assumptions will prove to be accurate over time. Accordingly, the pro forma financial information included in this prospectus does not purport to be indicative of what our results of operations and financial condition would have been had AB Acquisition and Safeway been a combined entity during the period presented, or what our results of operations and financial condition will be in the future. The challenges associated with integrating previously independent businesses makes evaluating our business and our future financial prospects difficult. Our potential for future business success and operating profitability must be considered in light of the risks, uncertainties, expenses and difficulties typically encountered by other companies following business combinations.
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Unfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect us. The storage and sale of petroleum products could cause disruptions and expose us to potentially significant liabilities.
Our operations, including our 378 fuel centers, are subject to various laws and regulations relating to the protection of the environment, including those governing the storage, management, disposal and cleanup of hazardous materials. Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, impose strict, and under certain circumstances joint and several, liability for costs to remediate a contaminated site, and also impose liability for damages to natural resources.
Federal regulations under the Clean Air Act require phase out of the production of ozone-depleting refrigerants that include hydrochlorofluorocarbons, the most common of which is R-22. By 2020, production of new R-22 refrigerant gas will be completely phased out; however, recovered and recycled/reclaimed R-22 will be available for servicing systems after 2020. The company is reducing its R-22 footprint while continuing to repair leaks, thus extending the useful lifespan of existing equipment. For fiscal 2015, $3.3 million has been budgeted for system retrofits, and we budgeted approximately $3 million in subsequent years. Leak repairs are part of the ongoing refrigeration maintenance budget. We may be required to spend additional capital above and beyond what is currently budgeted for system retrofits and leak repairs which could have a significant impact on our business, results of operations and financial condition.
Third-party claims in connection with releases of or exposure to hazardous materials relating to our current or former properties or third-party waste disposal sites can also arise. In addition, the presence of contamination at any of our properties could impair our ability to sell or lease the contaminated properties or to borrow money using any of these properties as collateral. The costs and liabilities associated with any such contamination could be substantial, and could have a material adverse effect on our business. Under current environmental laws, we may be held responsible for the remediation of environmental conditions regardless of whether we lease, sublease or own the stores or other facilities and regardless of whether such environmental conditions were created by us or a prior owner or tenant. In addition, the increased focus on climate change, waste management and other environmental issues may result in new environmental laws or regulations that negatively affect us directly or indirectly through increased costs on our suppliers. There can be no assurance that environmental contamination relating to prior, existing or future sites or other environmental changes will not adversely affect us through, for example, business interruption, cost of remediation or adverse publicity.
We are subject to, and may in the future be subject to, legal or other proceedings that could have a material adverse effect on us.
From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims, intellectual property claims and other proceedings arising in or outside of the ordinary course of business. In addition, there are an increasing number of cases being filed against companies generally, which contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings or changes in managements forecast assumptions or predictions, could have a material adverse impact on our results of operations.
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We may be adversely affected by risks related to our dependence on IT systems. Any future intrusion into these IT systems, even if we are compliant with industry security standards, could materially adversely affect our reputation, financial condition and operating results.
We have complex IT systems that are important to the success of our business operations and marketing initiatives. If we were to experience failures, breakdowns, substandard performance or other adverse events affecting these systems, or difficulties accessing the proprietary business data stored in these systems, or in maintaining, expanding or upgrading existing systems or implementing new systems, we could incur significant losses due to disruptions in our systems and business.
Our ability to effectively manage the day-to-day business of approximately 900 Albertsons and NAI stores depends significantly on IT services and systems provided by SuperValu pursuant to two transition services agreements (the SVU TSAs). It is intended that SuperValu will also provide IT services and systems for the stores Acme Markets acquires pursuant to the A&P Transaction. Prior to Albertsons and NAIs transition onto Safeways IT systems, the failure of SuperValus systems to operate effectively or to integrate with other systems, or unauthorized access into SuperValus systems, could cause us to incur significant losses due to disruptions in our systems and business.
We receive and store personal information in connection with our marketing and human resources organizations. The protection of our customer and employee data is critically important to us. Despite our considerable efforts to secure our respective computer networks, security could be compromised, confidential information could be misappropriated or system disruptions could occur, as has occurred with a number of other retailers. If we (or through SuperValu) experience a data security breach, we could be exposed to government enforcement actions, possible assessments from the card brands if credit card data was involved and potential litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop shopping at our stores altogether. The loss of confidence from a data security breach involving our employees could hurt our reputation and cause employee recruiting and retention challenges.
Improper activities by third parties, exploitation of encryption technology, new data-hacking tools and discoveries and other events or developments may result in future intrusions into or compromise of our networks, payment card terminals or other payment systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often cannot be recognized until launched against a target; accordingly, we may not be able to anticipate these frequently changing techniques or implement adequate preventive measures for all of them. Any unauthorized access into our customers sensitive information, or data belonging to us or our suppliers, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers confidence in us, and subject us to potential litigation, liability, fines and penalties and consent decrees, resulting in a possible material adverse impact on our financial condition and results of operations.
As merchants who accept debit and credit cards for payment, we are subject to the Payment Card Industry (PCI) Data Security Standard (PCI DSS) issued by the PCI Council. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical administrative and technical storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute (ANSI) data encryption standards and payment network security operating guidelines. In addition, we are required to comply with PCI DSS version 3.0 for our 2015 assessment, and are replacing or enhancing our in-store systems to comply with these standards. Failure to be PCI compliant or to meet other payment card standards may result in the imposition of financial penalties or the allocation by the card brands of the costs of fraudulent charges to us. Despite our efforts to comply with these or other payment card standards and other information security measures, we cannot be certain that all of our (or through SuperValu) IT systems will be able to prevent, contain or detect all
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cyber-attacks or intrusions from known malware or malware that may be developed in the future. To the extent that any disruption results in the loss, damage or misappropriation of information, we may be adversely affected by claims from customers, financial institutions, regulatory authorities, payment card associations and others. In addition, the cost of complying with stricter privacy and information security laws and standards, including PCI DSS version 3.0 and ANSI data encryption standards, could be significant.
Termination of the SuperValu transition services agreement or the failure of SuperValu to perform its obligations thereunder could adversely affect our business, financial results and financial condition.
Our ability to effectively monitor and control the operations of Albertsons and NAI depends to a large extent on the proper functioning of our IT and business support systems. In connection with our acquisition of NAI, Albertsons and NAI each entered into a comprehensive transition services agreement with SuperValu. Pursuant to the SVU TSAs, Albertsons and NAI each pay fees to SuperValu for certain services, including back office, administrative, IT, procurement, insurance and accounting services. The SVU TSAs limit the liability of SuperValu to instances in which SuperValu has committed gross negligence in regard to the provision of services or has breached its obligations under the SVU TSAs. The SVU TSAs terminated and replaced a transition services agreement providing for substantially similar services, which we had previously entered into with SuperValu in connection with our June 2006 acquisition of the Legacy Albertsons Stores. We plan to complete the transition of our Albertsons and NAI stores, distribution centers and systems onto Safeways IT systems by mid-2018, but may suffer disruptions as part of that process. In addition, we are dependent upon SuperValu to continue to provide these services to Albertsons and NAI until we transition Albertsons and NAI onto Safeways IT system and otherwise replace SuperValu as a service provider to Albertsons and NAI. In addition, we may depend on SuperValu to manage IT services and systems for additional stores we acquire, including the A&P stores we intend to acquire, until we are able to transition such stores onto Safeways IT system. The failure by SuperValu to perform its obligations under the SVU TSAs prior to Albertsons and NAIs transition onto Safeways IT systems and to other service providers (external or internal) could adversely affect our business, financial results, prospects and results of operations.
Furthermore, SuperValu manages and operates NAIs distribution center located in the Lancaster, Pennsylvania area. Under the Lancaster Agreement (as defined herein), SuperValu supplies NAIs Acme and Shaws stores from the distribution center under a shared costs arrangement. The failure by SuperValu to perform its obligations under the Lancaster Agreement could adversely affect our business, financial results and financial condition.
Our third-party IT services provider discovered unauthorized computer intrusions in 2014. These intrusions could adversely affect our brands and could discourage customers from shopping in our Albertsons and NAI stores.
Our third-party IT services provider for Albertsons and NAI, SuperValu, informed us in the summer of 2014 that it discovered unlawful intrusions to approximately 800 Shaws , Star Market , Acme , Jewel - Osco and Albertsons banner stores in an attempt to obtain payment card data. We have contacted the appropriate law enforcement authorities regarding these incidents and have coordinated with our merchant bank and payment processors to address the situation. We maintain insurance to address potential liabilities for cyber risks and, in the case of Albertsons and NAI, are self-insured for cyber risks for periods prior to August 11, 2014. We have also notified our various insurance carriers of these incidents and are providing further updates to the carriers as the investigation continues.
We believe the intrusions may have been an attempt to collect payment card data. The unlawful intrusions have given rise to putative class action litigation complaints against SuperValu and our company on behalf of customers. Certain state regulators have also made inquiries related to this
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issue. In addition, the payment card networks have required that forensic investigations be conducted of the intrusions. The investigator has completed its investigation into the earlier of the intrusions and has opined that at the time of the intrusion not all of the PCI DSS standards had been met. We believe it is probable that the payment card networks will make claims against us following the conclusion of the ongoing forensic investigation and associated analysis. These claims will likely include amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment card networks assert they or their issuing banks have incurred. If the payment card networks assert claims against us, we currently intend to dispute those claims and assert available defenses. At the present time, we cannot reasonably estimate a range of losses because to date no claims have yet been asserted and because significant factual and legal issues remain unresolved. We will continue to evaluate information as it becomes known and will record an estimate of loss when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
There can be no assurance that we will not suffer a similar criminal attack in the future or that unauthorized parties will not gain access to personal information of our customers. While we have recently implemented additional security software and hardware designed to provide additional protections against unauthorized intrusions, there can be no assurance that unauthorized individuals will not discover a means to circumvent our security. Computer intrusions could adversely affect our brands, have caused us to incur legal and other fees, may cause us to incur additional expenses for additional security measures and could discourage customers from shopping in our stores.
We use a combination of insurance and self-insurance to address potential liabilities for workers compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers liability, employment practices liability, pharmacy liability and employee health care benefits.
We use a combination of insurance and self-insurance to address potential liabilities for workers compensation, automobile and general liability, property risk (including earthquake and flood coverage), director and officers liability, employment practices liability, pharmacy liability and employee health care benefits and cyber and terrorism risks. We estimate the liabilities associated with the risks retained by us, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
The majority of our workers compensation liability is from claims occurring in California. California workers compensation has received intense scrutiny from the states politicians, insurers, employers and providers, as well as the public in general.
Our long-lived assets, primarily stores, are subject to periodic testing for impairment.
Our long-lived assets, primarily stores, are subject to periodic testing for impairment. Safeway incurred significant impairment charges to earnings in the past, including in Safeways fiscal years ended January 3, 2015, December 28, 2013 and December 29, 2012. Failure to achieve sufficient levels of cash flow at reporting units could result in impairment charges on long-lived assets.
Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products.
Our operations are dependent upon the availability of a significant amount of energy and fuel to manufacture, store, transport and sell products. Energy and fuel costs are influenced by international, political and economic circumstances and have experienced volatility over time. To reduce the impact
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of volatile energy costs, we have entered into contracts to purchase electricity and natural gas at fixed prices to satisfy a portion of our energy needs. We also manage our exposure to changes in energy prices utilized in the shipping process through the use of short-term diesel fuel derivative contracts. Volatility in fuel and energy costs that exceeds offsetting contractual arrangements could adversely affect our results of operations.
We may have liability under certain operating leases that were assigned to third parties.
We may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. In connection with FTC-mandated divestitures, we assigned leases with respect to 93 store properties to Haggen Holdings, LLC (Haggen). On August 14, 2015, Haggen announced that it intended to close 27 stores (including 20 leased stores) that we sold to it and that it may close or sell additional stores in the future. If Haggen defaults on its lease obligations relating to these stores, we could be responsible for the obligations of Haggen under the leases if the leases are not assigned to third parties. We do not know whether Haggen will default on its lease obligations to third parties or whether Haggen will be successful in selling the store leases to third parties. We also do not know what defenses may be available to us, including any loss mitigation obligations of Haggens landlords. As a result, we are currently unable to estimate our losses with respect to our contingent liability with respect to the Haggen leases.
With respect to the remainder of the leases we assigned to third parties, because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows. No liability has been recorded for assigned leases in our consolidated balance sheet related to these contingent obligations.
We may be unable to attract and retain key personnel, which could adversely impact our ability to successfully execute our business strategy.
The continued successful implementation of our business strategy depends in large part upon the ability and experience of members of our senior management. In addition, our performance is dependent on our ability to identify, hire, train, motivate and retain qualified management, technical, sales and marketing and retail personnel. We cannot assure you that we will be able to retain such personnel on acceptable terms or at all. If we lose the services of members of our senior management or are unable to continue to attract and retain the necessary personnel, we may not be able to successfully execute our business strategy, which could have an adverse effect on our business.
Risks Related to the Safeway and A&P Acquisitions and Integration
We may not be able to successfully integrate and combine Safeway with Albertsons and NAI, which could cause our business to suffer.
We may not be able to successfully integrate and combine the operations, management, personnel and technology of Safeway with the operations of Albertsons and NAI. If the integration is not managed successfully by our management, we may experience interruptions in our business activities, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation with consumers, all of which could have a material adverse effect on our business. We may also experience difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. In addition, the integration of our businesses will impose substantial demands on our management. There is no assurance that the benefits of consolidation will be achieved as a result of the Safeway acquisition or that our businesses will be successfully integrated in a timely manner.
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We may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.
Although we currently expect to achieve annual synergies from the Safeway acquisition of approximately $800 million by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or $690 million, net of estimated synergy-related asset sale proceeds, inclusion of the projected cost synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. Although we currently expect to achieve synergies from the Safeway acquisition of approximately $200 million during fiscal 2015, or $440 million on an annual run-rate basis, by the end of fiscal 2015, the inclusion of these expected cost synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2015, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.
We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeways IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.
We have incurred, and will continue to incur, significant integration costs in connection with Safeway.
We expect that we will continue to incur a number of costs associated with integrating the operations of Safeway, including associated one-time costs of approximately $1.1 billion, or $690 million, net of estimated synergy-related asset sale proceeds, to achieve expected synergies. The substantial majority of these costs will be non-recurring expenses resulting from the Safeway acquisition and will consist of our transition of Albertsons and NAI to Safeways IT systems, consolidation costs and employment-related costs. Anticipated synergies are expected to require approximately $300 million of one-time integration-related capital expenditures in fiscal 2015, in advance of anticipated sales of surplus assets. Additional unanticipated costs may be incurred in the integration of Safeways business and proceeds from the sale of surplus assets may be lower than anticipated. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
New business initiatives and strategies may be less successful than anticipated and could adversely affect our business.
The introduction, implementation, success and timing of new business initiatives and strategies, including, but not limited to, initiatives to increase revenue or reduce costs, may be less successful or may be different than anticipated, which could adversely affect our business.
We are currently party to appraisal proceedings related to our acquisition of Safeway which, if adversely determined, could subject us to significant liabilities.
In connection with the Safeway acquisition, five petitions for appraisal were filed in the Court of Chancery of the State of Delaware on behalf of all former holders of Safeway common stock who had demanded appraisal. The petitioners, who held approximately 17.7 million shares of Safeway common stock prior to its acquisition by the company, refused to accept the per share merger consideration that was paid to other stockholders in the acquisition and have instead requested an appraisal of the fair
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value of those shares pursuant to Section 262 of the Delaware General Corporation Law (the DGCL), requesting a determination that the per share merger consideration payable in the Safeway acquisition does not represent fair value for their shares. In May 2015, five of the seven petitioners dismissed their claims in exchange for additional merger consideration. The appraisal action is ongoing with respect to the two remaining petitioners, with trial on the merits set to commence in April 2016. These remaining petitioners, representing approximately 3.7 million shares of Safeway common stock, have previously accepted a tender offer of the cash portion of the merger consideration of $34.92 per share, which stops statutory interest from accruing on the amount of any recovery. A reserve for outstanding appraisal claims has been established by the company. If the remaining petitioners are successful, we could be required to pay those petitioners more for their stock than the per share merger consideration payable in the Safeway acquisition, which amount may be in excess of the liability that we have recorded.
We will be required to make payments under the contingent value rights within agreed periods even if the sale of the Casa Ley Interest is not completed within those periods.
If the Casa Ley Interest is not sold prior to January 30, 2018, we are obligated to make a cash payment to the holders of contingent value rights (the Casa Ley CVRs) in an amount equal to the fair market value of the unsold Casa Ley Interest, minus certain fees, expenses and assumed taxes that would have been deducted from the proceeds of a sale of the Casa Ley Interest. The sale process for the Casa Ley Interest will be conducted by a committee, or person controlled by a committee, as representative of the former Safeway stockholders, and we cannot control such sales process. If we are required to make a payment under the contingent value rights agreement with respect to the Casa Ley CVRs, our liquidity may be adversely affected.
The A&P Transaction may not be successfully completed on the terms set forth in the purchase agreement or at all.
The consummation of the A&P Transaction is subject to bankruptcy court approval and A&Ps solicitation of higher or otherwise better offers pursuant to specified bidding procedures and an auction process to be conducted under supervision of the bankruptcy court. A&P may terminate the A&P Transaction if the bankruptcy court approves an alternative transaction. A&P may also terminate the A&P Transaction prior to the entry of a sale order by the bankruptcy court to seek a restructuring transaction. If the A&P Transaction is not approved by the bankruptcy court or is otherwise terminated, the contemplated A&P Transaction will not be consummated. We may elect to revise the terms of our offer, including the purchase price, in order to avoid termination; however, we can provide no assurances that a revised offer would be accepted or approved.
In addition, the A&P Transaction is subject to customary closing conditions and regulatory approvals, including antitrust clearance by the FTC. If these conditions and approvals are not satisfied or waived, the A&P Transaction will not be consummated. Further, in certain circumstances, we or A&P may terminate the A&P Transaction without the other partys agreement and without completing the acquisition.
We have not provided any detailed financial information with respect to A&P or any pro forma information reflecting the A&P Transaction in this prospectus.
Pursuant to applicable Securities and Exchange Commission (SEC) rules, this prospectus does not include or incorporate by reference any detailed financial information with respect to the assets to be acquired pursuant to the A&P Transaction. In addition, in accordance with applicable SEC rules, we are not required to provide and have not provided any pro forma information giving effect to the A&P Transaction. A&Ps financial condition and results of operations for periods prior to its entry into bankruptcy are of limited utility in assessing the potential impact of the A&P Transaction on our financial condition because we are only purchasing certain assets and assuming certain liabilities of A&P.
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We will incur significant acquisition-related costs in connection with the A&P Transaction.
If the A&P Transaction is consummated, we expect to incur a number of costs associated with integrating the operations of the acquired A&P stores. We expect to spend approximately $170 million of one-time opening and transition costs and capital expenditures to remodel and remerchandise the stores and to invest in price and labor. The amount of expenditures required to improve store conditions and reposition the stores is greater on a per store basis than our previous acquisitions. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the acquired A&P stores may offset these costs over time, this net benefit may not be achieved in the near term, or at all.
We may not be able to achieve the full amount of synergies that are anticipated or achieve the synergies on the schedule anticipated from the A&P Transaction.
Although we currently expect to achieve annual synergies from the A&P Transaction of approximately $51 million by the end of fiscal 2019, inclusion of the projected cost synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2019, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.
We have identified various synergies including sourcing, distribution and IT. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from our estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies from the A&P Transaction.
Risks Relating to Our Indebtedness
Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. As of June 20, 2015 and after giving pro forma effect to this offering and the application of the use of the net proceeds, we would have had $ million of debt outstanding, and we would have been able to borrow an additional $ million under our revolving credit facilities.
Our substantial indebtedness could have important consequences to you. For example it could:
| adversely affect the market price of our common stock; |
| increase our vulnerability to general adverse economic and industry conditions; |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; |
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| place us at a competitive disadvantage compared to our competitors that have less debt; and |
| limit our ability to borrow additional funds. |
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In addition, we cannot assure you that we will be able to refinance any of our debt or that we will be able to refinance our debt on commercially reasonable terms. If we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:
| sales of assets; |
| sales of equity; or |
| negotiations with our lenders to restructure the applicable debt. |
Our debt instruments may restrict, or market or business conditions may limit, our ability to use some of our options.
Our debt instruments limit our flexibility in operating our business.
Our debt instruments contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries ability to, among other things:
| incur additional indebtedness or provide guarantees in respect of obligations of other persons, or issue disqualified or preferred stock; |
| pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments; |
| prepay, redeem or repurchase debt; |
| make loans, investments and capital expenditures; |
| sell or otherwise dispose of certain assets; |
| incur liens; |
| engage in sale and leaseback transactions; |
| restrict dividends, loans or asset transfers from our subsidiaries; |
| consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
| enter into a new or different line of business; and |
| enter into certain transactions with our affiliates. |
A breach of any of these covenants could result in a default under our debt instruments. In addition, any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions. In addition, the restrictive covenants in the revolving portion of our Senior Secured Credit Facilities (as defined herein) require us, in certain circumstances, to maintain a specific fixed charge coverage ratio. Our ability to meet that financial ratio can be affected by events beyond our control, and we cannot assure you that we will meet it. A breach of this covenant could result in a default under our Senior Secured Credit Facilities. Moreover, the occurrence of a default under our Senior Secured Credit Facilities could result in an event of default under our other indebtedness. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. See Description of Indebtedness.
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We may not have the ability to raise the funds necessary to finance the change of control offer required by the indentures governing the 2016 Safeway Notes, 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes and the ABS/Safeway Notes (each as defined herein and, collectively, the CoC Notes).
Upon the occurrence of certain kinds of change of control events, we will be required to offer to repurchase outstanding CoC Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the CoC Notes or that restrictions in our debt instruments will not allow such repurchases. Our failure to purchase the tendered notes would constitute an event of default under the indentures governing the CoC Notes which, in turn, would constitute a default under our Senior Secured Credit Facilities. In addition, the occurrence of a change of control would also constitute a default under our Senior Secured Credit Facilities. A default under our Senior Secured Credit Facilities would result in a default under the indenture if the lenders accelerate the debt under our Senior Secured Credit Facilities.
Moreover, our debt instruments restrict, and any future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control event. As a result, following a change of control event, we may not be able to repurchase the CoC Notes unless we first repay all indebtedness outstanding under our Senior Secured Credit Facilities and any of our other indebtedness that contains similar provisions, or obtain a waiver from the holders of such indebtedness to permit us to repurchase the CoC Notes. We may be unable to repay all of that indebtedness or obtain a waiver of that type. Any requirement to offer to repurchase the outstanding CoC Notes may therefore require us to refinance our other outstanding debt, which we may not be able to do on commercially reasonable terms, if at all. These repurchase requirements may also delay or make it more difficult for others to obtain control of us.
Substantially all of our assets are pledged as collateral under the ABS/Safeway ABL Facility, the NAI ABL Facility, the ABS/Safeway Term Loan Facilities and the NAI Term Loan Facilities (each as defined herein and, collectively, the Senior Secured Credit Facilities), the LC Facility (as defined herein), the Safeway Notes (as defined herein) and the ABS/Safeway Notes.
As of June 20, 2015, our total indebtedness was approximately $ billion, and after giving effect to this offering and the application of the use of the net proceeds, our total indebtedness as of June 20, 2015 would have been approximately $ billion on a pro forma basis, including $ million of senior secured indebtedness outstanding under our Senior Secured Credit Facilities, $ million outstanding under the LC Facility, $ million outstanding under the Safeway Notes, and $ million aggregate principal amount outstanding under the ABS/Safeway Notes. Substantially, all of our and our subsidiaries assets are pledged as collateral for these borrowings. As of June 20, 2015 and after giving pro forma effect to this offering and the application of the use of the net proceeds, our revolving credit facilities would have permitted additional borrowings of up to a maximum of $ million under the borrowing bases as of that date. If we are unable to repay all secured borrowings when due, whether at maturity or if declared due and payable following a default, the trustee or the lenders, as applicable, would have the right to proceed against the collateral pledged to the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Increases in interest rates and/or a downgrade of our credit ratings could negatively affect our financing costs and our ability to access capital.
We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future
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acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results.
We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.
Risks Related to This Offering and Owning Our Common Stock
There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity. If the stock price fluctuates after this offering, you could lose a significant part of your investment.
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling shares of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:
| the failure of securities analysts to cover our common stock after this offering, or changes in financial estimates by analysts; |
| changes in, or investors perception of, the food and drug retail industry; |
| the activities of competitors; |
| future sales of our common stock; |
| our quarterly or annual earnings or those of other companies in our industry; |
| the publics reaction to our press releases, our other public announcements and our filings with the SEC; |
| regulatory or legal developments in the United States; |
| litigation involving us, our industry, or both; |
| general economic conditions; and |
| other factors described elsewhere in these Risk Factors. |
As a result of these factors, you may not be able to resell your shares of our common stock at or above the initial offering price. In addition, the stock market often experiences extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
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The Cerberus-led Consortium controls us and may have conflicts of interest with other stockholders in the future.
After the completion of this offering, and assuming an offering of shares by us, the Cerberus-led Consortium will indirectly control approximately % of our common stock. As a result, the Cerberus-led Consortium will continue to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Eight of our 12 directors are either employees of, or advisors to, members of the Cerberus-led Consortium, as described under Management. The Cerberus-led Consortium, through Albertsons Investor and Kimco, will also have sufficient voting power to amend our organizational documents. The interests of the Cerberus-led Consortium may not coincide with the interests of other holders of our common stock. Additionally, Cerberus and the members of the Cerberus-led Consortium are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cerberus and the members of the Cerberus-led Consortium may also pursue, for its own members accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as the Cerberus-led Consortium continues to own a significant amount of the outstanding shares of our common stock through Albertsons Investor and Kimco, the Cerberus-led Consortium will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.
We will incur increased costs as a result of being a publicly traded company.
After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the stock market on which our common stock is traded. Being subject to these rules and regulations will result in additional legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place significant strain on management, systems and resources.
These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We are a controlled company within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Upon completion of this offering, Albertsons Investor, Kimco and Management Holdco, as a group, will control a majority of our outstanding common stock. As a result, we are a controlled company within the meaning of the NYSE rules. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including:
| the requirement that a majority of the board of directors consist of independent directors; |
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| the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
| the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
| the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. |
Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
We are currently not required to meet the standards required by Section 404 of the Sarbanes-Oxley Act (Section 404), and failure to meet and maintain effective internal control over financial reporting in accordance with Section 404 could have a material adverse effect on our business, financial condition and results of operations.
As a privately held company, we are not currently required to document or test our compliance with internal controls over financial reporting on a periodic basis in accordance with Section 404. We are in the process of addressing our internal control procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we are not in compliance with the applicable provisions of Section 404. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.
In addition, we may incur additional costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff.
Provisions in our charter documents, certain agreements governing our indebtedness, the Stockholders Agreement (as defined herein) and Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Provisions in our certificate of incorporation and, upon the completion of the IPO-Related Transactions, our bylaws, may discourage, delay or prevent a merger, acquisition or other change in control that some stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, possibly depressing the market price of our common stock.
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In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace members of our management team. Examples of such provisions are as follows:
| from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdcos respective rights under our certificate of incorporation (and such assignees or designees Affiliates) (of these entities, the entity that is the beneficial owner of the largest number of shares is referred to as the Designated Controlling Stockholder) ceases to own, in the aggregate, at least 50% of the then-outstanding shares of our common stock (the 50% Trigger Date), the authorized number of our directors may be increased or decreased only by the affirmative vote of two-thirds of the then-outstanding shares of our common stock or by resolution of our board of directors; |
| prior to the 50% Trigger Date, only our board of directors and the Designated Controlling Stockholder are expressly authorized to make, alter or repeal our bylaws and, from and after the 50% Trigger Date, our stockholders may only amend our bylaws with the approval of at least two-thirds of all of the outstanding shares of our capital stock entitled to vote; |
| from and after the 50% Trigger Date, the manner in which stockholders can remove directors from the board will be limited; |
| from and after the 50% Trigger Date, stockholder actions must be effected at a duly called stockholder meeting and actions by our stockholders by written consent will be prohibited; |
| from and after such date that Albertsons Investor, Kimco, Management Holdco and their respective Affiliates (or any person who is an express assignee or designee of Albertsons Investor, Kimco or Management Holdcos respective rights under our certificate of incorporation (and such assignees or designees Affiliates)) ceases to own, in the aggregate, at least 35% of the then-outstanding shares of our common stock (the 35% Trigger Date), advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors will be established; |
| limits on who may call stockholder meetings; |
| requirements on any stockholder (or group of stockholders acting in concert), other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, who seeks to transact business at a meeting or nominate directors for election to submit a list of derivative interests in any of our companys securities, including any short interests and synthetic equity interests held by such proposing stockholder; |
| requirements on any stockholder (or group of stockholders acting in concert) who seeks to nominate directors for election to submit a list of related party transactions with the proposed nominee(s) (as if such nominating person were a registrant pursuant to Item 404 of Regulation S-K, and the proposed nominee was an executive officer or director of the registrant); and |
| our board of directors is authorized to issue preferred stock without stockholder approval, which could be used to institute a poison pill that would work to dilute the stock ownership of a potential hostile acquiror, effectively preventing acquisitions that have not been approved by our board of directors. |
Our certificate of incorporation authorizes our board of directors to issue up to 30,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our board of directors at the time of issuance or fixed by resolution without further
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action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could delay, discourage, prevent, or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders control.
In addition, under the credit agreements governing our Senior Secured Credit Facilities, a change in control may lead the lenders to exercise remedies such as acceleration of the loan, termination of their obligations to fund additional advances and collection against the collateral securing such loans. Also, under the indentures governing the CoC Notes, a change of control may require us to offer to repurchase all of the CoC Notes for cash at a premium to the principal amount of the CoC Notes.
Furthermore, in connection with this offering, Albertsons Companies, Inc. will enter into the Stockholders Agreement with Albertsons Investor, Kimco and Management Holdco. Pursuant to the Stockholders Agreement, we will be required to appoint to our Board of Directors individuals designated by Albertsons Investor upon the closing of the IPO-Related Transactions. Pursuant to a limited liability company agreement entered into by the Cerberus-led Consortium, other than Kimco, and certain other individuals who agreed to co-invest with them through Albertsons Investor (the Albertsons Investor LLC Agreement), such appointees shall be selected by Albertsons Investors board of managers so long as Albertsons Companies, Inc. is a controlled company under the applicable rules of the NYSE. See Certain Relationships and Related Party TransactionsAlbertsons Investor Limited Liability Company Agreement.
The Stockholders Agreement will provide that, except as otherwise required by applicable law, from the date on which (a) Albertsons Companies, Inc. is no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Albertsons Investor will have the right to designate a number of individuals who satisfy the Director Requirements (as defined herein) equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board of directors unless the management board of Albertsons Investor otherwise agrees by the affirmative vote of 80% of the management board of Albertsons Investor; (b) a Holder (as defined herein) has beneficial ownership of at least 20% but less than 35% of our outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (c) a Holder has beneficial ownership of at least 15% but less than 20% of our outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number); and (d) a Holder has beneficial ownership of at least 10% but less than 15% of our outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements. The ability of Albertsons Investor or a Holder to appoint one or more directors could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our
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stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholders ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline.
If our Existing Owners sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decrease. The perception in the public market that our Existing Owners might sell shares of common stock could also create a perceived overhang and depress our market price. Upon completion of this offering, we will have shares of common stock outstanding of which shares will be held by our current stockholders. Prior to this offering, we and our Existing Owners will have agreed with the underwriters to a lock-up period, meaning that such parties may not, subject to certain exceptions, sell any of their existing shares of our common stock without the prior written consent of representatives of the underwriters for at least 180 days after the date of this prospectus. In addition, all of our Existing Owners will be subject to the holding period requirement of Rule 144 (Rule 144) under the Securities Act of 1933, as amended (the Securities Act), as described in Shares Eligible for Future Sale. When the lock-up agreements expire, these shares will become eligible for sale, in some cases subject to the requirements of Rule 144.
In addition, the Cerberus-led Consortium, through Albertsons Investor, will have substantial demand and incidental registration rights, as described in Certain Relationships and Related Party TransactionsStockholders Agreement. The market price for shares of our common stock may drop when the restrictions on resale by our Existing Owners lapse. We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our 2015 Equity and Incentive Award Plan (the 2015 Incentive Plan). Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover shares of our common stock. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, the market price of our common stock could decline.
The trading market for our common shares likely will be influenced by the research and reports that equity and debt research analysts publish about the industry, us and our business. The market price of our common stock could decline if one or more securities analysts downgrade our shares or if those analysts issue a sell recommendation or other unfavorable commentary or cease publishing reports about us or our business. If one or more of the analysts who elect to cover us downgrade our shares, the market price of our common stock would likely decline.
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Because we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We do not intend to pay dividends for the foreseeable future, and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. Our board of directors may, in its discretion, modify or repeal our dividend policy. The declaration and payment of dividends depends on various factors, including: our net income, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.
In addition, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. Our subsidiaries ability to pay dividends is restricted by agreements governing their debt instruments, and may be restricted by agreements governing any of our subsidiaries future indebtedness. Furthermore, our subsidiaries are permitted under the terms of their debt agreements to incur additional indebtedness that may severely restrict or prohibit the payment of dividends. See Description of Indebtedness.
Under the DGCL, our board of directors may not authorize payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution.
The initial public offering price of our common stock will be substantially higher than the tangible book value per share of our outstanding common stock. Assuming an initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, purchasers of our common stock will effectively incur dilution of $ per share in the net tangible book value of their purchased shares. The shares of our common stock owned by existing stockholders will receive a material increase in the net tangible book value per share. You may experience additional dilution if we issue common stock in the future. As a result of this dilution, you may receive significantly less than the full purchase price you paid for the shares in the event of a liquidation. See Dilution.
You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.
After this offering, we will have approximately million shares of common stock authorized but unissued under our certificate of incorporation. We will be authorized to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for consideration and on terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under our outstanding Phantom Unit awards granted under our Phantom Unit Plan (as defined herein) and for future awards that may be issued under our 2015 Incentive Plan. See Executive CompensationIncentive Plans and Shares Eligible for Future SaleIncentive Plans. Any common stock that we issue, including under our 2015 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.
45
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as may, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential, or continue or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
| the competitive nature of the industry in which we conduct our business; |
| general business and economic conditions, including the rate of inflation or deflation, consumer spending levels, population, employment and job growth and/or losses in our markets; |
| failure to successfully integrate Safeway or achieve anticipated synergies from the acquisition and integration of Safeway; |
| failure to consummate the A&P Transaction or to successfully integrate the acquired A&P stores or to achieve anticipated synergies from the integration of the acquired A&P stores; |
| pricing pressures and competitive factors, which could include pricing strategies, store openings, remodels or acquisitions by our competitors; |
| our ability to increase identical store sales, expand our own brands, maintain or improve operating margins, revenue and revenue growth rate, control or reduce costs, improve buying practices and control shrink; |
| labor costs, including benefit plan costs and severance payments, or labor disputes that may arise from time to time and work stoppages that could occur in areas where certain collective bargaining agreements have expired or are on indefinite extensions or are scheduled to expire in the near future; |
| disruptions in our manufacturing facilities or distribution centers operations, disruption of significant supplier relationships, or disruptions to our produce or product supply chains; |
| results of any ongoing litigation in which we are involved or any litigation in which we may become involved; |
| data security, or the failure of our (or through SuperValu) IT systems; |
| increased costs as the result of being a public company; |
| the effects of government regulation; |
| our ability to raise additional capital to finance the growth of our business; |
| our ability to service our debt obligations, and restrictions in our debt agreements; |
| financing sources; |
| dividends; and |
| plans for future growth and other business development activities. |
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business,
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financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section entitled Risk Factors and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
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We will receive net proceeds from the offering of approximately $ million (approximately $ million if the underwriters exercise their option to purchase additional shares in full), assuming that the common stock is offered at $ per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discount and our estimated expenses related to this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters option to purchase additional shares and no other change to the number of shares offered by us as set forth on the cover page of this prospectus.
We intend to use the net proceeds from this offering to repay certain existing debt, to pay fees and expenses related to this offering and for general corporate purposes.
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We do not intend to pay dividends for the foreseeable future. We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights to receive, dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our board of directors deems relevant. Our board of directors may decide, in its discretion, at any time, to modify or repeal the dividend policy or discontinue entirely the payment of dividends.
The ability of our board of directors to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our board of directors and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of our surplus, which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See Risk FactorsRisks Related to This Offering and Owning Our Common StockBecause we do not intend to pay dividends for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments. In addition, our subsidiaries will be subject to restrictions under agreements governing their debt instruments and general restrictions imposed on dividend payments under the jurisdiction of incorporation or organization of each subsidiary. See Risk FactorsRisks Related to Our IndebtednessOur debt instruments limit our flexibility in operating our business.
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IPO-RELATED TRANSACTIONS AND ORGANIZATIONAL STRUCTURE
Our business is currently conducted through our operating subsidiaries, which are wholly-owned by AB Acquisition. The equity interests of AB Acquisition immediately prior to the IPO-Related Transactions were owned (directly and indirectly) by our Existing Owners.
Albertsons Companies, Inc. is a newly formed entity, formed for the purpose of effecting the IPO-Related Transactions and this offering, and has engaged in no business or activities other than in connection with the IPO-Related Transactions and this offering.
In order to effectuate this offering, we expect to effect the following series of transactions prior to and/or concurrently with the closing of this offering, which will result in a reorganization of our business so that it is owned by Albertsons Companies, Inc. (the IPO-Related Transactions):
| our Existing Owners, other than Kimco and Management Holdco, will contribute all of their direct and indirect equity interests in AB Acquisition to Albertsons Investor, including their interests in NAI Group Holdings and Safeway Group Holdings; |
| Albertsons Investor, Kimco and Management Holdco will contribute all of their equity interests in AB Acquisition to Albertsons Companies, Inc. in exchange for common stock of Albertsons Companies, Inc.; |
| NAI Group Holdings, Safeway Group Holdings and other special purpose corporations owned by certain of the Sponsors through which they invested in AB Acquisition will be merged with and into Albertsons Companies, Inc., with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers; and |
| Certain stores owned by Albertsons LLC will be contributed to a newly formed subsidiary, Albertsons Stores Sub LLC, which subsidiary will be distributed to its ultimate owner AB Acquisition, AB Acquisition will transfer all of its equity interests in Albertsons Holdings LLC and NAI Holdings LLC to Albertsons Companies, Inc., and Albertsons Holdings LLC and NAI Holdings LLC will be merged with and into Albertsons Companies, Inc. with Albertsons Companies, Inc. remaining as the surviving corporation in the mergers. |
As a result of the IPO-Related Transactions and this offering, (i) Albertsons Companies, Inc., the issuer of common stock in this offering, will be a holding company with no material assets other than its ownership of AB Acquisition and its subsidiaries, (ii) an aggregate of , and shares of our common stock will be owned by Albertsons Investor, Kimco and Management Holdco, respectively, and such parties will enter the Stockholders Agreement with Albertsons Companies, Inc., (iii) our Existing Owners, other than Kimco and Management Holdco, will become holders of equity interests in our controlling stockholder, Albertsons Investor and (iv) the capital stock of Albertsons Companies, Inc. will consist of (y) common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and (z) undesignated and unissued preferred stock. See the section of this prospectus entitled Description of Capital Stock for additional information. Investors in this offering will only receive, and this prospectus only describes the offering of, shares of common stock of Albertsons Companies, Inc.
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The following charts summarize our ownership structure (i) prior to the IPO-Related Transactions and (ii) after giving effect to the IPO-Related Transactions and this offering (assuming no exercise of the underwriters option to purchase additional shares).
Ownership Structure Prior to the IPO-Related Transactions
Ownership Structure After Giving Effect to the IPO-Related Transactions
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The following table sets forth our cash and cash equivalents and capitalization as of June 20, 2015:
| on an actual basis; and |
| on a pro forma basis to reflect the IPO-Related Transactions and the completion of this offering and the application of the estimated net proceeds from this offering, as described in Use of Proceeds. |
The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with Selected Historical Financial Information of AB Acquisition and Managements Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of June 20, 2015 | ||||||||
Actual | Pro Forma(8) | |||||||
(dollars in millions) | ||||||||
Cash and cash equivalents |
$ | 989.3 | $ | |||||
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Debt, including current maturities, net of debt discounts and deferred financing costs(1) |
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ABS/Safeway ABL Facility(2) |
$ | 541.0 | $ | |||||
NAI ABL Facility(3) |
| |||||||
ABS/Safeway Term Loan Facilities |
6,084.3 | |||||||
NAI Term Loan Facility |
820.9 | |||||||
ABS/Safeway Notes |
584.4 | |||||||
Safeway Notes(4) |
1,453.4 | |||||||
NAI Notes(5) |
1,502.0 | |||||||
Capital leases |
963.1 | |||||||
Other notes payable, unsecured(6) |
167.0 | |||||||
Other debt(7) |
29.2 | |||||||
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Total Debt |
$ | 12,145.3 | $ | |||||
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Stockholders equity: |
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Common stock, $0.01 par value; no shares authorized, no shares issued and outstanding on an actual basis; shares authorized, shares issued and outstanding on a pro forma basis |
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Additional paid-in capital |
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Members investment |
1,904.2 | |||||||
Accumulated other comprehensive income |
52.9 | |||||||
Retained earnings |
106.9 | |||||||
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Total stockholders equity |
$ | 2,064.0 | $ | |||||
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Total capitalization |
$ | 14,209.3 | $ | |||||
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(1) | Debt discounts and deferred financing costs totaled $363.4 million and $183.3 million, respectively, as of June 20, 2015. |
(2) |
As of June 20, 2015, the ABS/Safeway ABL Facility provided for a $3,000.0 million revolving credit facility. As of June 20, 2015, the aggregate borrowing base on the credit facility was approximately $2,695.4 million, which was reduced by (i) $130.1 million of outstanding standby |
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letters of credit and (ii) an $541.0 million outstanding loan balance and $0.9 million of interest, resulting in a net borrowing base availability of approximately $2,023.4 million. See Description of IndebtednessABS/Safeway ABL Agreement. |
(3) | As of June 20, 2015, the NAI ABL Facility provided for a $1,000.0 million revolving credit facility. As of June 20, 2015, the aggregate borrowing base on the credit facility was approximately $830.0 million, which was reduced by $530.0 million of outstanding standby letters of credit and $3.4 million of accrued fees, resulting in a net borrowing base availability of approximately $296.5 million. See Description of IndebtednessNAI ABL Agreement. |
(4) | Consists of the 2016 Safeway Notes, 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes (each as defined herein). |
(5) | Consists of the NAI Medium-Term Notes, 2026 NAI Notes, 2029 NAI Notes, 2030 NAI Notes and 2031 NAI Notes (each as defined herein). |
(6) | Consists of unsecured build-to-suit PDC-related obligations. |
(7) | Consists of the ASC Notes (as defined herein) and mortgage notes payable. |
(8) | A $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) additional paid-in capital by $ , decrease (increase) long-term debt by $ and increase (decrease) total stockholders equity by $ , assuming no exercise of the underwriters option to purchase additional shares and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remained the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) additional paid-in capital by $ , decrease (increase) long-term debt by $ and increase (decrease) total stockholders equity by $ , assuming no exercise of the underwriters option to purchase additional shares and assuming the initial public offering price of $ per share (the midpoint of the price range set forth on the cover of this prospectus) remained the same and after deducting the underwriting discount and estimated offering expenses payable by us. The above assumes that any resulting change in net proceeds increases or decreases the amount used to repay indebtedness. |
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Purchasers of the common stock in this offering will suffer an immediate dilution in net tangible book value per share. Dilution is the amount by which the price paid by the purchasers of common stock in this offering will exceed the net tangible book value per share of common stock immediately after this offering.
Our historical net tangible book value at June 20, 2015 was $ million, or $ per share of common stock. Net tangible book value per share represents our tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of June 20, 2015.
After giving effect to the IPO-Related Transactions and the completion of this offering, assuming an initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, and the application of the net proceeds therefrom as described in this prospectus, our net tangible book value as of June 20, 2015 would have been $ million, or $ per share of common stock. This represents an immediate increase in net tangible book value to existing stockholders of $ per share of common stock and an immediate dilution to new investors of $ per share of common stock. The following table illustrates this per share dilution:
Assumed initial public offering price per share |
$ | |||
Historical net tangible book value per share as of June 20, 2015(1) |
$ | |||
Increase in net tangible book value per share attributable to investors in this offering |
$ | |||
Pro forma net tangible book value per share after this offering |
$ | |||
Dilution per share to new investors |
$ |
(1) | Based on the historical book value of the company as of June 20, 2015 divided by the number of shares of common stock expected to be issued in the IPO-Related Transactions but before giving effect to this offering. |
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase or decrease our net tangible book value by $ million, the net tangible book value per share of common stock after this offering by $ per share of common stock, and the dilution per share of common stock to new investors by $ per share of common stock, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus (assuming that the IPO-Related Transactions had taken place), remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us.
The following table summarizes, on the pro forma basis set forth above as of June 20, 2015, the difference between the total cash consideration paid and the average price per share paid by existing stockholders and the purchasers of common stock in this offering with respect to the number of shares of common stock purchased from us, before deducting estimated underwriting discounts, commissions and offering expenses payable by us.
Shares Purchased | Total Consideration |
Average Price
Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||
Existing stockholders |
$ | % | $ | |||||||||||||||
Purchasers of common stock in this offering |
$ | % | $ | |||||||||||||||
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Total |
100 | % | $ | 100 | % | $ | ||||||||||||
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A $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase or decrease total consideration
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paid by new investors and total consideration paid by all stockholders by $ million, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus (assuming that the IPO-Related Transactions had taken place), remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us from the number of shares set forth on the cover page of this prospectus would increase or decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $ million, assuming the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us.
The tables above are based on shares of common stock outstanding as of June 20, 2015 (assuming that the IPO-Related Transactions had taken place) and assume an initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus.
If the underwriters exercise their option to purchase additional shares from us, the following will occur:
| the pro forma percentage of shares of our common stock held by existing stockholders will decrease to approximately % of the total number of pro forma shares of our common stock outstanding after this offering; and |
| the pro forma number of shares of our common stock held by new public investors will increase to , or approximately % of the total pro forma number of shares of our common stock outstanding after this offering. |
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SELECTED HISTORICAL FINANCIAL INFORMATION OF AB ACQUISITION
The information below should be read along with Unaudited Pro Forma Condensed Consolidated Financial Information, Managements Discussion and Analysis of Financial Condition and Results of Operations of AB Acquisition, Business and the historical financial statements and accompanying notes included elsewhere in this prospectus. Our historical results set forth below are not necessarily indicative of results to be expected for any future period.
The selected consolidated financial information set forth below is derived from AB Acquisitions annual consolidated financial statements for the periods indicated below, including the consolidated balance sheets at February 28, 2015 and February 20, 2014 and the related consolidated statements of operations and comprehensive (loss) income and cash flows for the 53-week period ended February 28, 2015 and each of the 52-week periods ended February 20, 2014 and February 21, 2013 and notes thereto appearing elsewhere in this prospectus. The data for the first quarter of fiscal 2015 and the first quarter of fiscal 2014 is derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and which, in the opinion of management, include all adjustments necessary for a fair statement of the results of the applicable interim periods.
First Quarter |
Fiscal
2014(1) |
Fiscal
2013(2) |
Fiscal
2012 |
Fiscal
2011 |
Fiscal
2010 |
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(in millions) |
Fiscal 2015 | Fiscal 2014 | ||||||||||||||||||||||||||
Results of Operations |
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Net sales and other revenue |
$ | 18,051.0 | $ | 7,211.7 | $ | 27,198.6 | $ | 20,054.7 | $ | 3,712.0 | $ | 3,746.4 | $ | 3,676.6 | ||||||||||||||
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Gross profit |
$ | 4,918.2 | $ | 1,990.8 | $ | 7,502.8 | $ | 5,399.0 | $ | 937.7 | $ | 890.1 | $ | 877.1 | ||||||||||||||
Selling and administrative expenses |
4,821.3 | 1,958.9 | 8,152.2 | 5,874.1 | 899.0 | 860.2 | 849.9 | |||||||||||||||||||||
Bargain purchase gain |
| | | (2,005.7 | ) | | | | ||||||||||||||||||||
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Operating income (loss) |
96.9 | 31.9 | (649.4 | ) | 1,530.6 | 38.7 | 29.9 | 27.2 | ||||||||||||||||||||
Interest expense, net |
283.8 | 140.0 | 633.2 | 390.1 | 7.2 | 7.3 | 10.7 | |||||||||||||||||||||
Other (income) expense |
(4.6 | ) | 22.8 | 96.0 | | | | | ||||||||||||||||||||
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(Loss) income before income taxes |
(182.3 | ) | (130.9 | ) | (1,378.6 | ) | 1,140.5 | 31.5 | 22.6 | 16.5 | ||||||||||||||||||
Income tax (benefit) expense |
(29.0 | ) | (14.0 | ) | (153.4 | ) | (572.6 | ) | 1.7 | 1.5 | 1.3 | |||||||||||||||||
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(Loss) income from continuing operations, net of tax |
(153.3 | ) | (116.9 | ) | (1,225.2 | ) | 1,713.1 | 29.8 | 21.1 | 15.2 | ||||||||||||||||||
Income from discontinued operations, net of tax |
| | | 19.5 | 49.2 | 51.3 | 79.5 | |||||||||||||||||||||
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Net (loss) income |
$ | (153.3 | ) | $ | (116.9 | ) | $ | (1,225.2 | ) | $ | 1,732.6 | $ | 79.0 | $ | 72.4 | $ | 94.7 | |||||||||||
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Balance Sheet Data (at end of period) |
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Cash and equivalents |
$ | 989.3 | $ | 260.1 | $ | 1,125.8 | $ | 307.0 | $ | 37.0 | $ | 61.3 | $ | 80.3 | ||||||||||||||
Total assets |
24,469.4 | 9,062.4 | 25,761.8 | 9,359.0 | 586.1 | 612.5 | 649.0 | |||||||||||||||||||||
Total members equity (deficit) |
2,064.0 | 1,634.2 | 2,168.5 | 1,759.6 | (247.2 | ) | (276.1 | ) | (248.3 | ) | ||||||||||||||||||
Total debt, including capital leases |
12,145.3 | 3,622.7 | 12,569.0 | 3,694.2 | 120.2 | 136.7 | 119.1 |
(1) | Includes results from four weeks for the stores purchased in the Safeway acquisition on January 30, 2015. |
(2) | Includes results from 48 weeks for the stores purchased in the NAI acquisition on March 21, 2013 and eight weeks for the stores purchased in the United acquisition on December 29, 2013. |
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SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL INFORMATION OF SAFEWAY
You should read the information set forth below along with Unaudited Pro Forma Condensed Consolidated Financial Information, Supplemental Managements Discussion and Analysis of Results of Operations of Safeway and Safeways historical consolidated financial statements and related notes included elsewhere in this prospectus.
The supplemental selected historical financial information of Safeway set forth below has been derived from Safeways historical consolidated financial statements. Safeways historical consolidated financial statements as of January 3, 2015 and December 28, 2013 and for the fiscal years ended January 3, 2015, December 28, 2013 and December 29, 2012 have been included in this prospectus.
(in millions) |
Fiscal
2014 |
Fiscal
2013 |
Fiscal
2012 |
Fiscal
2011 |
Fiscal
2010 |
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Results of Operations |
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Net sales and other revenue |
$ | 36,330.2 | $ | 35,064.9 | $ | 35,161.5 | $ | 34,655.7 | $ | 33,011.3 | ||||||||||
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Gross profit |
$ | 9,682.0 | $ | 9,231.5 | $ | 9,229.1 | $ | 9,277.7 | $ | 9,261.1 | ||||||||||
Operating & administrative expense |
(9,147.5 | ) | (8,680.0 | ) | (8,593.7 | ) | (8,628.8 | ) | (8,508.4 | ) | ||||||||||
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Operating profit |
534.5 | 551.5 | 635.4 | 648.9 | 752.7 | |||||||||||||||
Interest expense |
(198.9 | ) | (273.0 | ) | (300.6 | ) | (268.1 | ) | (295.0 | ) | ||||||||||
Loss on extinguishment of debt |
(84.4 | ) | (10.1 | ) | | | | |||||||||||||
Loss on foreign currency translation |
(131.2 | ) | (57.4 | ) | | | | |||||||||||||
Other income, net |
45.0 | 40.6 | 27.4 | 17.2 | 17.0 | |||||||||||||||
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Income before income taxes |
165.0 | 251.6 | 362.2 | 398.0 | 474.7 | |||||||||||||||
Income taxes |
(61.8 | ) | (34.5 | ) | (113.0 | ) | (68.5 | ) | (162.7 | ) | ||||||||||
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Income from continuing operations, net of tax |
103.2 | 217.1 | 249.2 | 329.5 | 312.0 | |||||||||||||||
Income from discontinued operations, net of tax(1) |
9.3 | 3,305.1 | 348.9 | 188.7 | 278.6 | |||||||||||||||
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|
|||||||||||
Net income before allocation to noncontrolling interests |
112.5 | 3,522.2 | 598.1 | 518.2 | 590.6 | |||||||||||||||
Noncontrolling interests |
0.9 | (14.7 | ) | (1.6 | ) | (1.5 | ) | (0.8 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 113.4 | $ | 3,507.5 | $ | 596.5 | $ | 516.7 | $ | 589.8 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | See Note B to Safeways historical consolidated financial statements included elsewhere in this prospectus. |
57
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial information presents the unaudited pro forma condensed consolidated balance sheet as of June 20, 2015 and unaudited pro forma condensed consolidated statements of continuing operations for the 53 weeks ended February 28, 2015 (fiscal 2014) and the 16 weeks ended June 20, 2015 and June 12, 2014 based upon the consolidated historical financial statements of AB Acquisition and Safeway, after giving effect to the following transactions (collectively the Transactions):
| the Safeway acquisition, including the following related transactions: |
| the sale of PDC prior to the closing of the Safeway acquisition (in the case of fiscal 2014 and the 16 weeks ended June 12, 2014 only); and |
| the divestiture of certain stores required by the FTC that was a condition of closing the Safeway acquisition; |
| the IPO-Related Transactions; and |
| the issuance of shares of common stock in the initial public offering of Albertsons Companies, Inc. and the application of $ of the net proceeds from the sale of such shares (assuming the midpoint of the price range set forth on the cover page of this prospectus) to repay certain indebtedness as described in Use of Proceeds (the IPO Transactions). |
The Safeway acquisition closed on January 30, 2015, and, therefore, the fair value of the assets acquired and liabilities assumed are already included in AB Acquisitions historical condensed consolidated balance sheet as of June 20, 2015. The unaudited pro forma condensed consolidated balance sheet gives effect to the IPO-Related Transactions and IPO Transactions as if they had occurred on June 20, 2015. The unaudited pro forma condensed consolidated statement of continuing operations for fiscal 2014 and the 16 weeks ended June 12, 2014 gives effect to the Transactions as if they had been consummated on February 21, 2014, the first day of fiscal 2014. The unaudited pro forma condensed consolidated statement of continuing operations for the 16 weeks ended June 20, 2015 gives pro forma effect to the FTC divestitures, IPO-Related Transactions and IPO Transactions as if they had occurred on February 21, 2014.
AB Acquisitions historical financial and operating data for fiscal 2014 and the 16 weeks ended June 12, 2014 and the 16 weeks ended June 20, 2015 is derived from the financial data in its audited consolidated financial statements for fiscal 2014 and the unaudited condensed consolidated financial statements for the 16 weeks ended June 12, 2014 and the 16 weeks ended June 20, 2015, respectively. Safeway is included in the historical operating results of AB Acquisition for the 16 weeks ended June 20, 2015 and for the four-week period from January 31, 2015 through February 28, 2015. The adjusted fiscal 2014 historical financial information for Safeway for the 49 weeks ended January 30, 2015 is derived by adding the financial data from Safeways audited consolidated statement of income for the 53 weeks ended January 3, 2015 and Safeways unaudited condensed consolidated statement of income for the four weeks ended January 30, 2015, and subtracting Safeways unaudited condensed consolidated statement of income for the eight weeks ended February 22, 2014. The adjusted 16 weeks ended June 12, 2014 historical financial information for Safeway is derived by subtracting Safeways unaudited condensed consolidated statement of income for the eight weeks ended February 22, 2014 from Safeways unaudited condensed consolidated statement of income for the 24 weeks ended June 14, 2014.
The unaudited pro forma condensed consolidated financial information is prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated financial information includes adjustments that give effect to events that are directly attributable to the Transactions described above, are factually supportable and, with respect to our statement of
58
operations, are expected to have a continuing impact. The unaudited pro forma statement of continuing operations shows the impact on the consolidated statement of operations under the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations .
The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the Transactions had been completed as of the dates set forth above, nor is it indicative of the future results of the company. The unaudited pro forma condensed consolidated financial information also does not give effect to the potential impact of any anticipated synergies, operating efficiencies or cost savings that may result from the Safeway acquisition or any integration costs that do not have a continuing impact.
The unaudited pro forma condensed consolidated financial information should be read in conjunction with the consolidated financial statements of AB Acquisition and the consolidated financial statements of Safeway included elsewhere in this prospectus.
59
AB ACQUISITION LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
53 WEEKS ENDED FEBRUARY 28, 2015
(in millions except per share amounts)
AB
Acquisition LLC |
Safeway Inc. |
Period
Alignment(1) |
Pro Forma
Adjustments related to the Safeway Acquisition(2) |
Pro Forma
Adjustments for IPO-Related Transactions(3) |
Pro Forma
Adjustments for IPO Transactions(4) |
AB
Acquisition LLC Pro Forma |
||||||||||||||||||||||
53 Weeks
Ended February 28, 2015 |
53 Weeks
Ended January 3, 2015 |
53 Weeks
Ended February 28, 2015 |
||||||||||||||||||||||||||
Net sales and other revenue |
$ | 27,198.6 | $ | 36,330.2 | $ | (2,746.6 | ) | $ | (3,285.3 | ) 2(a) | $ | | $ | | $ | 57,496.9 | ||||||||||||
Cost of sales |
19,695.8 | 26,648.2 | (2,060.2 | ) | (2,283.3 | ) 2(a) | | | 42,013.5 | |||||||||||||||||||
13.0 | 2(b) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
7,502.8 | 9,682.0 | (686.4 | ) | (1,015.0 | ) | | | 15,483.4 | |||||||||||||||||||
Selling and administrative expenses |
8,152.2 | 9,147.5 | (609.3 | ) | (1,068.3 | ) 2(a) | | | 15,191.1 | |||||||||||||||||||
(431.0 | ) 2(c) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating (loss) income |
(649.4 | ) | 534.5 | (77.1 | ) | 484.3 | | | 292.3 | |||||||||||||||||||
Interest expense, net |
633.2 | 283.3 | (21.3 | ) | 43.4 | 2 (d) | | | 4(a) | 938.6 | ||||||||||||||||||
Other expense (income), net |
96.0 | 86.2 | (102.8 | ) | (98.1 | ) 2(e) | | | (18.7 | ) | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
(Loss) income from continuing operations before income taxes |
(1,378.6 | ) | 165.0 | 47.0 | 539.0 | | | (627.6 | ) | |||||||||||||||||||
Income tax (benefit) expense |
(153.4 | ) | 61.8 | 14.2 | (50.7 | ) 2(f) | (115.0 | ) 3(a) | | (243.1 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net (loss) income from continuing operations |
$ | (1,225.2 | ) | $ | 103.2 | $ | 32.8 | $ | 589.7 | $ | 115.0 | $ | | $ | (384.5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Pro forma loss per share, continuing operations |
||||||||||||||||||||||||||||
Basic and diluted |
4(b) | |||||||||||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||||||||||
Basic and diluted |
4(b) |
60
AB ACQUISITION LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
16 WEEKS ENDED JUNE 20, 2015
(in millions except per share amounts)
AB
Acquisition LLC |
Pro Forma
Adjustments related to the Safeway Acquisition(2) |
Pro Forma
Adjustments for IPO-Related Transactions(3) |
Pro Forma
Adjustments for IPO Transactions(4) |
AB
Acquisition LLC Pro Forma |
||||||||||||||||
16 Weeks
Ended June 20, 2015 |
16 Weeks
Ended June 20, 2015 |
|||||||||||||||||||
Net sales and other revenue |
$ | 18,051.0 | $ | (444.5 | ) 2(a) | $ | | $ | | $ | 17,606.5 | |||||||||
Cost of sales |
13,132.8 | (310.5 | ) 2(a) | | | 12,822.3 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
4,918.2 | (134.0 | ) | | | 4,784.2 | ||||||||||||||
Selling and administrative expenses |
4,821.3 | (110.9 | ) 2(a) | | | 4,710.4 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
96.9 | (23.1 | ) | | | 73.8 | ||||||||||||||
Interest expense, net |
283.8 | | | | 4(a) | 283.8 | ||||||||||||||
Other income (expense), net |
(4.6 | ) | | | | (4.6 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations before income taxes |
(182.3 | ) | (23.1 | ) | | | (205.4 | ) | ||||||||||||
Income tax benefit |
(29.0 | ) | (3.2 | ) 2(f) | (47.4 | ) 3(a) | | (79.6 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss from continuing operations |
$ | (153.3 | ) | $ | (19.9 | ) | $ | 47.4 | $ | | $ | (125.8 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Pro forma loss per share, continuing operations |
||||||||||||||||||||
Basic and diluted |
4(b) | |||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||
Basic and diluted |
4(b) |
61
AB ACQUISITION LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
16 WEEKS ENDED JUNE 12, 2014
(in millions except per share amounts)
AB
Acquisition LLC |
Safeway
Inc. |
Period
Alignment(1) |
Pro Forma
Adjustments related to the Safeway Acquisition(2) |
Pro Forma
Adjustments for IPO-Related Transactions(3) |
Pro Forma
Adjustments for IPO Transactions(4) |
AB
Acquisition LLC Pro Forma |
||||||||||||||||||||||
16 Weeks
Ended June 12, 2014 |
24 Weeks
Ended June 14, 2014 |
16 Weeks
Ended June 12, 2014 |
||||||||||||||||||||||||||
Net sales and other revenue |
$ | 7,211.7 | $ | 16,345.0 | $ | (5,358.5 | ) | $ | (978.0 | ) 2(a) | $ | | $ | | $ | 17,220.2 | ||||||||||||
Cost of sales |
5,220.9 | 12,096.2 | (3,944.4 | ) | (683.5 | ) 2(a) | | | 12,695.4 | |||||||||||||||||||
6.2 | 2(b) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
1,990.8 | 4,248.8 | (1,414.1 | ) | (300.7 | ) | | | 4,524.8 | |||||||||||||||||||
Selling and administrative expenses |
1,958.9 | 4,064.1 | (1,366.3 | ) | (245.6 | ) 2(a) | | | 4,425.1 | |||||||||||||||||||
14.0 | 2(c) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating income |
31.9 | 184.7 | (47.8 | ) | (69.1 | ) | | | 99.7 | |||||||||||||||||||
Interest expense, net |
140.0 | 103.1 | (34.3 | ) | 74.6 | 2(d) | | | 4(a) | 283.4 | ||||||||||||||||||
Other expense (income), net |
22.8 | 85.8 | (109.6 | ) | (22.8 | ) 2(e) | | | (23.8 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loss from continuing operations before income taxes |
(130.9 | ) | (4.2 | ) | 96.1 | (120.9 | ) | | | (159.9 | ) | |||||||||||||||||
Income tax benefit |
(14.0 | ) | (1.1 | ) | 33.6 | (56.8 | ) 2(f) | (23.6 | ) 3(a) | | (61.9 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net loss from continuing operations |
$ | (116.9 | ) | $ | (3.1 | ) | $ | 62.5 | $ | (64.1 | ) | $ | 23.6 | $ | | $ | (98.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Pro forma loss per share, continuing operations |
||||||||||||||||||||||||||||
Basic and diluted |
4 | (b) | ||||||||||||||||||||||||||
Pro forma weighted average shares outstanding |
||||||||||||||||||||||||||||
Basic and diluted |
4 | (b) |
62
AB ACQUISITION LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 20, 2015
(in millions)
AB Acquisition
LLC |
Pro Forma
Adjustments for IPO-Related Transactions(3) |
Pro Forma
Adjustments for IPO Transactions(4) |
AB
Acquisition LLC Pro Forma |
|||||||||||||
Assets |
||||||||||||||||
Current assets |
||||||||||||||||
Cash and cash equivalents |
$ | 989.3 | $ | | $ | | 4(h) | $ | 989.3 | |||||||
Receivables, net |
644.3 | | | 644.3 | ||||||||||||
Inventories, net |
4,185.1 | | | 4,185.1 | ||||||||||||
Other current assets |
549.8 | | | 549.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
6,368.5 | | | 6,368.5 | ||||||||||||
Property and equipment, net |
11,886.1 | | | 11,886.1 | ||||||||||||
Intangible assets, net |
4,093.0 | | | 4,093.0 | ||||||||||||
Goodwill |
1,028.6 | | | 1,028.6 | ||||||||||||
Other assets |
1,093.2 | | | 1,093.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TOTAL ASSETS |
$ | 24,469.4 | $ | | $ | | $ | 24,469.4 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities and Members/Stockholders Equity |
||||||||||||||||
Current liabilities |
||||||||||||||||
Accounts payable and accrued liabilities |
$ | 3,726.3 | $ | | $ | | $ | 3,726.3 | ||||||||
Current maturities of long-term debt and capitalized lease obligations |
246.4 | | | 4(d) | 246.4 | |||||||||||
Other current liabilities |
1,182.1 | | | 1,182.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
5,154.8 | | | 5,154.8 | ||||||||||||
Long-term debt and capitalized lease obligations |
11,898.9 | | | 4(c) | 11,898.9 | |||||||||||
| 4(e) | |||||||||||||||
Long-term tax liabilities |
1,714.9 | | | 1,714.9 | ||||||||||||
Other long-term liabilities |
3,636.8 | | | 3,636.8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TOTAL LIABILITIES |
22,405.4 | | | 22,405.4 | ||||||||||||
Commitments and contingencies |
||||||||||||||||
Members equity |
2,064.0 | | 3(b) | | 2,064.0 | |||||||||||
Stockholders equity |
| | 3(b) | | 4(f) | | ||||||||||
| 4(g) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TOTAL MEMBERS / STOCKHOLDERS EQUITY |
2,064.0 | | | 2,064.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TOTAL LIABILITIES AND MEMBERS/ STOCKHOLDERS EQUITY |
$ | 24,469.4 | $ | | $ | | $ | 24,469.4 | ||||||||
|
|
|
|
|
|
|
|
63
1. Basis of Presentation
The historical financial information of AB Acquisition and Safeway was derived from financial statements of the respective companies included elsewhere in this prospectus. The historical financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the Safeway acquisition, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed consolidated statement of continuing operations, expected to have a continuing impact on the consolidated results. Condensed consolidated statements of continuing operations data for the 16 weeks ended June 12, 2014 and June 20, 2015 and summary balance sheet data as of June 20, 2015 are derived from our unaudited condensed consolidated financial statements for the periods then ended also included elsewhere in this prospectus. Safeway is included in the historical operating results of AB Acquisition for the period from January 31, 2015 through June 20, 2015. The adjusted historical financial information for Safeway for the 49 weeks ended January 30, 2015 is derived by adding the financial data from Safeways audited consolidated statement of income for the 53 weeks ended January 3, 2015 and Safeways unaudited condensed consolidated statement of income for the four weeks ended January 30, 2015, and subtracting Safeways unaudited condensed consolidated statement of income for the eight weeks ended February 22, 2014. The adjusted historical Safeway financial information for the 16 weeks ended June 12, 2014 was derived from the Safeway pre-acquisition unaudited financial statements for the 24 weeks ended June 14, 2014 and subtracting Safeways unaudited condensed consolidated statement of income for the eight weeks ended February 22, 2014.
2. Pro Forma for Safeway Acquisition
The Safeway acquisition was accounted for in accordance with Accounting Standards Codification 805, Business Combinations , with AB Acquisition considered the acquirer of Safeway for accounting purposes. The Safeway acquisition closed on January 30, 2015, and, therefore, the fair value of the assets acquired and liabilities assumed are already included in AB Acquisitions historical condensed consolidated balance sheet as of June 20, 2015. The unaudited pro forma condensed consolidated statements of continuing operations reflects the adjustments as if the Safeway acquisition occurred on February 21, 2014, the first day of fiscal 2014 (collectively referred to as Pro Forma Adjustments for Safeway acquisition).
The Pro Forma Adjustments for Safeway acquisition consist of the following:
(a) | FTC divestiture |
In connection with the Safeway acquisition, Albertsons Holdings, together with Safeway, announced that they entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. Divestiture of these stores was required by the FTC as a condition of closing the Safeway acquisition and was contingent on the completion of the Safeway acquisition. The divestitures were completed by the end of the companys fiscal 2015 first quarter ended June 20, 2015. The pro forma adjustments reflect:
Fiscal 2014:
(i) | a reduction in Net sales and other revenue of $3,285.3 million and the related reductions in Cost of sales of $2,283.3 million; and |
(ii) | a decrease in Selling and administrative expenses of $1,068.3 million, which includes the $233.4 million impairment loss related to the divested stores. |
64
For the 16 weeks ended June 20, 2015:
(iii) | a reduction in Net sales and other revenue of $444.5 million and the related reductions in Cost of sales of $310.5 million; and |
(iv) | a decrease in Selling and administrative expenses of $110.9 million. |
For the 16 weeks ended June 12, 2014:
(v) | a reduction in Net sales and other revenue of $978.0 million and the related reductions in Cost of sales of $683.5 million; and |
(vi) | a decrease in Selling and administrative expense of $245.6 million. |
(b) | Cost of sales |
Adjustments have been included in the unaudited pro forma condensed consolidated statement of continuing operations to eliminate Safeways historical depreciation and amortization expense and record depreciation and amortization expense for the assets acquired related to the Safeway acquisition in Cost of sales:
Fiscal 2014 |
16 weeks ended
June 12, 2014 |
|||||||
(in millions) | (in millions) | |||||||
Elimination of Safeways historical depreciation and amortization expense |
$ | (97.0 | ) | $ | (29.7 | ) | ||
Depreciation and amortization expense for assets acquired |
110.0 | 35.9 | ||||||
|
|
|
|
|||||
Pro forma adjustment to increase Cost of sales |
$ | 13.0 | $ | 6.2 | ||||
|
|
|
|
65
(c) | Selling and administrative expenses |
The net pro forma adjustments to Selling and administrative expenses are comprised of the following items:
Fiscal 2014 |
16 weeks ended
June 12, 2014 |
|||||||
(in millions) | (in millions) | |||||||
Depreciation and amortization |
||||||||
Elimination of Safeways historical depreciation and amortization expense |
$ | (743.0 | ) | $ | (235.0 | ) | ||
Depreciation and amortization expense for acquired assets |
808.3 | 263.9 | ||||||
|
|
|
|
|||||
Adjustment to increase depreciation and amortization |
65.3 | 28.9 | ||||||
PDC properties |
||||||||
Elimination of Safeways gain on sale of PDC and the PDC properties historical depreciation expense, net |
$ | 17.3 | $ | (1.5 | ) | |||
Period alignment adjustment |
2.0 | 1.0 | ||||||
Rent expense for leaseback of PDC properties |
18.8 | 5.7 | ||||||
|
|
|
|
|||||
Total adjustments for PDC properties |
38.1 | 5.2 | ||||||
Other eliminations |
||||||||
Transaction and related costs 1 for the Safeway acquisition incurred by Albertsons. |
$ | (283.2 | ) | $ | (17.4 | ) | ||
Transaction costs related to the Safeway acquisition incurred by Safeway |
(59.6 | ) | (2.7 | ) | ||||
Non-employee equity-based compensation related to Safeway acquisition |
(191.6 | ) | | |||||
|
|
|
|
|||||
Total transaction costs elimination |
(534.4 | ) | (20.1 | ) | ||||
|
|
|
|
|||||
Pro forma adjustment to (decrease) increase Selling and administrative expenses |
$ | (431.0 | ) | $ | 14.0 | |||
|
|
|
|
1 | Includes direct acquisition costs and loss on the settlement of appraisal rights litigation related to the Safeway acquisition. |
66
(d) | Interest expense, net |
The net pro forma adjustment to Interest expense, net, is primarily driven by AB Acquisitions funding of the Safeway acquisition through borrowings of $4,859.0 million under the ABS/Safeway Term Loan Facilities, $850.0 million under the NAI Term Loan Facilities, net borrowings of $609.6 million under the 7.75% ABS/Safeway Notes and an additional $776.0 million under the ABS/Safeway ABL Facility, net of estimated payments on long-term borrowings related to the proceeds from the FTC divestitures. The interest expense included in the unaudited pro forma condensed consolidated financial information reflects a weighted average interest rate of 7.60% (including amortization of debt discounts and deferred financing costs).
Fiscal 2014 |
16 weeks ended
June 12, 2014 |
|||||||
(in millions) | (in millions) | |||||||
Interest expense, net |
||||||||
Interest expense related to outstanding debt and capital lease obligations of AB Acquisition |
$ | 938.6 | $ | 283.4 | ||||
Elimination of historical interest expense related to historical debt and capital lease obligations |
(916.5 | ) | (243.1 | ) | ||||
Period alignment adjustment |
21.3 | 34.3 | ||||||
|
|
|
|
|||||
Pro forma adjustment to increase Interest expense, net |
$ | 43.4 | $ | 74.6 | ||||
|
|
|
|
(e) | Other expense, net |
The net pro forma adjustment to Other expense, net primarily reflects the elimination of the loss on the deal-contingent interest rate swap (the Deal-Contingent Swap). Prior to the Safeway acquisition, the swap was treated as an economic hedge with changes in fair value recorded through earnings. Upon closing of the Safeway acquisition, the interest rate swap was designated as a cash flow hedge, with any subsequent changes in fair value being recorded through Accumulated other comprehensive income.
Fiscal 2014 |
16 weeks ended
June 12, 2014 |
|||||||
(in millions) | (in millions) | |||||||
Other expense, net |
||||||||
Elimination of loss on Deal-Contingent Swap |
$ | (96.1 | ) | $ | (22.8 | ) | ||
Elimination of PDC properties historical Other expense |
(2.0 | ) | | |||||
|
|
|
|
|||||
Pro forma adjustment to decrease Other expense, net |
$ | (98.1 | ) | $ | (22.8 | ) | ||
|
|
|
|
(f) | Income tax (benefit) expense |
The unaudited pro forma condensed consolidated income tax (benefit) expense has been adjusted for the tax effect of the pro forma adjustments to income before income taxes by applying a blended federal and state statutory tax rate of 39.6% for Safeway.
3. Pro Forma Adjustments for IPO-Related Transactions
Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations
(a) |
As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and as a result all of our operations will be taxable as part of a consolidated group for federal income tax purposes. The pro forma adjustment to Income tax (benefit) expense is derived by applying |
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a combined federal and state statutory tax rate of 38.7% to the pro forma pre-tax earnings of the company, which assumes that all of the AB Acquisition entities are taxable as a group for federal and state income tax purposes effective February 21, 2014. |
Unaudited Pro Forma Condensed Consolidated Balance Sheet
(b) | As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation. The pro forma adjustments to members equity and stockholders equity represent the creation of share capital, paid in capital and retained earnings upon the corporate reorganization and the elimination of the historical membership equity. |
4. Pro Forma Adjustments for IPO Transactions
Unaudited Pro Forma Condensed Consolidated Statement of Continuing Operations
(a) | The pro forma adjustment to Interest expense, net represents the decrease to pro forma interest expense related to the application of $ million of the net proceeds to us from the sale of such shares to repay certain indebtedness as described in Use of Proceeds as if these events had occurred on February 21, 2014, the first day of fiscal 2014. The pro forma adjustments are based on an effective interest rate of %. |
(b) | Pro forma Net loss per weighted average basic and diluted shares outstanding gives effect to (i) the exchange of all our outstanding units into shares of our common stock as part of the IPO-Related Transactions and (ii) the issuance of shares of common stock in this offering to fund the debt repayment discussed above. The exchange and issuance of shares in this offering are calculated based on an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover of this prospectus) after deducting underwriting discounts and commissions and estimated aggregate offering expenses payable by us. |
No adjustment has been made to the unaudited pro forma condensed consolidated statement of continuing operations to reflect the estimated $ million loss on early extinguishment of debt, as this amount is a non-recurring charge incurred as a result of the repayment of certain debts.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
The unaudited pro forma condensed consolidated balance sheet of AB Acquisition reflects the Transactions, including the pro forma effects of the issuance of shares of common stock and the application of $ million of the net proceeds from the sale of such shares to repay certain indebtedness as described in Use of Proceeds (excluding the remaining shares of common stock being issued in this offering) as if these events had occurred on June 20, 2015, as follows:
(c) | The pro forma adjustment to long-term debt is the $ of deferred financing costs written off in connection with the repayment of certain existing debt. |
(d) | The pro forma adjustment to Current maturities of long-term debt and capitalized lease obligations represents repayments of the current portion of certain debts outstanding with proceeds from this offering. |
(e) | The pro forma adjustment to Long-term debt and capitalized lease obligations represents repayments of the long-term portion of certain debts outstanding with proceeds from this offering. |
(f) | The pro forma adjustments to stockholders equity represent (i) the issuance of shares of common stock in this offering to fund the debt repayments discussed above and (ii) the deduction of the estimated underwriting discounts and commissions and estimated offering expenses. |
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(g) | The pro forma adjustment to stockholders equity represents the impact to retained earnings for the loss on early extinguishment of debt incurred as a result of the debt repayments. |
(h) | The pro forma adjustment to cash represents the remaining net proceeds from the IPO after the repayment of debt described above. |
The following schedules represent the long-term debt being repaid with the net proceeds from this offering and, on a pro forma basis, the amount of scheduled repayments remaining under the applicable debt instruments, including the scheduled maturities of such debt instruments:
Debt Instrument |
Amount
(in millions) |
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Senior Secured Credit Facilities |
$ | |||
Senior secured notes |
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Total debt repayments |
$ | |||
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Debt Instrument (in millions) |
2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | |||||||||||||||||||||
Senior Secured Credit Facilities |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Senior secured notes |
| | | | | | | |||||||||||||||||||||
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Total scheduled debt repayments |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AB ACQUISITION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Historical Financial Information of AB Acquisition, Unaudited Pro Forma Condensed Consolidated Financial Information and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in the Risk Factors section of this prospectus. Our actual results may differ materially from those contained in any forward-looking statements.
Our last three fiscal years consisted of the 53-week period ended February 28, 2015, the 52-week period ended February 20, 2014 and the 52-week period ended February 21, 2013. Our first fiscal quarter consists of 16 weeks. Our fiscal 2014 results include four weeks of Safeways financial results from January 31, 2015 through February 28, 2015. Comparability is affected by income and expense items that vary significantly between and among the periods, including as a result of our acquisition of Safeway during the fourth quarter of fiscal 2014, the acquisition of NAI in fiscal 2013 and an extra week in fiscal 2014.
Business Overview
We are one of the largest food and drug retailers in the United States, with strong local presence and national scale. Over the past three years, we have completed a series of acquisitions that has significantly increased our portfolio of stores. We operated 2,205, 2,382, 1,075 and 192 stores as of June 20, 2015, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. In addition, as of June 20, 2015, we operated 378 adjacent fuel centers, 30 dedicated distribution centers and 21 manufacturing facilities. Our operations are predominantly located in the Western, Southern, Midwest, Northeast, and Mid-Atlantic regions of the United States under the banners Albertsons , Safeway , Jewel-Osco , Vons , Shaws , Star Market , Acme , Tom Thumb , Pavilions , Carrs , Randalls , United Supermarkets , Market Street , Amigos , United Express and Sav - On and are reported in a single reportable segment.
Our operations and financial performance are affected by U.S. economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the current economic situation does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales growth. In addition, consumers perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. We are unable to predict if the economy will continue to improve or predict the rate at which the economy may improve or the direction of gasoline prices. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and results of operations could be adversely affected.
We currently expect to achieve approximately $800 million of annual synergies by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or $690 million, net of estimated synergy-related asset sale proceeds. Inclusion of the projected cost synergies in this prospectus should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018, or at all. In addition, although we currently expect to achieve synergies from the Safeway acquisition of approximately $200 million during fiscal 2015, or $440 million on an
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annual run-rate basis, by the end of fiscal 2015, the inclusion of these expected cost synergy targets in this prospectus should not be viewed as a representation that we will in fact achieve these synergies by the end of fiscal 2015, or at all. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material.
We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NAI onto Safeways IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.
Total debt, including both the current and long-term portions of capital lease obligations, increased to $12.6 billion as of the end of fiscal 2014. The increase in fiscal 2014 was primarily the result of the financing for the Safeway acquisition and the assumption of Safeway debt. Our substantial indebtedness could have important consequences for you. For example it could: adversely affect the market price of our common stock; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds. See Debt Management. We have exposure to future interest rates based on the variable rate debt under our credit facilities and to the extent we raise additional debt in the capital markets to meet maturing debt obligations, to fund our capital expenditures and working capital needs and to finance future acquisitions. Daily working capital requirements are typically financed with operational cash flow and through the use of various committed lines of credit. The interest rate on these borrowing arrangements is generally determined from the inter-bank offering rate at the borrowing date plus a pre-set margin. Although we employ risk management techniques to hedge against interest rate volatility, significant and sustained increases in market interest rates could materially increase our financing costs and negatively impact our reported results. We rely on access to bank and capital markets as sources of liquidity for cash requirements not satisfied by cash flows from operations. A downgrade in our credit ratings from the internationally recognized credit rating agencies could negatively affect our ability to access the bank and capital markets, especially in a time of uncertainty in either of those markets. A rating downgrade could also impact our ability to grow our business by substantially increasing the cost of, or limiting access to, capital.
We employed a diverse workforce of approximately 254,000, 265,000, 123,000 and 19,000 associates as of June 20, 2015, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. As of February 28, 2015, approximately 174,000 of our employees were covered by collective bargaining agreements. During fiscal 2015, collective bargaining agreements covering approximately 73,000 employees are scheduled to expire. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could increase our operating costs and disrupt our operations. A considerable number of our employees are paid at rates related to the federal minimum wage. Any further increases in the federal minimum wage or the enactment of state or local minimum wage increases could also increase our labor costs, which may adversely affect our results of operations and financial condition.
We participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective
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bargaining agreements. In fiscal 2015, we expect to contribute approximately $370.0 million to multiemployer pension plans, subject to collective bargaining conditions, exclusive of additional amounts we may be required to contribute relating to A&P.
Safeway Acquisition
On January 30, 2015, the company completed its acquisition of Safeway by acquiring all of the outstanding shares of Safeway for cash consideration of $34.92 per share or $8,263.5 million and issuing contingent value rights with an estimated fair value of $1.03 and $0.05 per share relating to Safeways 49% interest in Casa Ley and deferred considerations related to Safeways previous sale of the PDC assets, respectively, for an aggregate fair value of $270.9 million. At the time of the Safeway acquisition, Safeway operated 1,325 retail food stores under the banners Safeway , Vons , Tom Thumb , Pavilions , Randalls and Carrs located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, and the Mid-Atlantic region. In addition, at the time of the Safeway acquisition, Safeway had 353 fuel centers, 15 distribution centers and 19 manufacturing facilities.
As a condition to approving the Safeway acquisition, the FTC required the sale of 111 Albertsons stores and 57 Safeway stores. Haggen purchased 146 stores in Arizona, California, Nevada, Oregon and Washington; Associated Wholesale Grocers purchased 12 stores in Texas; Associated Food Stores purchased eight stores in Montana and Wyoming; and SuperValu purchased two stores in Washington. The aggregate sales price of these stores was $525.8 million, including the book value of inventory. The company recorded an impairment loss on the sale of the 111 Albertsons banner stores during the fourth quarter of fiscal 2014. The company recorded the assets and liabilities associated with the 57 Safeway stores at fair value less costs to sell as part of its accounting for the Safeway acquisition. The transfer of these stores to the respective buyers commenced following the closing of the Safeway acquisition and was completed in the first quarter of fiscal 2015 in accordance with the asset purchase agreements. Haggen has withheld payment of approximately $41 million due for purchased inventory at 38 stores and has announced its intention to close or sell 27 of the acquired stores. See Risks Related to Our Business and IndustryWe may have liability under certain operating leases that were assigned to third parties.
NAI Acquisition
On March 21, 2013, the company acquired all of the issued and outstanding shares of NAI from SuperValu pursuant to a stock purchase agreement for a total purchase consideration of $253.6 million, including $69.9 million of working capital adjustments, and assumed debt and capital lease obligations with a carrying value prior to the acquisition date of $3.2 billion. The purchase consideration was primarily cash and a short-term payable that was fully paid as of February 20, 2014. At the time of the NAI acquisition, NAI operated 871 retail food stores under its Jewel-Osco , ACME , Shaws , Star Market and Albertsons banners, primarily located in the Northeast, Midwest, Mid-Atlantic and Western regions of the United States. In addition, we acquired NAIs 10 distribution centers.
United Acquisition
On December 29, 2013, we acquired United Supermarkets for $362.1 million in cash, expanding our presence in North and West Texas, in a transaction that offered significant synergies and added a differentiated upscale store format, Market Street, to the Albertsons portfolio. At the time of the United acquisition, United operated 51 traditional, specialty and Hispanic retail food stores under its United Supermarkets , Market Street and Amigos banners, seven convenience stores and 26 fuel centers under its United Express banner and three distribution centers. United is located in 30 markets across North and West Texas.
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The following table shows stores operated, acquired, opened, divested and closed during the periods presented:
First
Quarter Fiscal 2015 |
Fiscal
2014(1) |
Fiscal
2013(2) |
Fiscal
2012 |
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Stores, beginning of period |
2,382 | 1,075 | 192 | 205 | ||||||||||||
Acquired |
| 1,330 | 926 | | ||||||||||||
Divested |
(153 | ) | (15 | ) | | | ||||||||||
Opened |
3 | 4 | 1 | | ||||||||||||
Closed |
(27 | ) | (12 | ) | (44 | ) | (13 | ) | ||||||||
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Stores, end of period |
2,205 | 2,382 | 1,075 | 192 | ||||||||||||
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(1) | Primarily includes the 1,325 stores acquired through the Safeway acquisition on January 30, 2015. |
(2) | Stores acquired during this period include 871 stores acquired through the NAI acquisition on March 21, 2013, four stores acquired from Vons REIT, Inc. on October 10, 2013, and 51 stores acquired through the United acquisition on December 29, 2013. |
Our Strategy
Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and free cash flow, through execution of the following strategies:
Continue to Drive Identical Store Sales Growth . Consistent with our operating playbook, we plan to deliver identical store sales growth by implementing the following initiatives:
| Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products . We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth. |
| Expanding Our Own Brand Offerings . We continue to drive sales growth and profitability by extending our own brand offering across our banners, including high-quality and recognizable brands such as O Organics, Open Nature , Eating Right and Lucerne . |
| Leveraging Our Effective and Scalable Loyalty Programs . We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U , MyMixx and fuel-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, and through the expansion of our online and home delivery options. |
| Capitalizing on Demand for Health and Wellness Services . We intend to leverage our portfolio of pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to patients. We believe that these efforts will drive sales growth and generate customer loyalty. |
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| Continuously Evaluating and Upgrading Our Store Portfolio . We plan to pursue a disciplined capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. |
| Driving Innovation . We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We will also seek to build new, and enhance existing, customer relationships through our digital capabilities. |
| Sharing Best Practices Across Divisions . Our division leaders collaborate closely to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons fresh fruit and vegetables cut in-store and a broader assortment and new fixtures for our wine and floral shops, implementing Safeways successful strategy across many of our banners. |
We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under BusinessOur Industry, will continue to drive identical store sales growth.
Following the NAI acquisition, we implemented our operating playbook focused on decentralizing operations, improving the overall customer and store experience, expanding and upgrading fresh food offerings, increasing store-level accountability and selected investment in price. The SVU Albertsons Stores were averaging negative 4.8% identical store sales in fiscal 2012 (prior to their acquisition). The SVU Albertsons Stores averaged positive 5.7% identical store sales during the final 24 weeks of fiscal 2013, with momentum continuing into fiscal 2014 with positive 8.7%, 7.5%, 8.0% and 8.5% identical store sales growth in the first, second, third and fourth quarter of fiscal 2014, respectively. The NAI Stores were averaging negative 4.8% identical store sales, compared to positive 7.7% identical store sales during the final 24 weeks of fiscal 2013 with momentum continuing into fiscal 2014 with positive 12.2%, 11.9%, 8.5% and 3.6% identical store sales growth in the first, second, third and fourth quarters of fiscal 2014, respectively.
Enhance Our Operating Margin . Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. In addition, we maintain a disciplined approach to expense management and budgeting.
Implement Our Synergy Realization Plan . We are currently executing on an annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $1.1 billion, or $690 million (net of estimated synergy-related asset sale proceeds). Anticipated synergies are expected to require approximately $300 million of one-time integration-related capital expenditures in fiscal 2015, in advance of anticipated sales of surplus assets. Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. Over time, Safeways information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons , Acme , Jewel-Osco , Shaws and Star Market stores with SuperValu on a store-by-store basis. We anticipate extending the expansive and high-quality own brand program developed at Safeway across all of our banners. We believe our increased scale will optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and
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reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs and leverage our combined scale for volume discounts on branded and generic drugs. We expect to achieve synergies from the Safeway acquisition of approximately $200 million in fiscal 2015, or $440 million on an annual run rate basis, by the end of fiscal 2015, principally from corporate and division overhead savings, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of achieving our target.
Selectively Grow Our Store Base Organically and Through Acquisition . We intend to grow our store base organically through disciplined investment in new stores. On July 19, 2015, we entered into an agreement to acquire 76 stores from A&P for our Acme banner. We believe our healthy balance sheet and decentralized structure also provide us with strategic flexibility and a strong platform to make further acquisitions. We evaluate strategic acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe selected acquisitions and our successful track record of integration and synergy delivery provide us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and free cash flow.
Results of Operations
The following discussion sets forth certain information and comparisons regarding the components of our consolidated statements of operations for the 16 weeks ended June 20, 2015, the 16 weeks ended June 12, 2014 and fiscal 2014, fiscal 2013 and fiscal 2012.
Comparison of 16 Weeks Ended June 20, 2015 to 16 Weeks Ended June 12, 2014:
The following table and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 16 weeks ended June 20, 2015 (first quarter of fiscal 2015) and June 12, 2014 (first quarter of fiscal 2014). As of the end of the first quarter of fiscal 2015 and the first quarter of fiscal 2014, we operated 2,205 and 1,076 stores, respectively.
First Quarter Ended | ||||||||||||||||
(Dollars in Millions) | ||||||||||||||||
June 20, 2015 | % of Sales | June 12, 2014 | % of Sales | |||||||||||||
Net sales and other revenue |
$ | 18,051.0 | 100.0 | % | $ | 7,211.7 | 100.0 | % | ||||||||
Cost of sales |
13,132.8 | 72.8 | % | 5,220.9 | 72.4 | % | ||||||||||
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Gross profit |
4,918.2 | 27.2 | % | 1,990.8 | 27.6 | % | ||||||||||
Selling and administrative expenses |
4,821.3 | 26.7 | % | 1,958.9 | 27.2 | % | ||||||||||
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Operating income |
96.9 | 0.5 | % | 31.9 | 0.4 | % | ||||||||||
Interest expense |
283.8 | 1.6 | % | 140.0 | 1.9 | % | ||||||||||
Other (income) expense, net |
(4.6 | ) | (0.1 | )% | 22.8 | 0.3 | % | |||||||||
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Loss before income taxes |
(182.3 | ) | (1.0 | )% | (130.9 | ) | (1.8 | )% | ||||||||
Income tax benefit |
(29.0 | ) | (0.2 | )% | (14.0 | ) | (0.2 | )% | ||||||||
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Net loss |
$ | (153.3 | ) | (0.8 | )% | $ | (116.9 | ) | (1.6 | )% | ||||||
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Identical Store Sales, Excluding Fuel
First quarter ended | ||||||||
June 20,
2015 |
June 12,
2014 |
|||||||
AB Acquisition LLC(1) |
5.1 | % | 8.4 | % |
(1) | The SVU Albertsons Stores and the acquired NAI Stores became identical on March 21, 2014, and the acquired United stores became identical on December 29, 2014. The Safeway stores are not considered identical for any periods presented above. |
Net Sales and Other Revenue
Sales and other revenue increased 150.3% to $18.1 billion for the first quarter of fiscal 2015 from $7.2 billion for the first quarter of fiscal 2014. The increase in sales was driven primarily by $10.8 billion from the Safeway acquisition and $325.5 million from 5.1% growth in identical store sales, partly offset by a $311.5 million decline in sales related to stores sold as part of the FTC divestiture process.
Gross Profit
Gross profit represents the portion of sales and other revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of cost of goods sold.
For the first quarter of fiscal 2015, gross profit margin decreased to 27.2% compared to 27.6% for the first quarter of fiscal 2014. The 40 basis-point reduction in margin is primarily driven by an increase in low-margin fuel sales from Safeway fuel centers, partially offset by our acquisition of additional stores in higher margin markets as a result of the Safeway acquisition.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
For the first quarter of fiscal 2015, selling and administrative expenses decreased to 26.7% of sales, compared to 27.2% of sales for the first quarter of fiscal 2014. The 50 basis-point improvement in selling and administrative expenses is driven by the impact of increased fuel sales resulting from the Safeway acquisition, and leveraging of employee-related expenses and other fixed operating costs due to the Safeway acquisition and the growth in identical store sales.
Interest Expense, Net
Interest expense was $283.8 million for the first quarter of fiscal 2015 compared to $140.0 million for the first quarter of fiscal 2014. The increase in interest expense was due to significantly higher borrowings of $12.1 billion as of the end of the first quarter of fiscal 2015 compared to borrowings of $3.6 billion as of the end of the first quarter of fiscal 2014, primarily related to borrowings associated with the Safeway acquisition.
Other (Income)/Expense, Net
For the first quarter of fiscal 2015, other income, net, was $4.6 million, compared to other expense, net, of $22.8 million for the first quarter of fiscal 2014. The change in other (income) expense,
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net is primarily due to a loss on the change in fair value on our Deal-Contingent Swap recorded during the first quarter of fiscal 2014. This swap became effective upon closing of the Safeway acquisition, at which time it was designated as a cash flow hedge with changes in fair value being marked to market through accumulated other comprehensive income. Prior to closing the Safeway acquisition, the swap was treated as an economic hedge and was marked to market through earnings.
Income Tax Benefit
Income tax benefit was $29.0 million and $14.0 million, representing effective tax rates of 15.9% and 10.7%, for the first quarter of fiscal 2015 and the first quarter of fiscal 2014, respectively. The increase in the effective tax rate for the first quarter of fiscal 2015 as compared with the first quarter of fiscal 2014 was primarily due to the impact of the Safeway operations, partially offset by the effect of recording an additional valuation allowance on the NAI deferred tax assets. The company is organized as a partnership, which generally is not subject to entity level tax, and conducts its operations primarily through limited liability companies and Subchapter C Corporations. The company provides for federal and state income taxes on its Subchapter C Corporations, which are subject to entity level tax and state income taxes on its limited liability companies, where applicable. As such, our effective tax rate can fluctuate from period to period depending on the mix of pre-tax income or loss between our limited liability companies and Subchapter C Corporations.
Supplemental Pro Forma Results of Operations of AB Acquisition for the 16 Weeks Ended June 20, 2015 compared to the Pro Forma Results of Operations of AB Acquisition for the 16 Weeks Ended June 12, 2014
The following table and related discussion sets forth supplemental information and comparisons regarding the components of our pro forma condensed consolidated statements of operations for the first fiscal quarters ended June 20, 2015 and June 12, 2014, which include the pro forma results of operations for our 16-week periods then ended. The supplemental pro forma financial information was derived from the unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus. The supplemental pro forma results of operations are provided for informational purposes only and are not necessarily indicative of the operating results that would have occurred if the acquisition of Safeway and related divestitures had been completed at the commencement of our first quarter of fiscal 2014. The unaudited pro forma condensed consolidated financial information also does not give effect to the potential impact of any future anticipated synergies, future operating efficiencies or cost savings that may result from the Safeway acquisition or any integration costs that do not have a continuing impact.
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As of June 20, 2015, we operated 2,205 stores, and as of June 12, 2014, on a pro forma basis, we operated 2,234 stores.
First Quarter Ended | ||||||||||||||||
(Dollars in Millions) | ||||||||||||||||
June 20, 2015
(Pro Forma) |
% of Sales |
June 12, 2014
(Pro Forma) |
% of Sales | |||||||||||||
Net sales and other revenue |
$ | 17,606.5 | 100.0 | % | $ | 17,220.2 | 100.0 | % | ||||||||
Cost of sales |
12,822.3 | 72.8 | % | 12,695.4 | 73.7 | % | ||||||||||
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Gross profit |
4,784.2 | 27.2 | % | 4,524.8 | 26.3 | % | ||||||||||
Selling and administrative expenses |
4,710.4 | 26.8 | % | 4,425.1 | 25.7 | % | ||||||||||
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Operating income |
73.8 | 0.4 | % | 99.7 | 0.6 | % | ||||||||||
Interest expense |
283.8 | 1.6 | % | 283.4 | 1.6 | % | ||||||||||
Other income, net |
(4.6 | ) | 0.0 | % | (23.8 | ) | (0.1 | )% | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(205.4 | ) | (1.2 | )% | (159.9 | ) | (0.9 | )% | ||||||||
Income tax benefit |
(79.6 | ) | (0.5 | )% | (61.9 | ) | (0.4 | )% | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (125.8 | ) | (0.7 | )% | $ | (98.0 | ) | (0.5 | )% | ||||||
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|
|
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|
|
Identical Store Sales, Excluding Fuel
On a pro forma basis, identical store sales increased 4.3% during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. The increase in identical store sales was driven by a 2.6% increase in average ticket size in addition to a 1.7% increase in customer traffic.
Sales and Other Revenue
On a pro forma basis, sales and other revenue increased $386.3 million, or 2.2%, for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. The increase was primarily attributable to a 4.3% increase in identical store sales, which drove an increase of $670.6 million, partially offset by $352.1 million reduction in fuel sales. The reduction in fuel sales was the result of a decrease in retail fuel prices, reflecting the decrease in the product cost of fuel.
Gross Profit
On a pro forma basis, gross profit margin increased 90 basis points during the first quarter of 2015 compared to the first quarter of fiscal 2014. The increase was primarily attributable to higher fuel margins during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. Excluding fuel, gross profit margin increased 20 basis points compared to the prior year. The 20 basis-point increase was primarily attributable to improved product mix, partially offset by higher shrink expense compared to the prior fiscal quarter. Shrink expense increased as Safeway increased its in-stock positions in order to increase customer traffic.
Selling and Administrative Expense
On a pro forma basis, selling and administrative expenses increased by $285.3 million during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. The increase was primarily attributable to increases of $70.7 million related to the transition and integration of the Safeway operations with our operations and $62.9 million in non-cash equity-based compensation expense. The increase in non-cash equity-based compensation was primarily the result of charges of $55.5 million for awards issued to members of management in the first quarter of fiscal 2015 and a charge related to the modification of an award issued to an executive employee who transitioned to a non-employee
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consultant. This compared to a net benefit recorded during the first quarter of fiscal 2014 as a result of the reversal of compensation expense on Safeways performance based awards that were determined to be no longer probable of vesting.
Interest Expense, Net
On a pro forma basis, interest expense, net was $283.8 million for the first quarter of fiscal 2015 compared to $283.4 million for the first quarter of fiscal 2014. Interest expense, net was primarily flat due to the same borrowings and average interest rates during the pro forma first quarter of fiscal 2015 compared to the first quarter of fiscal 2014.
Other Income, Net
On a pro forma basis, other income, net, was $4.6 million during the first quarter of fiscal 2015 compared to $23.8 million during the first quarter of fiscal 2014. The decrease in other income, net for the pro forma first quarter of fiscal 2015 was primarily driven by a lower gain on foreign currency translation and a non-cash charge of $7.7 million related to the change in fair value in the Casa Ley contingent value right.
Income Tax Benefit
On a pro forma basis, income tax was a benefit of $79.6 million for the first quarter of fiscal 2015 and $61.9 million for the first quarter of fiscal 2014, each reflecting a combined federal and state statutory tax rate of 38.7% to the pro forma pre-tax earnings of the company. As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., and, as a result, all of our operations will be taxable as part of a consolidated group for federal and state income tax purposes.
Comparison of Fiscal Year 2014 to Fiscal Year 2013
Net Sales and Other Revenue
The companys identical store sales increases for the past three fiscal years were as follows:
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Identical store sales increases |
7.2 | % | 1.6 | % | 1.9 | % |
Net sales and other revenue increased $7,143.9 million, or 35.6%, from $20,054.7 million in fiscal 2013 to $27,198.6 million in fiscal 2014. The components of the change in net sales and other revenue for fiscal 2014 were as follows (in millions):
(dollars in millions) | ||||
Net sales and other revenue for fiscal 2013 |
$ | 20,054.7 | ||
Additional sales due to Safeway acquisition |
2,696.0 | |||
Additional sales due to United acquisition |
1,439.9 | |||
Identical store sales increase of 7.2% |
1,410.7 | |||
Additional sales due to NAI acquisition |
1,357.0 | |||
53rd-week impact |
443.5 | |||
Other(1) |
(203.2 | ) | ||
|
|
|||
Net sales and other revenue for fiscal 2014 |
$ | 27,198.6 | ||
|
|
(1) | Primarily relates to changes in non-identical store sales and other revenue. |
Identical store sales increased $1,410.7 million, or 7.2%, primarily due to a 6.5% increase in customer traffic during fiscal 2014, as the stores we acquired in the NAI acquisition benefited from the
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implementation of our operating playbook including improving store layout and conditions, enhanced fresh, natural and organic offerings, improved levels of customer service and selected investment in price.
Net sales and other revenue increased $16,342.7 million, or 440.3%, from $3,712.0 million in fiscal 2012 to $20,054.7 million in fiscal 2013. The components of the change in net sales and other revenue for fiscal 2013 were as follows (in millions):
Net sales and other revenue for fiscal 2012 |
$ | 3,712.0 | ||
Additional sales due to NAI acquisition |
16,071.0 | |||
Additional sales due to United acquisition |
255.0 | |||
Identical store sales increase of 1.6% |
56.0 | |||
Other(1) |
(39.3 | ) | ||
|
|
|||
Net sales and other revenue for fiscal 2013 |
$ | 20,054.7 | ||
|
|
(1) | Primarily relates to changes in non-identical store sales and other revenue. |
Identical store sales also increased 1.6%. The stores acquired in the NAI acquisition experienced significant improvement during the second half of fiscal 2013, primarily driven by increased customer traffic.
Gross Profit
Gross profit represents the portion of net sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Vendor allowances are classified as an element of cost of goods sold.
Our gross profit rate increased 70 basis points to 27.6% in fiscal 2014 from 26.9% in fiscal 2013, primarily driven by improvements in shrink and improved leverage of fixed warehouse cost over a larger store base. During fiscal 2013, we increased in-stock positions in fresh product to fully stock the stores we acquired from SuperValu to improve customer perception of the acquired stores in advance of increased customer traffic, resulting in higher shrink levels throughout fiscal 2013, especially in the first and second quarters of fiscal 2013. During fiscal 2014, customer traffic to our acquired stores increased resulting in reduced shrink levels as a result of increased turnover of products.
Fiscal 2014 vs. Fiscal 2013 |
Basis-point
increase (decrease) |
|||
Improvements in shrink |
46 | |||
Warehouse cost |
33 | |||
Lower advertising expense |
8 | |||
Increased LIFO expense |
(10 | ) | ||
Other |
(7 | ) | ||
|
|
|||
Total |
70 | |||
|
|
Our gross profit rate increased 160 basis points to 26.9% in fiscal 2013 from 25.3% in fiscal 2012, primarily driven by our entry into higher margin markets as a result of the NAI acquisition and improvement in merchandise pricing due to increased volume of purchasing. Both of these factors were driven by significant increases in our store portfolio resulting from the NAI acquisition.
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Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices. Selling and administrative expenses increased 70 basis points to 30.0% of net sales and other revenue in fiscal 2014 from 29.3% in fiscal 2013.
Fiscal 2014 vs. Fiscal 2013 |
Basis-point
increase (decrease) |
|||
Non-cash equity-based compensation |
123 | |||
Acquisition and integration costs (including the charge to terminate the long-term incentive plans) |
89 | |||
Property dispositions, asset impairment and lease exit costs |
78 | |||
Employee-related costs |
(88 | ) | ||
Depreciation and amortization |
(68 | ) | ||
Rent and occupancy |
(29 | ) | ||
Legal and professional fees |
(18 | ) | ||
Other |
(17 | ) | ||
|
|
|||
Total |
70 | |||
|
|
The Safeway acquisition resulted in additional non-cash equity-based compensation and increased acquisition and integration costs. In addition, the FTC-mandated divestitures resulted in increased impairment charges. These increases were offset by reductions in selling and administrative expense as a percentage of sales that were largely driven by increased sales from acquired stores and strong identical store sales.
Selling and administrative expenses increased 510 basis points to 29.3% of net sales and other revenue in fiscal 2013 from 24.2% in fiscal 2012:
Fiscal 2013 vs. Fiscal 2012 |
Basis-point
increase (decrease) |
|||
Depreciation and amortization |
266 | |||
Employee-related costs |
155 | |||
Acquisition and integration costs |
50 | |||
Other |
39 | |||
|
|
|||
Total |
510 | |||
|
|
Selling and administrative expense increased 510 basis points primarily due to increased depreciation and amortization expense and increased employee-related costs. Depreciation and amortization expense increased in fiscal 2013 due to the recognition of the acquired properties and intangible assets at fair value as part of applying the acquisition method of accounting for the NAI acquisition. Employee-related costs increased as a percentage of net sales and other revenue reflecting higher labor rates in stores acquired in the NAI acquisition compared to our Legacy Albertsons Stores, together with additional investments in store labor to improve customer service in these acquired stores as part of our turnaround initiatives.
Interest Expense
Interest expense was $633.2 million in fiscal 2014, $390.1 million in fiscal 2013 and $7.2 million in fiscal 2012. Interest expense in fiscal 2014 increased as a result of an increase in total debt from
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$3,694.2 million in fiscal 2013 to $12,569.0 million in fiscal 2014. The increased debt level was primarily attributable to financing the Safeway acquisition and the assumption of $2,210.6 million of Safeway debt including capital lease obligations, net of $864.6 million of assumed debt that was immediately paid following the Safeway acquisition. The increase in interest expense in fiscal 2013, compared to fiscal 2012, resulted primarily from the assumption of debt and related financing of the NAI acquisition.
The following details our components of interest expense for the respective fiscal years (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
ABL facility, senior secured notes, term loans, notes and debentures |
$ | 454.1 | $ | 246.0 | $ | 2.8 | ||||||
Capital lease obligations |
77.5 | 63.3 | 1.4 | |||||||||
Loss on extinguishment of debt |
| 49.1 | | |||||||||
Amortization and write off of deferred financing costs |
65.3 | 25.1 | 1.2 | |||||||||
Amortization and write off of debt discount |
6.8 | 1.3 | | |||||||||
Other, net |
29.5 | 5.3 | 1.8 | |||||||||
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|
|
|||||||
Total interest expense, net |
$ | 633.2 | $ | 390.1 | $ | 7.2 | ||||||
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|
At February 28, 2015, the company had total debt, including capital lease obligations, outstanding of $12,569.0 million with a weighted average interest rate of 7.30%.
Other Expense, Net
For fiscal 2014, Other expense, net was $96.0 million, primarily driven by the loss on our deal-contingent interest rate swap. In April 2014, we entered into a deal-contingent interest rate swap to hedge against adverse fluctuations in the interest rate on anticipated variable rate debt planned to be incurred to finance the Safeway acquisition. Prior to the Safeway acquisition, the swap was treated as an economic hedge with changes in fair value recorded through earnings. Upon closing of the Safeway acquisition, the interest rate swap was designated as a cash flow hedge, with any subsequent changes in fair market value being marked to market through accumulated other comprehensive income. We did not have Other expense, net in fiscal 2013 or fiscal 2012.
Income Taxes
Income tax was a benefit of $153.4 million in fiscal 2014, $572.6 million in fiscal 2013 and immaterial in fiscal 2012. A substantial portion of the businesses and assets were held and operated by limited liability companies during these periods, which generally are not subject to entity-level federal or state income taxation. The income tax benefit of $153.4 million in fiscal 2014 is primarily driven by the tax benefits from the operating results of Safeway and NAI, both of which are subject to federal and state income taxes. This income tax benefit was reduced by nondeductible acquisition-related transaction costs and non-cash equity-based compensation. The income tax benefit of $572.6 million in fiscal 2013 is the result of the bargain purchase gain related to the NAI acquisition not being subject to income taxes; the effects of the accounting for income taxes related to the intercompany sale of the Albertsons banners from NAI to Albertsons LLC immediately after the NAI acquisition; and the operating loss of NAI.
As part of the IPO-Related Transactions, all of our operating subsidiaries will become subsidiaries of Albertsons Companies, Inc., a Delaware corporation, and, as a result, all of our operations will be taxable as part of a consolidated group for federal and state income tax purposes. The consolidation of our operations will result in higher income taxes and an increase in income taxes paid. Pro forma income for fiscal 2014 reflects a combined federal and state statutory tax rate of 38.7%. See Note 3(b) to the Unaudited Pro Forma Condensed Consolidated Financial Information.
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Operating Results Overview
Loss from continuing operations was $1,225.2 million in fiscal 2014, and income from continuing operations was $1,713.1 million in fiscal 2013, a decrease of $2,938.3 million. The decrease from fiscal 2013 was primarily attributable to the favorable impact of a bargain purchase gain of $2,005.7 million recognized in fiscal 2013 resulting from the NAI acquisition, the net decrease in fiscal 2014 in our income tax benefit over fiscal 2013 of $419.2 million and increased interest expense in fiscal 2014 of $243.1 million over fiscal 2013. Fiscal 2014 also included the impact of charges relating to non-cash equity-based compensation of $344.1 million, an increase in the net loss on property dispositions, asset impairment and lease exit costs of $230.1 million principally as a result of FTC-mandated divestitures in connection with the Safeway acquisition, a net loss on interest rate and commodity hedges of $98.2 million, a net increase from fiscal 2013 in acquisition and integration related costs of $178.5 million and a $78.0 million charge associated with the termination of the companys long-term incentive plans.
Income from continuing operations was $1,713.1 million in fiscal 2013 and $29.8 million in fiscal 2012, an increase of $1,683.3 million. This increase was primarily attributable to the recognition of a bargain purchase gain of $2,005.7 million and income tax benefit of $572.6 million in fiscal 2013, partially offset by increased interest expense of $382.9 million in fiscal 2013 over fiscal 2012 and charges associated with store transition and related costs of $166.5 million and acquisition and integration costs of $173.5 million in fiscal 2013.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP operating financial measure that we define as earnings (net income (loss)) before interest, income taxes, depreciation and amortization, as further adjusted to eliminate the effects of items management does not consider in assessing ongoing performance. We believe that Adjusted EBITDA provides a meaningful representation of operating performance because it excludes the impact of items that could be considered non-core in nature. We use Adjusted EBITDA to measure overall performance and assess performance against peers. Adjusted EBITDA also provides useful information for our investors, securities analysts and other interested parties. Adjusted EBITDA is not a measure of performance under GAAP and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.
For the first quarter of fiscal 2015, Adjusted EBITDA was $727.8 million, or 4.0% of sales, an increase of 187.1% compared to $253.5 million, or 3.5% of sales, for the first quarter of fiscal 2014. The increase in Adjusted EBITDA for the first quarter of fiscal 2015 reflects contributions from the Safeway acquisition as well as our improved operating performance.
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The following is a reconciliation of Net loss to Adjusted EBITDA (in millions) for the quarters ended June 20, 2015 and June 12, 2014:
First Quarter Ended | ||||||||
June 20, 2015(1) | June 12, 2014 | |||||||
Net loss |
$ | (153.3 | ) | $ | (116.9 | ) | ||
Depreciation and amortization |
478.0 | 207.9 | ||||||
Interest expense, net |
283.8 | 140.0 | ||||||
Income tax benefit |
(29.0 | ) | (14.0 | ) | ||||
|
|
|
|
|||||
EBITDA |
579.5 | 217.0 | ||||||
(Gain) loss on interest rate and commodity hedges, net |
(0.8 | ) | 22.8 | |||||
Acquisition and integration costs(2) |
73.3 | 20.8 | ||||||
Non-cash equity-based compensation expense |
55.5 | 2.1 | ||||||
Net gain on property dispositions, asset impairment and lease exit costs |
(5.9 | ) | (12.3 | ) | ||||
LIFO expense |
6.2 | 7.2 | ||||||
Facility closures and related transition costs(3) |
9.5 | | ||||||
Other(4) |
10.5 | (4.1 | ) | |||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 727.8 | $ | 253.5 | ||||
|
|
|
|
(1) | Includes results for the stores acquired in the Safeway acquisition. |
(2) | Primarily includes costs related to acquisitions, integration of acquired businesses and adjustments to a tax indemnification liability. |
(3) | Includes costs related to facility closures and the transition to our decentralized operating model. |
(4) | Primarily includes non-cash lease adjustments related to deferred rents and deferred gains on lease expenses related to closed stores. Also includes amortization of unfavorable leases on acquired Safeway surplus properties and non-cash pension and post-retirement expense, net. |
For fiscal 2014, Adjusted EBITDA was $1.1 billion, or 4.0% of sales, an increase of 87.5% compared to $585.9 million, or 2.9% of sales, for fiscal 2013. The increase in Adjusted EBITDA for fiscal 2014 reflects our improved operating performance as well as contributions from the Safeway and United acquisitions.
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Following is a reconciliation of GAAP Net (loss) income to Adjusted EBITDA (in millions) for each of fiscal 2014, fiscal 2013 and fiscal 2012:
Fiscal 2014(1) | Fiscal 2013(2) | Fiscal 2012 | ||||||||||
Net (loss) income |
$ | (1,225.2 | ) | $ | 1,732.6 | $ | 79.0 | |||||
Depreciation and amortization |
718.1 | 676.4 | 16.9 | |||||||||
Interest expense, netcontinued operations |
633.2 | 390.1 | 7.2 | |||||||||
Income tax (benefit) expense |
(153.4 | ) | (572.6 | ) | 1.7 | |||||||
Interest expensediscontinued operations |
| 3.9 | 0.8 | |||||||||
|
|
|
|
|
|
|||||||
EBITDA |
$ | (27.3 | ) | $ | 2,230.4 | $ | 105.6 | |||||
Bargain purchase gain |
| (2,005.7 | ) | | ||||||||
Loss on interest rate and commodity swaps, net |
98.2 | | | |||||||||
Store transition and related costs(3) |
| 166.5 | | |||||||||
Acquisition and integration costs(4) |
352.0 | 173.5 | 7.1 | |||||||||
Termination of long-term incentive plans |
78.0 | | | |||||||||
Non-cash equity-based compensation expense |
344.1 | 6.2 | | |||||||||
Net loss (gain) on property dispositions, asset impairments and lease exit costs |
227.7 | (2.4 | ) | (45.6 | ) | |||||||
LIFO expense |
43.1 | 11.6 | 2.1 | |||||||||
Non-cash pension and postretirement expense(5) |
(3.0 | ) | (7.6 | ) | | |||||||
Other(6) |
(14.1 | ) | 13.4 | (4.2 | ) | |||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 1,098.7 | $ | 585.9 | $ | 65.0 | ||||||
|
|
|
|
|
|
(1) | Includes results from four weeks for the stores purchased in the acquisition of Safeway on January 30, 2015. |
(2) | Includes results from 48 weeks for the stores purchased in the acquisition of NAI on March 21, 2013 and eight weeks for the stores purchased in the acquisition of United on December 29, 2013. |
(3) | Includes costs related to the transition of stores acquired in the NAI acquisition by improving store conditions and enhancing product offerings. |
(4) | Includes costs related to the Safeway acquisition (including the charge associated with the settlement of appraisal rights litigation) and the NAI and United acquisitions. |
(5) | Excludes the companys one-time cash contribution of $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the closing of the Safeway acquisition. |
(6) | Primarily includes non-cash lease adjustments related to deferred rents and deferred gains on leases, expenses related to closed stores and discontinued operations. |
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The following is a reconciliation of Cash Flow from Operating Activities to Free Cash Flow (in millions):
First Quarter Ended |
Fiscal
2014 |
Fiscal
2013 |
Fiscal
2012 |
|||||||||||||||||
June 20,
2015 |
June 12,
2014 |
|||||||||||||||||||
Cash flow provided by (used in) operating activities |
$ | 196.1 | $ | 146.4 | $ | (165.1 | ) | $ | 49.5 | $ | 32.5 | |||||||||
Income tax (benefit) expense |
(29.0 | ) | (14.0 | ) | (153.4 | ) | (572.6 | ) | 1.7 | |||||||||||
Deferred income taxes |
54.3 | 17.3 | 170.1 | 657.6 | | |||||||||||||||
Interest expensecontinued operations |
283.8 | 140.0 | 633.2 | 390.1 | 7.2 | |||||||||||||||
Interest expensediscontinued operations |
| | | 3.9 | 0.8 | |||||||||||||||
Changes in operating assets and liabilities |
163.4 | (15.8 | ) | 39.3 | (202.1 | ) | 21.1 | |||||||||||||
Amortization and write-off of deferred financing costs |
(14.9 | ) | (27.4 | ) | (65.3 | ) | (25.1 | ) | (1.2 | ) | ||||||||||
Loss on debt extinguishment |
| | | (49.1 | ) | | ||||||||||||||
Store transition and related costs |
| | | 166.5 | | |||||||||||||||
Acquisition and integration costs |
73.3 | 20.8 | 352.0 | 173.5 | 7.1 | |||||||||||||||
Termination of long-term incentive plan |
| | 78.0 | | | |||||||||||||||
Pension contribution in connection with Safeway acquisition |
| | 260.0 | | | |||||||||||||||
Other adjustments |
0.8 | (13.8 | ) | (50.1 | ) | (6.3 | ) | (4.2 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
727.8 | 253.5 | 1,098.7 | 585.9 | 65.0 | |||||||||||||||
Less: capital expenditures |
(214.7 | ) | (97.1 | ) | (328.2 | ) | (128.2 | ) | (28.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Free cash flow |
$ | 513.1 | $ | 156.4 | $ | 770.5 | $ | 457.7 | $ | 36.3 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Liquidity and Financial Resources
Net Cash Provided By Operating Activities
Net cash provided by operating activities was $196.1 million for the first quarter of fiscal 2015 compared to $146.4 million for the first quarter of fiscal 2014. The change in cash flow from operations for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 was primarily due to improved net earnings after adjusting for non-cash charges and favorable changes in operating assets and liabilities, partially offset by increases in working capital.
Our net cash flow used in operating activities was $165.1 million in fiscal 2014 compared to net cash provided by operating activities of $49.5 million in fiscal 2013 and $32.5 million in fiscal 2012.
Net cash flow used in operating activities increased by $214.6 million in fiscal 2014 compared to fiscal 2013. The increase was due to (i) our higher cash contributions to our pension and post-retirement benefits plans in fiscal 2014, primarily as a result of a $260.0 million contribution to the Safeway Inc. ERP under a settlement with the PBGC related to the Safeway acquisition, (ii) an increase in interest payments of $298.4 million due to the increased borrowings for acquisitions and (iii) an increase in payments for acquisition and integration costs related to the Safeway acquisition, offset by cash inflows related to improved operations and the additional Safeway operations. As a result of the $260.0 million cash contribution to the ERP, we do not expect to make additional contributions to the ERP until 2018.
Net cash flow provided by operating activities increased $17.0 million in fiscal 2013 compared to fiscal 2012 primarily due to cash inflows related to the expansion of our operations from the NAI and United acquisitions, partially offset by an increase in interest payments of $278.0 million and increases in acquisition and integration costs.
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Net Cash Provided By (Used In) Investing Activities
Net cash provided by investing activities was $144.6 million for the first quarter of fiscal 2015 compared to net cash used in investing activities of $82.0 million for the first quarter of fiscal 2014. For the first quarter of fiscal 2015, proceeds from the sale of assets and divestitures of $465.5 million and a decrease in restricted cash of $254.4 million were offset by $387.2 million related to the merger consideration paid related to the Safeway acquisition appraisal settlement and $214.7 million to acquire property and equipment. For the first quarter of fiscal 2014, purchases of property and equipment of $97.1 million were partly offset by proceeds from the sale of assets and changes in restricted cash.
Net cash flow used in investing activities was $5,945.0 million in fiscal 2014, consisting primarily of cash paid for the Safeway acquisition, net of cash acquired, of $5,673.4 million and cash paid for property additions of $328.2 million. Net cash flow used in investing activities was $781.5 million in fiscal 2013, consisting primarily of cash paid for the acquisition of NAI and United, net of cash acquired, of $463.9 million, cash paid for property additions of $128.2 million and changes in restricted cash of $246.0 million related to collateralized surety bonds and letters of credit obtained during fiscal 2013. Net cash flow provided by investing activities was $20.8 million in fiscal 2012, primarily consisting of proceeds of the sale of assets of $45.2 million, partially offset by cash paid for property additions of $28.7 million.
In fiscal 2015, the company expects to spend approximately $1,150.0 million in capital expenditures, including $300.0 million of expected one-time Safeway-related integration-related capital expenditures, as follows (in millions):
Projected Fiscal 2015 Capital Expenditures |
||||
IT |
$ | 300.0 | ||
Supply chain |
200.0 | |||
Maintenance |
240.0 | |||
New stores and remodels |
180.0 | |||
Real estate and expansion capital |
200.0 | |||
Other |
30.0 | |||
|
|
|||
Total |
$ | 1,150.0 | ||
|
|
Net Cash Used In Financing Activities
Net cash used in financing activities, consisting primarily of net payments on debt from the proceeds of asset sales, was $477.2 million for the first quarter of fiscal 2015. Net cash used in financing activities was $111.3 million for the first quarter of fiscal 2014.
Net cash flow provided by financing activities was $6,928.9 million in fiscal 2014 and $1,002.0 million in fiscal 2013. Cash used in financing activities was $77.6 million in fiscal 2012. Net cash provided by financing activities increased in fiscal 2014 compared to fiscal 2013, primarily as a result of proceeds from the issuance of long-term debt and equity contributions used to finance the Safeway acquisition. Net cash provided by financing activities increased in fiscal 2013 compared to fiscal 2012, primarily as a result of proceeds from the issuance of long-term debt and equity contributions used to finance the NAI and United acquisitions.
Proceeds from the issuance of long-term debt were $8,097.0 million in fiscal 2014, $2,485.0 million in fiscal 2013 and $55.0 million in fiscal 2012. In fiscal 2014, cash payments on long-term borrowings were $2,123.6 million, including $864.6 million of assumed debt that was immediately paid following the Safeway acquisition. In fiscal 2014, cash payments for debt financing costs were $229.1
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million and cash payments on obligations under capital leases were $64.1 million. In fiscal 2013, cash payments on long-term borrowings were $923.3 million, cash payments on debt financing costs were $121.0 million and cash payments under capital leases were $24.5 million. In addition, we repurchased $619.9 million of debt under tender offers in fiscal 2013. In fiscal 2012, net cash payments on long-term borrowings were $75.0 million.
Proceeds from equity contributions were $1,283.2 million in fiscal 2014 and $250.0 million in fiscal 2013. There were no equity contributions in fiscal 2012. In addition, we made distributions to our equityholders of $34.5 million in fiscal 2014 and $50.0 million in fiscal 2012. There were no distributions in fiscal 2013.
Debt Management
Total debt, including both the current- and long-term portions of capital lease obligations, increased by $8.9 billion to $12.6 billion as of the end of fiscal 2014 compared to $3.7 billion as of the end of fiscal 2013. The increase in fiscal 2014 was primarily the result of the financing for the Safeway acquisition and the assumption of Safeway debt. In anticipation of the closing of the Safeway acquisition, we secured term-loan financing of $5.7 billion with interest rates ranging from 4.75% to 5.5% and completed the sale of $1,145.0 million of 7.750% second lien notes, of which $535.4 million was subsequently redeemed on February 9, 2015. We assumed notes and debentures with a fair value of $2.5 billion from Safeway and subsequently redeemed $864.6 million of the Safeway debt pursuant to change of control tender offers. We also increased the borrowings under our asset-based revolving credit agreements by approximately $800 million.
Outstanding debt, including current maturities and net of debt discounts and deferred financing costs, as of February 28, 2015 principally consists of (in millions):
Term loans |
$ | 6,899.9 | ||
Notes and debentures |
3,534.9 | |||
Capital leases |
974.7 | |||
ABL borrowings |
980.0 | |||
Other notes payable and mortgages |
179.5 | |||
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Total debt, including capital leases |
$ | 12,569.0 | ||
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Total debt, including both the current and long-term portions of capital lease obligations, increased by $3.6 billion to $3.7 billion as of the end of fiscal 2013 compared to the end of fiscal 2012. This increase was primarily the result of the NAI acquisition and United acquisition and related financing. We assumed debt with a fair value of $2.6 billion as a result of the NAI acquisition and subsequently redeemed $592.0 million of the assumed debt. We also secured term loan financing of $1.2 billion in connection with the NAI acquisition and subsequently increased the borrowings under the term loan financing by $300 million to finance the United acquisition.
During the first quarter of fiscal 2015 we used approximately $439 million of sales proceeds from the FTC-required divestitures to reduce outstanding borrowings under the ABS/Safeway ABL Facility.
See Note 8Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information related to our outstanding debt.
Liquidity and Factors Affecting Liquidity
We estimate our liquidity needs over the next fiscal year to be approximately $5.0 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt, operating leases, capital leases and our TSA agreements with SuperValu. Based on current operating trends, we believe that cash flows from operating activities and
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other sources of liquidity, including borrowings under our asset-based revolving credit facilities, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our revolving credit facilities. See Contractual Obligations for a more detailed description of our commitments as of the end of fiscal 2014.
As of June 20, 2015, we had approximately $541.0 million of borrowings outstanding under our asset-based revolving credit facilities and total availability of $2.3 billion (net of letter of credit usage). As of February 28, 2015, we had approximately $980.0 million of borrowings outstanding under our asset-based revolving credit facilities and total availability of approximately $1.8 billion (net of letter of credit usage).
The ABS/Safeway ABL Facility contains no financial covenants unless and until (i) an event of default under the ABS/Safeway ABL Facility has occurred and is continuing or (ii) the failure of Albertsons to maintain excess availability of at least 10.0% of the aggregate commitments at any time or (iii) excess availability is less than $200.0 million. If any such events occur, then Albertsons is required to maintain a fixed-charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30th day after the other trigger event ceases to exist.
The NAI ABL Facility contains no covenants unless and until (i) an event of default under the NAI ABL Facility has occurred and is continuing or (ii) the failure of NAI to maintain excess availability of at least 10.0% of the aggregate commitments at any time. If any of such events occur, NAI is required to maintain a fixed-charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30th day after the other trigger event ceases to exist.
During fiscal 2014 and the first quarter of fiscal 2015, there were no financial covenants in effect under our asset-based revolving credit facilities because the conditions listed above had not been met.
Contractual Obligations
The table below presents our significant contractual obligations as of February 28, 2015 (in millions) (1) :
Payments Due Per Fiscal Year | ||||||||||||||||||||
Total | 2015 | 2016-2017 | 2018-2019 | Thereafter | ||||||||||||||||
Long-term debt(2) |
$ | 12,158.5 | $ | 503.4 | $ | 541.4 | $ | 2,505.6 | $ | 8,608.1 | ||||||||||
Interest on long-term debt(3) |
5,579.5 | 675.0 | 1,323.4 | 1,183.9 | 2,397.2 | |||||||||||||||
Operating leases(4) |
5,896.7 | 735.7 | 1,308.8 | 994.0 | 2,858.2 | |||||||||||||||
Capital leases(4) |
1,508.3 | 202.2 | 363.6 | 273.0 | 669.5 | |||||||||||||||
SVU TSAs(5) |
304.6 | 182.1 | 109.9 | 12.6 | | |||||||||||||||
Purchase obligations(6) |
1,839.6 | 1,407.2 | 432.4 | | | |||||||||||||||
Other long-term liabilities(7) |
1,545.1 | 365.8 | 445.8 | 219.8 | 513.7 | |||||||||||||||
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Total contractual obligations |
$ | 28,832.3 | $ | 4,071.4 | $ | 4,525.3 | $ | 5,188.9 | $ | 15,046.7 | ||||||||||
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(1) | Excludes the estimated multiemployer pension plan withdrawal liability which was assumed as part of the Safeway acquisition in connection with Safeways closure of its Dominicks division and contributions under various multiemployer pension plans which totaled $113.4 million in fiscal 2014. In fiscal 2015, we expect to contribute approximately $370.0 million to multiemployer pension plans, subject to collective bargaining conditions, exclusive of additional amounts we may be required to contribute relating to A&P. This table also excludes unrecognized tax benefits because a reasonably reliable estimate of the timing of future pension contributions and tax settlements cannot be determined. |
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(2) | Long-term debt amounts include asset-backed loans and exclude any debt discounts and deferred financing costs. See Note 8Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information. |
(3) | Amounts include contractual interest payments using the interest rate as of February 28, 2015 applicable to our variable interest term debt instruments and stated fixed rates for all other debt instruments. See Note 8Long-Term Debt in our consolidated financial statements, included elsewhere in this prospectus, for additional information. |
(4) | Represents the minimum rents payable under operating and capital leases, excluding common area maintenance, insurance or tax payments, for which the company is also obligated. |
(5) | Represents minimum contractual commitments expected to be paid under the SVU TSAs and the related amendment, executed on April 16, 2015. See Note 15Related Parties in our consolidated financial statements, included elsewhere in this prospectus, for additional information. |
(6) | Purchase obligations include various obligations that have annual purchase commitments. As of February 28, 2015, future purchase obligations primarily relate to fixed asset and information technology commitments. In addition, in the ordinary course of business, the company enters into supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. The company also enters into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above. |
(7) | Includes estimated self-insurance liabilities, which have not been reduced by insurance-related receivables, and fixed-price energy contracts. See Note 1Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for additional information. |
Off-Balance Sheet Arrangements
Guarantees
The company is party to a variety of contractual agreements pursuant to which it may be obligated to indemnify the other party for certain matters. These contracts primarily relate to the companys commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the company may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. The company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the companys financial statements.
Letters of Credit
The company had letters of credit of $660.1 million outstanding as of June 20, 2015. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the company. The company pays fees ranging from the London Interbank Offered Rate (LIBOR) plus 1.5% to LIBOR plus 3.0% plus a fronting fee of 0.125% on the face amount of the letters of credit.
New Accounting Policies Not Yet Adopted
See Note 1Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for new accounting pronouncements which have not yet been adopted.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See Note 1Description of Business, Basis of Presentation and Summary of Significant Accounting Policies in our consolidated financial statements, included elsewhere in this prospectus, for a discussion of our significant accounting policies.
Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.
Vendor Allowances
Consistent with standard practices in the retail industry, we receive allowances from many of the vendors whose products we buy for resale in our stores. These vendor allowances are provided to increase the sell-through of the related products. We receive vendor allowances for a variety of merchandising activities: placement of the vendors products in our advertising; display of the vendors products in prominent locations in our stores; supporting the introduction of new products into our retail stores and distribution systems; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale at retail stores. We also receive vendor allowances for buying activities such as credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor allowance contracts have terms of less than one year.
We recognize vendor allowances for merchandising activities as a reduction of cost of sales when the related products are sold. Vendor allowances that have been earned because of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as well as the amount of vendor allowances to be recognized as a reduction of ending inventory requires management judgment and estimates. We determine these amounts based on estimates of current-year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates affect our reported gross profit, operating earnings (loss) and inventory amounts. Our historical estimates have been reliable in the past, and we believe the methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support.
Self-Insurance Liabilities
We are primarily self-insured for workers compensation and general and automobile liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established third-party coverage that limits our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we continually review our overall position and reserving techniques. Because recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.
Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors
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influenced historical development trends that were used to determine the current-year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.
Long-Lived Asset Impairment
We regularly review our individual stores operating performance for indications of impairment. We also regularly review our distribution centers, manufacturing and intangible assets with finite lives. When events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of the asset group to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the asset group at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions.
On December 19, 2014, in connection with the Safeway acquisition, we, together with Safeway, announced that we had entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. The divestiture of these stores was required by the FTC as a condition of closing the Safeway acquisition and was contingent on the closing of the Safeway acquisition. As a result, we recorded an impairment loss on the Albertsons stores of $233.4 million during fiscal 2014.
Business Combination Measurements
In accordance with ASC 805, Business Combinations , we estimate the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill or bargain purchase gain.
The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.
Goodwill
As of February 28, 2015, our goodwill totaled $1.0 billion, of which $957.2 million was recorded as part of our recent acquisition of Safeway. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. Fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a reporting
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unit for purposes of identifying potential impairment. We base projected future cash flows on managements knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, we measure the fair value of a reporting unit against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting units goodwill. We recognize goodwill impairment for any excess of the carrying value of the reporting units goodwill over the implied fair value. The impairment review requires the use of management judgment and financial estimates. Application of alternative estimates and assumptions, such as reviewing goodwill for impairment at a different level, could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy and market competition.
The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2014, fiscal 2013 and fiscal 2012 did not result in impairment. Based on current and future expected cash flows, we believe goodwill impairments are not reasonably likely.
Equity-Based Compensation
We periodically grant membership interests to employees and non-employees in exchange for services. The membership interests we grant to employees are not traditional stock options or stock awards, but are equity interests in a privately held company that participate in earnings, subject to certain distribution thresholds. We account for these as equity-based awards in accordance with the applicable accounting guidance for equity awards issued to employees and non-employees, respectively. To value these awards, the company has determined that an option pricing model is the most appropriate method to measure the fair value of these awards.
In March 2013, we granted 103 Class C Units (2,641,428 Class C Units following a 25,598 for 1 split in January 2015) to certain key executives under the companys Class C Incentive Unit Plan (the Class C Plan). Class C units were accounted for as equity awards to employees in accordance with Accounting Standards Codification 718, CompensationStock Compensation (ASC 718). The fair value of these grants was based on the grant date fair value, which was based on the enterprise valuation at the date of grant and the residual cash flows distributed to Class C unit holders after hurdles are met as defined in the limited liability company agreement of AB Acquisition. The fair value of the Class C units was calculated using an assumed and expected term of three years and no forfeiture rate given the low likelihood that the recipients would discontinue working for the company.
The Class C units granted were valued at $7.70 per unit with a $20.3 million aggregate fair value. Factors contributing to the March 2013 fair value included the acquisition of NAI, which significantly expanded the companys operations, but whose store performance and expected synergies had not yet been proven.
In January 2015, we granted the following equity awards to employees and non-employees:
| 3,350,083 Series 1 Incentive Units (as defined herein) to a member of management under the Incentive Unit Plan, with an additional 16,750,420 authorized and reserved for future issuance. 50% of the incentive units have a service vesting period of four years from the date awarded and vest 25% on each of the subsequent four anniversaries of such date. The remaining 50% have performance-based vesting terms, which vest 25% on the last day of the companys fiscal year for each of the following four fiscal years, subject to specific performance targets. The units accelerate upon a qualifying change of control. |
| 3,350,084 fully vested, non-forfeitable Investor Incentive Units in exchange for services. The units convert into an equal number of ABS Units, NAI Units and Safeway Units based on the fair market value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control. |
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| 11,557,787 fully vested, non-forfeitable Investor Incentive Units to five institutional investors. The units granted and issued to our institutional investors were treated as non-employee compensation for merger consulting services and direct equity issuance costs related to the Safeway acquisition. The units vest immediately and convert into an equal number of ABS Units, NAI Units and Safeway Units based on the fair market value of the Investor Incentive Units on the conversion date after five years or upon a qualifying change of control. |
In March of the first quarter of fiscal 2015, we issued the following equity awards to employees and non-employees:
| 11,465,000 Phantom Units (as defined herein) to employees and directors of the company. Each Phantom Unit provides the participant with a contractual right to receive upon vesting one Incentive Unit under the terms and conditions of the Incentive Unit Plan. Fifty percent of the Phantom Units are Time-Based Units that will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date. The remaining 50% of the Phantom Units are Performance-Based Units that will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of the fiscal year in which the units are granted, subject to continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year. Upon the consummation of an IPO, the unvested Phantom Units that are Performance-Based Units will convert into Phantom Units that are solely Time-Based Units. Following the consummation of the IPO-Related Transactions and this offering, all unvested Phantom Units will accelerate and become vested in the event of the termination of the participants employment due to death or disability or by the company without cause. |
We determine fair value of unvested and issued awards on the grant date using an option pricing model, adjusted for a lack of marketability and using an expected term or time to liquidity based on judgments made by management. We also consider forfeitures for equity-based grants which are not expected to vest. Expected volatility is calculated based upon historical volatility data from a group of comparable companies over a time frame consistent with the expected life of the awards. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero as we do not anticipate making regular future distributions to stockholders. Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of our equity-based compensation expense.
We are required to estimate the enterprise value underlying our equity-based awards when performing fair value calculations. Due to the prior absence of a market for our equity interests, enterprise value is determined by management with the assistance of valuation specialists. The most recent valuation was performed as of January 2015 and uses a Market and Income approach weighted at 50% each. The Market Approach uses the Guideline Public Company Method, which focuses on comparing the subject entity to selected reasonably similar (or guideline) publicly traded companies. Under this method, valuation multiples are: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the subject entity relative to the selected guideline companies; and (iii) applied to the operating data of the subject entity to arrive at an indication of value. The Income Approach utilized the Discounted Cash Flow (DCF) Method. The DCF Method measures the value of the enterprise by estimating the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the company. The steps followed in applying this approach include estimating the expected after-tax cash flows attributable to the company over its life and discounts the cash flows using a rate of return that accounts for both the time value of money and investment risk factors. Management utilized future projections discounted using a present value factor of 9% and a long-term terminal growth rate of 2.4%. Grants subsequent to our initial public offering will be based on the trading value of our common stock.
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The Series 1 Incentive Units and Investor Incentive Units granted in January 2015 were valued at $22.11 per unit with a $403.7 million aggregate fair value. Factors contributing to the January 2015 fair value included the significant improvement of the stores acquired as part of the NAI acquisition in 2013 and realization of operational synergies, the acquisition of United and the acquisition of Safeway, as well as market valuations of comparable publicly traded grocers, and general capital market conditions in the U.S.
The Phantom Units granted in the first quarter of fiscal 2015 were valued at $21.82 per unit with a $250.2 million aggregate fair value. The per unit fair value of the March 2015 unit grants approximated the January 2015 unit grants.
The following assumptions were used for the January and March 2015 equity awards issued and granted:
First Quarter 2015 | Fiscal 2014 | |||||||
Valuation Date |
March 2015 | January 2015 | ||||||
Dividend yield |
0.0% | 0.0% | ||||||
Expected volatility |
41.7% | 42.4% | ||||||
Risk free interest rate |
0.6% | 0.47% | ||||||
Expected term, in years |
1.9 years | 2.0 years | ||||||
Discount for lack of marketability |
16.0% | 16.0% |
Employee Benefit Plans and Collective Bargaining Agreements
Substantially all of our employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to a dedicated defined benefit plan for Safeway, a plan for NAI and a plan for United employees. Certain employees participate in a long-term retention incentive bonus plan. We also provide certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by us.
We recognize a liability for the under-funded status of the defined benefit plans as a component of pension and post-retirement benefit obligations. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive income (loss). The determination of our obligation and related expense for our sponsored pensions and other post-retirement benefits is dependent, in part, on managements selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. Our methodology for selecting the discount rates was to match the plans cash flows to that of a hypothetical bond portfolio whose cash flows from coupons and maturities match the plans projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. We utilized weighted discount rates of 3.75% and 4.62% for our pension plan expenses for fiscal 2014 and fiscal 2013, respectively. To determine the expected rate of return on pension plan assets held by us for fiscal 2014, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. Our weighted assumed pension plan investment rate of return was 6.97% for fiscal 2014 and 7.17% for fiscal 2013. See Note 14Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information on the asset allocations of pension plan assets.
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Sensitivity to changes in the major assumptions used in the calculation of our pension and other post-retirement plan liabilities is illustrated below (in millions).
Percentage
Point Change |
Project Benefit Obligation
Decrease / (Increase) |
Expense
Decrease / (Increase) |
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Discount rate |
+/- 1.00 | % | $336.0 / $(427.8) | $ | 7.8 / $(1.9) | |||||
Expected return on assets |
+/- 1.00 | % | / | $ | 4.4 / $(4.4) |
Safeways pension and post-retirement plans results were only included for the last four weeks of fiscal 2015 that followed the acquisition date. If the impact of a full year of Safeways results were included in the sensitivity table above, the results would be more significant. A 1% increase in discount rate would decrease pension expense by $12.3 million and a 1% decrease in discount rate would increase pension expense by $6.2 million. Additionally, a 1% increase in expected return on plan assets would decrease pension expense by $20.4 million and a 1% decrease in expected return on plan assets would increase pension expense by $20.3 million.
In the fourth quarter of fiscal 2014, we contributed $260.0 million to the Safeway ERP under a settlement with the PBGC in connection with the Safeway acquisition closing.
Multiemployer Pension Plans
We contribute to various multiemployer pension plans. In conjunction with the Safeway acquisition, we assumed a multiemployer pension withdrawal liability in connection with Safeways closure of its Dominicks division. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded. We made contributions to these plans of $113.4 million, $74.2 million and $33.1 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. In fiscal 2015, we expect to contribute approximately $370.0 million to multiemployer pension plans, subject to collective bargaining conditions, exclusive of additional amounts we may be required to contribute relating to A&P.
See Note 14Employee Benefit Plans and Collective Bargaining Agreements in our consolidated financial statements, included elsewhere in this prospectus, for more information relating to our participation in these multiemployer pension plans.
Income Taxes and Uncertain Tax Positions
We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our consolidated financial statements. See Note 13Income Taxes in our consolidated financial statements, included elsewhere in this prospectus, for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. Various taxing authorities periodically examine our income tax returns. These examinations include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating these various tax filing positions, including state and local taxes. We assess our income tax positions and record tax benefits for all years subject to examination based upon managements evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements.
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A number of years may elapse before an uncertain tax position is examined and fully resolved. As of February 28, 2015, we are no longer subject to federal income tax examinations for fiscal years prior to 2007 and in most states are no longer subject to state income tax examinations for fiscal years before 2007. Tax years 2007 through 2014 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from a variety of sources, including changes in interest rates, foreign currency exchange rates and commodity prices. We have from time to time selectively used derivative financial instruments to reduce these market risks. We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our market risk exposures related to interest rates, foreign currency and commodity prices are discussed below and have not materially changed from the prior fiscal year. In fiscal 2014, we began using derivative financial instruments to reduce these market risks related to interest rates.
Interest Rate Risk and Long-Term Debt
We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps (Cash Flow Hedges). Our risk management objective and strategy is to utilize these interest rate swaps to protect the company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. We believe that we are meeting our objectives of hedging our risks in changes in cash flows that are attributable to changes in the LIBOR rate, which is the designated benchmark interest rate being hedged (the hedged risk), on an amount of the companys debt principal equal to the then-outstanding swap notional amount.
Additionally, we had the Deal-Contingent Swap that was entered into on April 16, 2014 in order to reduce our exposure to anticipated variable rate debt issuances in connection with the Safeway acquisition. Upon consummation of the Safeway acquisition, the swap became effective and was designated as a cash flow hedge. In accordance with the swap agreement, we receive a floating rate of interest and pay a fixed rate of interest over the life of the contract.
Interest rate volatility could also materially affect the interest rate we pay on future borrowings under the Senior Secured Credit Facilities. The interest rate we pay on future borrowings under the Senior Secured Credit Facilities are dependent on LIBOR. We believe a 100 basis point increase or decrease on our variable interest rates would not be significant.
See Note 7Derivative Financial Instruments in our consolidated financial statements, included elsewhere in this prospectus, for additional information.
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The tables below provide information about our interest rate derivatives classified as Cash Flow Hedges, deal-contingent swaps and underlying debt portfolio as of February 28, 2015 (dollars in millions).
Pay Fixed/Receive Variable | ||||||||||||||||||||||||
Fiscal
2015 |
Fiscal
2016 |
Fiscal
2017 |
Fiscal
2018 |
Fiscal
2019 |
Thereafter | |||||||||||||||||||
Cash Flow Hedges and Deal- Contingent Swap |
||||||||||||||||||||||||
Average notional amount outstanding |
$ | 5,125 | $ | 4,628 | $ | 3,807 | $ | 2,925 | $ | 1,921 | $ | 1,357 | ||||||||||||
Average pay rate |
6.79 | % | 6.86 | % | 6.82 | % | 6.77 | % | 7.19 | % | 7.19 | % | ||||||||||||
Average receive rate |
5.34 | % | 5.37 | % | 5.92 | % | 6.39 | % | 6.67 | % | 6.97 | % |
Fiscal
2015 |
Fiscal
2016 |
Fiscal
2017 |
Fiscal
2018 |
Fiscal
2019 |
Thereafter | Total |
Fair
Value |
|||||||||||||||||||||||||
Long-Term Debt |
||||||||||||||||||||||||||||||||
Principal payments |
$ | 503.4 | $ | 217.1 | $ | 324.3 | $ | 219.1 | $ | 2,286.5 | $ | 8,608.1 | $ | 12,158.5 | $ | 12,095.2 | ||||||||||||||||
Weighted average interest rate(1) |
3.15 | % | 4.56 | % | 5.77 | % | 5.23 | % | 5.24 | % | 5.68 | % | 5.43 | % |
(1) | Excludes effect of interest rate swaps |
Commodity Price Risk
We have entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. Contracts entered into as of February 28, 2015 expire from 2015 through 2034 with a combined contract value of $99.9 million. We expect to take delivery of these commitments in the normal course of business, and, as a result, these commitments qualify as normal purchases. We do not believe that these energy and commodity swaps would cause a material change to the financial position of the company.
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SUPPLEMENTAL MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS OF SAFEWAY
The following discussion should be read in conjunction with Supplemental Selected Historical Financial Information of Safeway and Safeways historical consolidated financial statements, and the accompanying notes contained therein, included elsewhere in this prospectus. This discussion contains forward-looking statements. Please see Special Note Regarding Forward-Looking Statements for a discussion of the risks, uncertainties and assumptions relating to these statements.
Safeways last three fiscal years prior to the Safeway acquisition consisted of the 53-week period ended January 3, 2015 (fiscal 2014 or 2014), the 52-week period ended December 28, 2013 (fiscal 2013 or 2013) and the 52-week period ended December 29, 2012 (fiscal 2012 or 2012).
Management Overview of Safeway
On January 30, 2015, Albertsons Holdings wholly-owned subsidiary, Saturn Acquisition Merger Sub, Inc., merged with and into Safeway, with Safeway surviving the merger as a wholly-owned subsidiary of Albertsons Holdings. See BusinessOur Integration History and Banners and Note V to Safeways historical consolidated financial statements, included elsewhere in this prospectus, for additional information.
On December 23, 2014, Safeway and its wholly-owned real estate development subsidiary, PDC, sold substantially all of the net assets of PDC to Terramar Retail Centers, LLC (Terramar), an unrelated party. PDCs assets were comprised of shopping centers that are completed or under development. Most of these centers included a grocery store that was leased back to Safeway. The sale was consummated pursuant to an asset purchase agreement dated as of December 22, 2014 by and among Safeway, PDC and Terramar. See Note D to Safeways historical consolidated financial statements, included elsewhere in this prospectus, for additional information.
Discontinued Operations
See Note B to Safeways historical consolidated financial statements, included elsewhere in this prospectus, for additional information on discontinued Safeways operations.
Reduction of Debt
In fiscal 2014, Safeway reduced its debt by $1.2 billion with net proceeds from the sale of its Canadian operations and free cash flow. In August 2014, Safeway paid $802.7 million to redeem $320.0 million of the 2016 Safeway Notes and $400.0 million of the 2017 Safeway Notes. In connection with the Safeway acquisition, Safeway contributed $40.0 million in cash to PDC in the second quarter of fiscal 2014. This cash was to be held in a reserve account until the earlier to occur of (i) payment in full of the mortgage indebtedness encumbering a shopping center in Lahaina, Hawaii and (ii) the release of Safeway from any guaranty obligations in connection with such indebtedness. During the third quarter of fiscal 2014, Safeway deposited $40.0 million with a trustee and achieved a full legal defeasance of the mortgage indebtedness and was released from the guaranty obligations associated with such indebtedness. Therefore, during the third quarter of fiscal 2014, Safeway extinguished the $40.8 million mortgage from its condensed consolidated balance sheet. In addition, Safeway repaid the $400.0 million outstanding under its term credit agreement during fiscal 2014.
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During fiscal 2013, Safeway reduced debt by $1.4 billion with a combination of net proceeds from the sale of its Canadian operations, free cash flow and net proceeds from the initial public offering of Blackhawk. Safeway repaid its $250.0 million floating rate senior notes on the December 12, 2013 maturity date and redeemed $500.0 million of 6.25% Senior Notes due March 15, 2014. Additionally, in the fourth quarter of fiscal 2013, Safeway deposited CAD304.5 million in an account with the trustee under the indenture governing the CAD300.0 million, 3.00% second series notes due March 31, 2014. Safeway met the conditions for satisfaction and discharge of Safeways obligations under the indenture and, as a result, extinguished the $287.9 million notes and $292.2 million cash from the consolidated balance sheet. In addition, Safeway reduced borrowings under its term credit agreement by $300.0 million.
Effect of the Acquisition on Liquidity
In connection with the closing of the Safeway acquisition, on January 30, 2015, Safeway became party to (i) the ABS/Safeway ABL Agreement (as defined herein) with borrowing capacity of up to $3.0 billion, $980.0 million of which was drawn as of January 30, 2015 and (ii) the $6.3 billion principal amount ABS/Safeway Term Loan Agreement (as defined herein). In addition, pursuant to the Safeway acquisition agreement, Safeway is an obligor and its domestic subsidiaries are guarantors of $609.7 million in principal amount of the 7.750% ABS/Safeway Notes (after repayment of a portion of those notes on February 9, 2015). The proceeds of this indebtedness, together with approximately $650 million of cash on hand, were used to pay a portion of the Safeway acquisition consideration and related fees and expenses of the Safeway acquisition and to provide working capital.
Results of Operations
Income from Continuing Operations
Income from continuing operations was $103.2 million ($0.44 per diluted share) in fiscal 2014, $217.1 million ($0.89 per diluted share) in fiscal 2013 and $249.2 million ($1.00 per diluted share) in fiscal 2012. Fiscal 2014 included a loss on foreign currency translation of $131.2 million, a loss on extinguishment of debt of $84.4 million and merger- and integration-related expenses of $48.8 million. Fiscal 2013 included a $57.4 million loss on foreign currency translation and a $30.0 million loss from the impairment of notes receivable. Fiscal 2012 included a $46.5 million gain from legal settlements.
Sales and Other Revenue
Safeways identical store sales increases for fiscal 2014, fiscal 2013 and fiscal 2012 were as follows:
Fiscal
2014 |
Fiscal
2013 |
Fiscal
2012 |
||||||||||
Identical store sales |
2.8 | % | 1.7 | % | 0.8 | % | ||||||
Identical store sales (including fuel) |
1.7 | % | 0.2 | % | 1.6 | % |
Safeways sales increased 3.6% to $36,330.2 million in fiscal 2014 from $35,064.9 million in fiscal 2013. Identical store sales increased 2.8%, or $865 million, due to inflation and better merchandising. Average transaction size and transaction counts increased during fiscal 2014. The additional week in fiscal 2014 contributed $573 million in sales. Fuel sales decreased $206 million in fiscal 2014, as a result of the average retail price per gallon of fuel decreasing 2.9% and gallons sold decreasing 2.1%.
Safeways sales decreased 0.3% to $35,064.9 million in fiscal 2013 from $35,161.5 million in fiscal 2012. Identical store sales increased 1.7%, or $511 million, due to inflation and better
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merchandising. Warehouse and supply sales increased $35 million. Other revenue, primarily from gift and prepaid card sales, increased $13 million. Fuel sales declined $425.8 million in fiscal 2013, as a result of the average retail price per gallon of fuel decreasing 4.1% and gallons sold decreasing 5.4%. Sales declined $233 million due to the disposition of Safeways Genuardis stores in fiscal 2012. Store closures, net of new stores, decreased sales by $39 million. Average transaction size and transaction counts increased during fiscal 2013.
Gross Profit
Gross profit represents the portion of sales revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with Safeways distribution network. Advertising and promotional expenses are also a component of cost of goods sold. Additionally, all vendor allowances are classified as an element of cost of goods sold.
Safeways gross profit margin was 26.7% of sales in fiscal 2014, 26.3% of sales in fiscal 2013 and 26.3% in fiscal 2012.
Safeways gross profit margin increased 32 basis points to 26.7% of sales in fiscal 2014 from 26.3% of sales in fiscal 2013 primarily for the following reasons:
Basis point
increase (decrease) |
||||
Impact of fuel sales |
53 | |||
Lower advertising expense |
19 | |||
Investments in price |
(25 | ) | ||
Higher shrink expense |
(15 | ) | ||
|
|
|||
Total |
32 | |||
|
|
Safeways gross profit margin increased eight basis points to 26.33% of sales in fiscal 2013 from 26.25% of sales in fiscal 2012 primarily for the following reasons:
Basis point
increase (decrease) |
||||
Impact of fuel sales |
35 | |||
Lower advertising expense |
16 | |||
Changes in product mix |
6 | |||
Increased LIFO income(1) |
5 | |||
Fuel partner discounts |
(15 | ) | ||
Investments in price |
(18 | ) | ||
Higher shrink expense |
(19 | ) | ||
Other individually immaterial items |
(2 | ) | ||
|
|
|||
Total |
8 | |||
|
|
(1) | LIFO is defined as last-in, first-out. |
Safeways shrink expense increased 15 basis points in fiscal 2014 and 19 basis points in fiscal 2013. In the second half of fiscal 2013, Safeway implemented a new strategy which focused more on increasing sales with less emphasis on controlling shrink, which led to higher shrink expense in fiscal 2014 and fiscal 2013.
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Safeways vendor allowances totaled $2.5 billion in fiscal 2014, $2.4 billion in fiscal 2013 and $2.3 billion in fiscal 2012 and can be grouped into the following broad categories: promotional allowances, slotting allowances and contract allowances.
Promotional allowances make up the vast majority of all of Safeways allowances. With promotional allowances, vendors pay Safeway to promote their product. The promotion may be any combination of a temporary price reduction, a feature in print ads, a feature in a Safeway circular or a preferred location in the store. Safeways promotions are typically one to two weeks long.
Slotting allowances are a very small portion of Safeways total allowances. With slotting allowances, the vendor reimburses Safeway for the cost of placing new product on the shelf. Safeway has no obligation or commitment to keep the product on the shelf for a minimum period.
Contract allowances make up the remainder of all of Safeways allowances. Under a typical contract allowance, a vendor pays Safeway to keep product on the shelf for a minimum period of time or when volume thresholds are achieved.
Promotional and slotting allowances are accounted for as a reduction in the cost of purchased inventory and are recognized when the related inventory is sold. Contract allowances are recognized as a reduction in the cost of goods sold as volume thresholds are achieved or through the passage of time.
Operating and Administrative Expense
Safeways operating and administrative expense consists primarily of store occupancy costs and backstage expenses, which, in turn, consist primarily of wages, employee benefits, rent, depreciation and utilities.
Safeways operating and administrative expense was 25.18% of sales in fiscal 2014 compared to 24.75% of sales in fiscal 2013 and 24.44% in fiscal 2012.
Safeways operating and administrative expense margin increased 43 basis points to 25.18% of sales in fiscal 2014 from 24.75% of sales in fiscal 2013 primarily for the following reasons:
Basis point
increase (decrease) |
||||
Impact of fuel sales |
22 | |||
Store occupancy costs |
(20 | ) | ||
Write-off of $30 million of notes receivable in fiscal 2013 |
(10 | ) | ||
Lower pension expense |
(14 | ) | ||
Store labor |
(12 | ) | ||
Higher bonus expense |
18 | |||
Safeway acquisition- and integration-related expenses |
16 | |||
Higher self-insurance expense |
15 | |||
Lower property gains |
8 | |||
Higher legal expenses |
8 | |||
Other |
12 | |||
|
|
|||
Total |
43 | |||
|
|
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Safeways self-insurance expense increased $55.3 million to $153.9 million in fiscal 2014 from $98.6 million in fiscal 2013. A 25 basis point decline in the discount rate used to measure the present value of the self-insurance liability in fiscal 2014 increased Safeways self-insurance expense by approximately $6 million. The primary drivers leading to the increase in fiscal 2014 were a significant claim related to Safeways in-store pharmacy operations and two significant claims related to Safeways transportation operations. In fiscal 2013, a 100 basis point increase in the discount rate reduced fiscal 2013 expense by approximately $24 million. The remaining increase was due primarily to adverse claim development.
Safeways operating and administrative expense margin increased 31 basis points to 24.75% of sales in fiscal 2013 from 24.44% of sales in fiscal 2012 primarily for the following reasons:
Basis point
increase (decrease) |
||||
Impact of fuel sales |
33 | |||
$46.5 million gain from legal settlements in fiscal 2012 |
15 | |||
Write-off of $30.0 million of notes receivable |
9 | |||
Decline in self-insurance expense |
(16 | ) | ||
Lower depreciation expense |
(11 | ) | ||
Lower pension expense |
(5 | ) | ||
Other individually immaterial items |
6 | |||
|
|
|||
Total |
31 | |||
|
|
Gain on Property Dispositions
Safeways operating and administrative expense included a net gain on property dispositions of $38.8 million in fiscal 2014, a net gain of $51.2 million in fiscal 2013 and a net gain of $48.3 million in fiscal 2012.
Interest Expense
Safeways interest expense was $198.9 million in fiscal 2014, compared to $273.0 million in fiscal 2013 and $300.6 million in fiscal 2012. The decrease in fiscal 2014 was due to lower average borrowings, partly offset by increased average interest rates. The decrease in interest expense in fiscal 2013 was due to lower average borrowing in fiscal 2013 compared to fiscal 2012, partly offset by slightly higher interest rates.
Average borrowings from continuing operations at Safeway were $3,680.5 million, $5,623.9 million and $6,378.9 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. Average interest rates were 5.42%, 4.85% and 4.71% in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Loss on Extinguishment of Debt
Safeway incurred a loss on extinguishment of debt of $84.4 million and $10.1 million in fiscal 2014 and fiscal 2013, respectively. See Note G to Safeways historical consolidated financial statements, included elsewhere in this prospectus, for additional information.
Loss on Foreign Currency Translation
After the sale of Safeways Canadian operations, the adjustments resulting from translation of assets and liabilities denominated in Canadian dollars are included in Safeways statement of income as a foreign currency gain or loss. Foreign currency loss at Safeway was $131.2 million in fiscal 2014 and $57.4 million in fiscal 2013.
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Other Income, Net
In fiscal 2014, Safeways other income, net consisted of interest income of $22.5 million, equity in earnings of unconsolidated affiliate of $16.2 million and gain on the sale of investments of $6.3 million. In fiscal 2013, Safeways other income, net consisted primarily of interest income of $14.8 million, equity in earnings from Safeways unconsolidated affiliate of $17.6 million and gain on the sale of investments of $8.6 million. In fiscal 2012, other income, net consists primarily of interest income of $9.9 million and equity in earnings of unconsolidated affiliates of $17.5 million.
Income Taxes
Safeways fiscal 2014 income tax expense was $61.8 million, or 37.5% of pre-tax income. In fiscal 2013, Safeway had income tax expense of $34.5 million, or 13.7% of pre-tax income. In fiscal 2013, Safeway withdrew $68.7 million from the accumulated cash surrender value of corporate-owned life insurance policies and determined that a majority of the remaining cash surrender value would be received in the future through tax-free death benefits. Consequently, Safeway reversed deferred taxes on that remaining cash surrender value and reduced fiscal 2013 income tax expense by $17.2 million. In fiscal 2012, income tax expense was $113.0 million, or 31.2%, of pre-tax income.
Adjusted EBITDA
Adjusted EBITDA from Continuing Operations is a non-GAAP operating financial measure that excludes the financial impact of items management does not consider in assessing ongoing performance. Management believes that Adjusted EBITDA from Continuing Operations provides a meaningful representation of operating performance because it excludes the impact of items that could be considered non-core in nature.
Management uses Adjusted EBITDA from Continuing Operations to measure overall operating performance and assess performance against Safeways peers. Since the levels of indebtedness, tax structures, discontinued operations, property impairment charges, methodologies in calculating LIFO expense and unconsolidated affiliates that other companies have are different from Safeways, we omit these amounts to facilitate investors ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because, in managements experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution such store makes to operating performance.
Adjusted EBITDA from Continuing Operations also provides useful information to our investors, securities analysts and other interested parties.
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The computation of Adjusted EBITDA from Continuing Operations is provided below. Adjusted EBITDA from Continuing Operations should not be considered as an alternative to income from continuing operations, net of tax, or cash flow from operating activities (which are determined in accordance with GAAP). Other companies may define Adjusted EBITDA differently and, as a result, such measures may not be comparable to Safeways Adjusted EBITDA from Continuing Operations (dollars in millions).
Fiscal
2014 |
Fiscal
2013 |
Fiscal
2012 |
||||||||||
Income from continuing operations, net of tax (1) |
$ | 103.2 | $ | 217.1 | $ | 249.2 | ||||||
Noncontrolling interest |
| | 0.3 | |||||||||
Income taxes |
61.8 | 34.5 | 113.0 | |||||||||
Interest expense |
198.9 | 273.0 | 300.6 | |||||||||
Depreciation expense |
921.5 | 922.2 | 952.8 | |||||||||
LIFO (income) / expense |
(5.0 | ) | (14.3 | ) | 0.7 | |||||||
Share-based employee compensation |
24.7 | 50.4 | 48.4 | |||||||||
Property impairment charges |
56.1 | 35.6 | 33.6 | |||||||||
Equity in earnings of unconsolidated affiliate |
(16.2 | ) | (17.6 | ) | (17.5 | ) | ||||||
Dividend from unconsolidated affiliate |
9.0 | 3.8 | 0.7 | |||||||||
Impairment of notes receivables |
| 30.0 | | |||||||||
Loss on foreign currency translation |
131.2 | 57.4 | | |||||||||
Loss on extinguishment of debt |
84.4 | 10.1 | | |||||||||
Acquisition and integration costs |
48.8 | 0.5 | | |||||||||
|
|
|
|
|
|
|||||||
Total Adjusted EBITDA from Continuing Operations |
$ | 1,618.4 | $ | 1,602.7 | $ | 1,681.8 | ||||||
|
|
|
|
|
|
(1) | Excludes discontinued operations of Blackhawk, Dominicks and Canada Safeway. |
Liquidity and Financial Resources
Safeways net cash flow provided by operating activities was $1,387.7 million in fiscal 2014, $1,071.4 million in fiscal 2013 and $1,226.5 million in fiscal 2012. Net cash flow from operating activities increased in fiscal 2014 compared to fiscal 2013 primarily due to higher income taxes paid in fiscal 2013. The decrease in Safeways net cash flow provided by operating activities in fiscal 2013 from fiscal 2012 was due primarily to income taxes paid from continuing operations.
Safeways cash contributions to Safeways pension and post-retirement benefit plans are expected to be $268.0 million in fiscal 2015 and totaled $13.3 million in fiscal 2014, $56.3 million in fiscal 2013 and $110.3 million in fiscal 2012.
Safeways net cash flow used by investing activities, which consists principally of cash paid for property additions, was $115.6 million in fiscal 2014, $442.7 million in fiscal 2013 and $593.2 million in fiscal 2012. Safeways net cash flow used by investing activities declined in fiscal 2014 compared to fiscal 2013, primarily as a result of proceeds from the sale of PDC in fiscal 2014. Net cash flow used by investing activities declined in fiscal 2013 compared to fiscal 2012, primarily as a result of lower capital expenditures and higher proceeds from Safeway-owned life insurance policies in fiscal 2013.
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Safeways cash paid for property additions was $711.2 million in fiscal 2014, $738.2 million in fiscal 2013 and $800.1 million in fiscal 2012. Capital expenditures by major category of spending were as follows:
(in millions) |
Fiscal
2014 |
Fiscal
2013 |
Fiscal
2012 |
|||||||||
Remodels |
$ | 121.8 | $ | 227.9 | $ | 227.8 | ||||||
Information technology |
123.3 | 117.0 | 96.1 | |||||||||
New stores |
96.0 | 111.7 | 157.2 | |||||||||
Property Development Centers |
107.3 | 105.0 | 177.2 | |||||||||
Supply chain |
138.8 | 91.1 | 59.3 | |||||||||
Others |
124.0 | 85.5 | 82.5 | |||||||||
|
|
|
|
|
|
|||||||
Cash paid for property additions |
$ | 711.2 | $ | 738.2 | $ | 800.1 | ||||||
|
|
|
|
|
|
Safeways net cash flow used by financing activities was $1,672.1 million in fiscal 2014, $2,003.9 million in fiscal 2013 and $1,329.1 million in fiscal 2012. In fiscal 2014, net cash payments on debt were $1,371.8 million. Safeway paid $82.0 million to extinguish certain debt and paid $251.8 million in dividends in fiscal 2014. In fiscal 2013, net cash payments on debt were $1,386.0 million. Safeway also repurchased $663.7 million of common stock, paid $181.4 million in dividends and received net proceeds of $240.1 million from the exercise of stock options in fiscal 2013. In fiscal 2012, net cash additions to debt were $117.5 million. Additionally, Safeway repurchased $1,274.5 million of common stock and paid $163.9 million in dividends in fiscal 2012.
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Our Company
We are one of the largest food and drug retailers in the United States, with both strong local presence and national scale. As of June 20, 2015, we operated 2,205 stores across 33 states under 18 well-known banners, including Albertsons , Safeway , Vons , Jewel - Osco , Shaws , Acme , Tom Thumb , Randalls , United Supermarkets , Pavilions , Star Market and Carrs . We operate in 121 MSAs and are ranked #1 or #2 by market share in 68% of them. We provide our customers with a service-oriented shopping experience, including convenient and value-added services through 1,698 pharmacies, 1,090 in-store branded coffee shops and 378 adjacent fuel centers. We have approximately 265,000 talented and dedicated employees serving on average more than 33 million customers each week.
Our operating philosophy is simple: we run great stores with a relentless focus on driving sales growth. We believe that our management team, with decades of collective experience in the food and drug retail industry, has developed a proven and successful operating playbook that differentiates us from our competitors.
We implement our playbook through a decentralized management structure. We believe this approach allows our division and district-level leadership teams to create a superior customer experience and deliver outstanding operating performance. These teams are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending in the local communities and neighborhoods they serve. Our store directors are responsible for implementing our operating playbook on a daily basis and ensuring that our employees remain focused on delivering outstanding service to our customers.
We believe that the execution of our operating playbook, among other factors, including improved economic conditions and consumer confidence, has enabled us to grow sales, profitability and free cash flow across our business. During fiscal 2014 and the first quarter of fiscal 2015, excluding Safeway, our identical store sales grew at 7.2% and 5.1%, respectively. At Safeway, prior to our acquisition, the rate of identical store sales growth was 3.0% in fiscal 2014, and accelerated in the first quarter of fiscal 2015 to 3.8%. We believe that implementation of our playbook, together with improved economic conditions and consumer confidence, will enable us to further accelerate this rate. We are currently executing on an annual synergy plan of approximately $800 million related to the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018. We expect to deliver annual run-rate synergies of approximately $440 million by the end of fiscal 2015.
For fiscal 2014 on a pro forma basis, we would have generated net sales of $57.5 billion, Adjusted EBITDA of $2.4 billion and free cash flow (which we define as Adjusted EBITDA less capital expenditures) of $1.5 billion. For the 12 months ended June 20, 2015 on a pro forma basis, we would have generated net sales of $57.9 billion, Adjusted EBITDA of $2.5 billion and free cash flow of $1.7 billion. For the first quarter of fiscal 2015, we generated net sales of $18.1 billion, Adjusted EBITDA of $728 million and free cash flow of $513 million. In addition to realizing increased sales, profitability and free cash flow through the implementation of our operating playbook, we expect synergies from the Safeway acquisition to enhance our profitability and free cash flow over the next few years.
Our Integration History and Banners
Over the past nine years, we have completed a series of acquisitions, beginning with our purchase of Albertsons LLC in 2006. This was followed in March 2013 by our acquisition of NAI from SuperValu, which included the Albertsons stores that we did not already own and stores operating under the Acme , Jewel - Osco , Shaws and Star Market banners. In December 2013, we acquired United, a regional grocery chain in North and West Texas. In January 2015, we acquired Safeway in a transaction that significantly increased our scale and geographic reach. We have also completed the
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divestiture of 168 stores required by the FTC in connection with the Safeway acquisition. On July 19, 2015, we entered into an agreement to acquire 76 stores from A&P operating under the A&P, Superfresh and Pathmark banners.
The following map represents our regional banners and combined store network as of June 20, 2015. We also operate 30 strategically located distribution centers and 21 manufacturing facilities. Approximately 48% of our stores are owned or ground-leased. Together, our owned and ground-leased properties have a value of approximately $10.5 billion (see Properties). Our principal banners are described in more detail below.
Albertsons
Under the Albertsons banner, which dates back to 1939, we operate 456 stores in 16 states across the Western and Southern United States. In addition to our broad grocery offering, approximately 364 Albertsons stores include in-store pharmacies (offering prescriptions, immunizations, online prescription refills and prescription savings plans), and we operate three fuel centers adjacent to our Albertsons stores.
The operating performance of the Albertsons stores that we acquired in 2013 has significantly improved since acquisition. In fiscal 2012, prior to their acquisition, identical store sales at these stores declined by 4.8%, compared to positive 8.2% identical store sales growth during fiscal 2014 and positive 9.5% identical store sales growth during the first quarter of fiscal 2015.
Safeway
We operate 1,247 Safeway stores in 19 states across the Western, Southern and Mid-Atlantic regions of the United States. We operate these stores under the Safeway banner, which dates back to 1926, as well as the Vons, Pavilions , Randalls , Tom Thumb and Carrs banners. Our Safeway stores also provide convenience to our customers through a network of 980 in-store pharmacies and 340 adjacent fuel centers.
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The Safeway acquisition has better positioned us for long-term growth by providing us with a broader assortment of products, a more efficient supply chain, enhanced fresh and perishable offerings and a high-quality and expansive portfolio of own brand products. These improvements enable us to respond to changing customer tastes and preferences and compete more effectively in a highly competitive industry.
Safeway has achieved consistent positive identical store sales growth over the past 16 fiscal quarters, driven in part by continued investment in the store base (with approximately 87% of Safeway stores new or remodeled since 2003) and the implementation of local marketing programs to enhance sales. Safeway has also begun to experience an acceleration in identical store sales growth, from 1.4% in fiscal 2013 to 3.0% in fiscal 2014 and 3.8% in the first quarter of fiscal 2015.
Acme, Jewel-Osco, Shaws and Star Market
Under the Acme , Jewel - Osco , Shaws and Star Market banners, we operate 446 stores, 302 in-store pharmacies and five adjacent fuel centers in 12 states across the Mid-Atlantic, Midwest and Northeast regions of the United States. Each of these banners has an operating history going back more than 100 years, has excellent store locations and has a loyal customer base.
The operating performance of these banners has significantly improved since we acquired them in 2013. During the four fiscal quarters prior to their acquisition, our Acme , Jewel - Osco , Shaws and Star Market stores were averaging negative 4.8% identical store sales compared to positive 9.1% for fiscal 2014 and positive 4.1% for the first quarter of fiscal 2015.
United Supermarkets
In the North and West Texas area, we operate 54 stores under the United Supermarkets , Amigos and Market Street banners, together with 29 adjacent fuel centers and 11 United Express convenience stores. Our acquisition of United in December 2013 represented a unique opportunity to add a growing and profitable business in the growing Texas economy with an experienced and successful management team in place. Retaining the local management team was critical to our acquisition thesis. We have leveraged their abilities by both re-assigning and opening additional stores under their direct oversight. The United management team has considerable expertise in meeting the preferences of an upscale customer base with its Market Street format. United addresses its significant Hispanic customer base through its Amigos format, which we intend to leverage across other relevant regions going forward. We also benefit from distribution center and transportation efficiencies as a result of Uniteds adjacencies to our other operating divisions in the Southwest.
Our Organizational Structure and Operating Playbook
Our Organizational Structure
We are organized across 14 operating divisions. We operate with a decentralized management structure. Our division and district-level leadership teams are responsible and accountable for their own sales, profitability and capital expenditures, and are empowered and incentivized to make decisions on product assortment, placement, pricing, promotional plans and capital spending to best serve the local communities and neighborhoods they serve. Our division leaders collaborate to facilitate the rapid sharing of best practices. Our local merchandising teams spend considerable time working with store directors to make sure we are satisfying consumer preferences. Our store directors are responsible for ensuring that our employees provide outstanding service to our customers. We believe that this aspect of our operating playbook, combined with ongoing investments in store labor,
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coordinated employee training and a simple, well-understood quarterly sales and EBITDA-based bonus structure, fosters an organization that is nimble and responsive to the local tastes and preferences of our customers.
Our executive management team sets long-term strategy and annual objectives for our 14 divisions. They also facilitate the sharing of expertise and best practices across our business, including through the operation of centers of excellence for areas such as our own brands, space planning, pricing analytics, promotional effectiveness, product category trends and consumer insights. They seek to leverage our national scale by driving our efforts to maintain and deepen strong relationships with large, national consumer products vendors. The executive management team also provides substantial data-driven analytical support for decision-making, providing division management teams with insights on their relative performance. Together, all of these elements reinforce our high standards of store-level execution and foster a collaborative, competitive and winning culture.
Our Operating Playbook
Our management team has developed and implemented a proven and successful operating playbook to drive sales growth, profitability and free cash flow. Our playbook covers every major facet of store-level operations and is based on the following key concepts:
| Operate Our Stores to the Highest Standards . We ensure that our stores are always full, fresh, friendly and clean. Our efforts are driven through our rigorous G.O.L.D. (Grand Opening Look Daily) program focused on delivering fresh offerings, well-stocked shelves, and clean and brightly lit departments. |
| Deliver Superior Customer Service . We focus on providing superior customer service. We consistently invest in store labor and training, and our simple and well-understood sales- and EBITDA-based bonus structure ensures that our employees are properly incentivized. We measure customer satisfaction scores weekly and hold management accountable for continuous improvement. Our focus on customer service is reflected in our improving customer satisfaction scores and identical store sales growth. |
| Provide a Compelling Product Offering . We focus on providing the highest quality fresh, natural and organic assortments to meet the demands of our customers, including through our private label brands, which we refer to as our own brands, such as Open Nature and O Organics . In addition, we offer high-volume, high-quality and differentiated signature products, including fresh fruit and vegetables cut in-store, cookies and fried chicken prepared using our proprietary recipes, in-store roasted turkey and freshly-baked bread. Our decentralized operating structure enables our divisions to offer products that are responsive to local tastes and preferences. |
| Offer an Attractive Value Proposition to Our Customers . We maintain price competitiveness through systematic, selective and thoughtful price investment to drive customer traffic and basket size. We also use our loyalty programs, including just for U , MyMixx and our fuel-based rewards programs, as well as our strong own brand assortment to improve customer perception of our value proposition. |
| Drive Innovation Across our Network of Stores . We focus on innovation to enhance our customers in-store experience, generate customer loyalty and drive traffic and sales growth. We ensure that our stores benefit from modern décor, fixtures and store layout. We systematically monitor emerging trends in food and source new and innovative products to offer in our stores. In addition, we are focused on continuing to deliver personalized and promotional offers to further develop our relationship with our customers and on expanding our online and home delivery options. |
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| Make Disciplined Capital Investments . We believe that our store base is modern and in excellent condition. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. Our capital budgets are subject to approval at the corporate level, but we empower our division leadership to prudently allocate capital to projects that will generate the highest return. |
Identical Store Sales
We believe that the execution of our operating playbook has been an important factor in the acceleration of identical store sales growth across our SVU Albertsons Stores and NAI Stores. Identical store sales growth across our Safeway stores has also accelerated, and we believe that the implementation of our operating playbook to the Safeway stores will, together with other factors, including improved economic conditions and consumer confidence, enable us to further accelerate this rate. The charts below illustrate historical identical store sales growth across the Albertsons Stores, the NAI Stores and the Safeway stores:
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Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and contribute to our ongoing success:
Powerful Combination of Strong Local Presence and National Scale . We operate a portfolio of well-known banners with both strong local presence and national scale. We have leading positions in many of the largest and fastest-growing MSAs in the United States. Given the long operating history of our banners, many of our stores form an important part of the local communities and neighborhoods in which they operate and occupy First-and-Main locations. We believe that our combination of local presence and national scale provides us with competitive advantages in brand recognition, customer loyalty and purchasing, marketing and advertising and distribution efficiencies.
Best-in-Class Management Team with a Proven Track Record . We have assembled a best-in-class management team with decades of operating experience in the food and drug retail industry. Our Chairman and Chief Executive Officer, Bob Miller, has over 50 years of food and drug retail experience, including serving as Chairman and CEO of Fred Meyer and Rite Aid and Vice Chairman of Kroger. We have created an Office of the CEO to set long-term strategy and annual objectives for our 14 divisions. The Office of the CEO is comprised of Bob Miller, Wayne Denningham (Chief Operating Officer), Justin Dye (Chief Administrative Officer) and Shane Sampson (Chief Marketing and Merchandising Officer), each of whom brings significant leadership and operational experience with long tenures at our company and within the industry. Our Executive and Senior Vice Presidents and our division, district and store-level leadership teams are also critical to the success of our business. Our nine Executive Vice Presidents, 15 Senior Vice Presidents and 14 division Presidents have an average of almost 23, 24 and 32 years of service, respectively, with our company.
Proven Operating Playbook . We believe that the execution of our operating playbook has been an important factor in enabling us to accelerate identical store sales growth. The Legacy Albertsons Stores have delivered positive identical store sales growth in each of the past 17 fiscal quarters. In fiscal 2014, we delivered identical store sales growth of 8.2% across the SVU Albertsons Stores, and 9.1% across the NAI Stores, compared with negative 4.8% for each of them in fiscal 2012 (prior to their acquisition). In the first quarter of fiscal 2015, we delivered identical store sales growth of 9.5% across the SVU Albertsons Stores, and 4.1% across the NAI Stores, compared to positive identical store sales growth of 8.7% and 12.2% for them, respectively, in the first quarter of fiscal 2014. Our Safeway stores delivered identical store sales growth of 3.0% in fiscal 2014, and 3.8% identical store sales growth in the first quarter of fiscal 2015, and we believe that implementation of our playbook, together with other factors, including improved economic conditions and consumer confidence, will enable us to further accelerate our sales growth.
Strong Free Cash Flow Generation . Our strong operating results, in combination with our disciplined approach to capital allocation, have resulted in the generation of strong free cash flow. On a pro forma basis, we would have generated free cash flow of approximately $1.5 billion in fiscal 2014. Our ability to grow free cash flow will be enhanced by the synergies we expect to achieve from our acquisition of Safeway. We expect to deliver approximately $800 million of annual synergies by the end of fiscal 2018, including approximately $440 million on an annual run-rate basis by the end of fiscal 2015.
Significant Acquisition and Integration Expertise . Growth through acquisition is an important component of our strategy, both to enhance our competitiveness in existing markets (as with recent acquisitions for our Jewel-Osco banner) and to expand our footprint into new markets (as with the United acquisition). On July 19, 2015, we entered into an agreement to acquire 76 stores from A&P for our Acme banner. We have developed a proprietary and repeatable blueprint for integration, including a clearly defined plan for the first 100 days. We believe that our ability to integrate acquisitions is
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significantly enhanced by our decentralized approach, which allows us to leverage the expertise of incumbent local management teams. We have also developed significant expertise in synergy planning and delivery. We believe that the acquisition and integration experience of our management team, together with the considerable transactional expertise of our equity sponsors, positions us well for future acquisitions as the food and drug retail industry continues to consolidate.
For more information on our ability to achieve any expected synergies, see Risk FactorsRisks Related to the Safeway and A&P Acquisitions and IntegrationWe may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.
Our Strategy
Our operating philosophy is simple: we run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and free cash flow, through execution of the following strategies:
Continue to Drive Identical Store Sales Growth . Consistent with our operating playbook, we plan to deliver identical store sales growth by implementing the following initiatives:
| Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products . We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth. |
| Expanding Our Own Brand Offerings . We continue to drive sales growth and profitability by extending our own brand offerings across our banners, including high-quality and recognizable brands such as O Organics , Open Nature , Eating Right and Lucerne . |
| Leveraging Our Effective and Scalable Loyalty Programs . We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U , MyMixx and fuel-based loyalty programs. In addition, we believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, and through the expansion of our online and home delivery options. |
| Capitalizing on Demand for Health and Wellness Services . We intend to leverage our portfolio of 1,698 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend is over 2.5x that of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to patients. We believe that these efforts will drive sales growth and generate customer loyalty. |
| Continuously Evaluating and Upgrading Our Store Portfolio . We plan to pursue a disciplined capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. |
| Driving Innovation . We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We will also seek to build new, and enhance existing, customer relationships through our digital capabilities. |
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| Sharing Best Practices Across Divisions . Our division leaders collaborate to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics offering across banners, the accelerated roll-out of signature products such as Albertsons fresh fruit and vegetables cut in-store and a broader assortment and new fixtures for our wine and floral shops, implementing Safeways successful strategy across many of our banners. |
We believe the combination of these actions and initiatives, together with the attractive industry trends described in more detail under Our Industry, will continue to drive identical store sales growth.
Enhance Our Operating Margin . Our focus on identical store sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefit through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. In addition, we maintain a disciplined approach to expense management and budgeting.
Implement Our Synergy Realization Plan . We are currently executing our annual synergy plan of approximately $800 million from the acquisition of Safeway, which we expect to achieve by the end of fiscal 2018, with associated one-time costs of approximately $690 million (net of estimated synergy-related asset sale proceeds). We expect to achieve synergies from the Safeway acquisition of approximately $200 million in fiscal 2015, or $440 million on an annual run-rate basis, by the end of fiscal 2015, principally from corporate and division overhead savings, our own brands, vendor funds and marketing and advertising cost reductions. Approximately 80% of our $800 million annual synergy target is independent of sales growth, which we believe significantly reduces the risk of achieving our target.
Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. Synergies are expected to consist of approximately 28% from operational efficiencies within our back office, distribution and manufacturing operations, 21% from the conversion of Albertsons stores onto Safeways information technology systems, 14% from increased own brand penetration and improved cost synergies and 12% from improved vendor relationships. An additional 25% of synergies are expected to come from optimizing marketing and advertising spend in adjacent regions, as well as actionable synergies in pharmacy, utilities and insurance. A more detailed description of the expected sources of synergy is set out below:
| Corporate and Division Cost Savings . We are removing complexity from our business by simplifying business processes and rationalizing redundant positions. As part of this process we have finalized the plans and timing of headcount reductions in connection with our acquisition of Safeway and as of June 20, 2015 have already completed approximately 70% of these reductions. In addition, we are taking steps to reduce transportation costs due to reduced mileage, improved facility utilization and fleet rationalization. |
| IT Conversion . We are in the process of converting our Albertsons and NAI stores, distribution centers and systems onto Safeways IT systems, which we believe will result in significant savings as we wind down our transition services agreements with SuperValu. We have obtained Safeway systems access for Albertsons and NAI users, developed initial consolidated reporting, launched our Data Integrity/Validation team and consolidated email directories across the company. In addition, we hired a new Chief Information Security Officer in early 2015. |
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Own Brands . We are leveraging the high-quality and expansive portfolio of our own brand products, consumer brands and manufacturing facilities owned by Safeway to improve |
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profitability across our company. We recently developed a plan to redesign and consolidate our own brand packaging, which will no longer be differentiated by banners. Upon completion, each of our banners will offer the same own brand products. |
| Vendor Funding . We believe our increased scale will provide optimized and improved vendor relationships, through which we receive allowances and credits for volume incentives, promotional allowances and new product placement. We intend to leverage our scale through our joint accelerated growth program with leading consumer packaged goods vendors. |
| Marketing and Advertising . We believe our scale provides opportunities for marketing and advertising savings, primarily from lower advertising rates in overlapping regions and reduced agency spend. We intend to leverage our scale, but operate locally. Our national team will execute cutting-edge merchandising programs, optimize best practice sharing across divisions and enhance consumer understanding through consumer insight and analysis. Our local marketing teams will set brand strategy and communicate brand message to customers through the use of direct mail, radio, email and web applications, just for U and MyMixx personalization, television, social media, display and signage, search engines and weekly inserts. We also intend to develop and leverage cutting-edge loyalty and digital marketing programs. Since the Safeway acquisition, we have outsourced tactical advertising functions and implemented a standardized consumer survey index across the company. |
| Pharmacy, Utilities and Insurance . We intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale for volume discounts on branded and generic drugs. We will also benefit from the conversion of our banners to Safeways leading energy purchasing program that will allow us to buy a portion of our electrical power needs at wholesale prices. In addition, we expect to lower our corporate insurance costs by leveraging best practices and scale across the combined company. In addition, in May 2015 we hired a new Senior Vice President of Pharmacy, Health and Wellness to help grow our pharmacy business. |
For more information on our ability to achieve any expected synergies, see Risk FactorsRisks Related to the Safeway and A&P Acquisitions and IntegrationWe may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule anticipated, from the Safeway acquisition.
Selectively Grow Our Store Base Organically and Through Acquisition . We intend to continue to grow our store base organically through disciplined investment in new stores. On July 19, 2015, we entered into an agreement to acquire 76 stores from A&P for our Acme banner. We believe our healthy balance sheet and decentralized structure also provide us with strategic flexibility and a strong platform to make further acquisitions. We evaluate strategic acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe selected acquisitions and our successful track record of integration and synergy delivery provide us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and free cash flow.
Our Industry
We operate in the $584 billion U.S. food and drug retail industry, a highly fragmented sector with a large number of companies competing locally and a limited number of companies with a national footprint. From 2010 through 2014, food and drug retail industry revenues increased at an average annual rate of 1.3%, driven in part by improving macroeconomic factors including gross domestic product, household disposable income, consumer confidence and employment. Food-at-Home inflation
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is forecasted to be 1.75% to 2.75% in 2015, which should also benefit industry sales. In addition to macroeconomic factors, the following trends, in particular, are expected to drive sales growth across the industry:
| Customer Focus on Fresh, Natural and Organic Offerings . Evolving customer tastes and preferences have caused food retailers to improve the breadth and quality of their fresh, natural and organic offerings. This, in turn, has resulted in the increasing convergence of product selections between conventional and alternative format food retailers. |
| Converging Approach to Health and Wellness . Customers increasingly view their food shopping experience as part of a broader approach to health and wellness. As a result, food retailers are seeking to drive sales growth and customer loyalty by incorporating pharmacy and wellness clinic offerings in their stores. |
| Increased Customer Acceptance of Own Brand Offerings . Increased customer acceptance has driven growth in demand for own brand offerings, including the introduction of premium store brands. In general, own brand offerings have a higher gross margin than similarly positioned products of national brands. |
| Loyalty Programs and Personalization . To remain competitive and boost customer loyalty, food retailers are increasing their focus on loyalty programs that target the delivery of personalized offers to their customers. Food retailers are also expected to seek to strengthen customer loyalty and make the shopping experience more convenient by introducing mobile applications that allow customers to make purchases, access loyalty card data and check prices while in-store. |
| Convenience as a Differentiator . Industry participants are addressing customers desire for convenience through in-store amenities and services, including store-within-store sites such as coffee bars, fuel centers, banks and ATMs. Customer convenience is important for traditional grocers that must differentiate themselves from other mass retailers, club stores and other food retailers. The increasing penetration of e-commerce competition has prompted food retailers to develop or outsource online and mobile applications for home delivery, pickup and digital shopping solutions with customer convenience in mind. It has also resulted in the emergence of a number of online-only food and drug offerings. |
Properties
As of June 20, 2015, we operated 2,205 stores located in 33 states and the District of Columbia as shown in the following table:
Location |
Number of
Stores |
Location |
Number of
Stores |
Location |
Number of
Stores |
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Alaska |
26 | Iowa | 1 | Oregon | 119 | |||||||||||
Arizona |
142 | Louisiana | 18 | Pennsylvania | 43 | |||||||||||
Arkansas |
1 | Maine | 22 | Rhode Island | 8 | |||||||||||
California |
584 | Maryland | 72 | South Dakota | 3 | |||||||||||
Colorado |
117 | Massachusetts | 78 | Texas | 217 | |||||||||||
Delaware |
16 | Montana | 38 | Utah | 5 | |||||||||||
District of Columbia |
14 | Nebraska | 5 | Vermont | 19 | |||||||||||
Florida |
3 | Nevada | 44 | Virginia | 40 | |||||||||||
Hawaii |
21 | New Hampshire | 28 | Washington | 202 | |||||||||||
Idaho |
38 | New Jersey | 47 | Wyoming | 16 | |||||||||||
Illinois |
179 | New Mexico | 34 | |||||||||||||
Indiana |
4 | North Dakota | 1 |
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The following table summarizes our stores by size as of June 20, 2015:
Square Footage |
Number of Stores | Percent of Total | ||||||
Less than 30,000 |
185 | 8.4 | % | |||||
30,000 to 50,000 |
790 | 35.8 | % | |||||
More than 50,000 |
1,230 | 55.8 | % | |||||
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Total stores |
2,205 | 100.0 | % | |||||
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Approximately 48% of our operating stores are owned or ground-leased properties. Together, our owned and ground-leased properties have a value of approximately $10.5 billion. Appraisals of our real estate were conducted by Cushman & Wakefield, Inc. between the fourth quarter of 2012 and the fourth quarter of 2014. The foregoing value estimate includes a third-party valuation of United properties relied on by management and is adjusted to give effect to FTC-mandated divestitures and other asset sales since the dates of the appraisals.
Our corporate headquarters are located in Boise, Idaho. We own our headquarters. The premises is approximately 250,000 square feet in size. In addition to our corporate headquarters, we have corporate offices in Pleasanton, California and Phoenix, Arizona. We are in the process of consolidating our corporate campuses and division offices to increase efficiency.
On December 23, 2014, Safeway and its wholly-owned real estate development subsidiary, PDC, sold substantially all of the net assets of PDC to Terramar Retail Centers, LLC, an unrelated party. PDCs assets were comprised of shopping centers that are completed or under development. Most of these centers included grocery stores that are leased back to Safeway.
Products
Our stores offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services. We are not dependent on any individual supplier, and no third-party supplier represented more than 5% of our fiscal 2014 sales on a pro forma basis. During fiscal 2014, on a pro forma basis, approximately 20% of sales, excluding fuel and pharmacy, were from our own brand products. The following table represents sales by revenue by similar type of product (in millions). Year over year increases in volume reflect acquisitions as well as identical store sales growth.
Fiscal Year | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
Non-perishables(1) |
$ | 12,906 | 47.5 | % | $ | 9,956 | 49.7 | % | $ | 1,836 | 49.5 | % | ||||||||||||
Perishables(2) |
11,044 | 40.6 | % | 7,842 | 39.1 | % | 1,441 | 38.8 | % | |||||||||||||||
Pharmacy |
2,603 | 9.6 | % | 2,019 | 10.1 | % | 393 | 10.6 | % | |||||||||||||||
Fuel |
387 | 1.4 | % | 47 | 0.2 | % | | | ||||||||||||||||
Other(3) |
259 | 0.9 | % | 191 | 0.9 | % | 42 | 1.1 | % | |||||||||||||||
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Total |
$ | 27,199 | 100.0 | % | $ | 20,055 | 100.0 | % | $ | 3,712 | 100.0 | % | ||||||||||||
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(1) | Consists primarily of general merchandise, grocery and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, deli, floral and seafood. |
(3) | Consists primarily of lottery and various other commissions and other miscellaneous income. |
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Distribution
As of June 20, 2015, we operated 30 strategically located distribution centers, 70% of which are owned or ground-leased. Our distribution centers collectively provide approximately 86% of all products to our retail operating areas. We are in the process of consolidating our distribution centers and moving Albertsons and NAI stores, distribution centers and systems onto Safeways IT systems in order to operate our entire distribution network across one unified platform.
Manufacturing
As measured by dollars for fiscal 2014, on a pro forma basis, 12% of our own brand merchandise was manufactured in company-owned facilities, and the remainder of our own brand merchandise was purchased from third parties. We closely monitor make-versus-buy decisions on internally sourced products to optimize our profitability. In addition, we believe that our scale will provide opportunities to leverage our fixed manufacturing costs in order to drive innovation across our own brand portfolio.
We operated the following manufacturing and processing facilities as of June 20, 2015:
Facility Type |
Number | |||
Milk plants |
6 | |||
Bakery plants |
5 | |||
Soft drink bottling plants |
4 | |||
Grocery/prepared food plants |
2 | |||
Ice cream plants |
2 | |||
Cake commissary |
1 | |||
Ice plant |
1 | |||
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Total |
21 | |||
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In addition, we operate laboratory facilities for quality assurance and research and development in certain plants and at our corporate offices.
Marketing, Advertising and Online Sales
Our marketing efforts involve collaboration between our national marketing and merchandising team and local divisions and stores. We augment the local division teams with corporate resources and are focused on providing expertise, sharing best practices and leveraging scale in partnership with leading consumer packaged goods vendors. Our corporate teams support divisions by providing strategic guidance in order to drive key areas of our business, including pharmacy, general merchandise and our own brands. Our local marketing teams set brand strategy and communicate brand messages through our integrated digital and physical marketing and advertising channels. Our online ordering platform, www.safeway.com, was the third largest in the United States based on 2013 sales.
Relationship with SuperValu
Transition Services Agreements with SuperValu
Services . Currently, SuperValu provides certain business support services to Albertsons and NAI pursuant to the SVU TSAs. The services provided by SuperValu to Albertsons and NAI include back office, administrative, IT, procurement, insurance and accounting services. Albertsons provides records management and retention services and environmental services to SuperValu, and also provides office space to SuperValu at our Boise offices. NAI provides pharmacy services to SuperValu.
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Fees . Albertsons and NAIs fees under the SVU TSAs are 50% fixed and 50% variable, and are determined in part based on the number of stores and distribution centers receiving services, which number can be reduced by Albertsons and by NAI at any time upon five weeks notice, with a corresponding reduction in the variable portion of the fees due to SuperValu.
Albertsons, in its capacity as a recipient of services from SuperValu, paid total fees of $104.6 million for fiscal 2014. The expected fee due to SuperValu for fiscal 2015 is $91.3 million, $10 million of which was paid in advance. SuperValu reimburses Albertsons monthly expenses incurred in connection with providing office space to SuperValu at our Boise offices, as well as fees for records management and retention services, and environmental services.
NAI, in its capacity as a recipient of services from SuperValu, paid total fees of $86.2 million for fiscal 2014. The expected fee due to SuperValu for fiscal 2015 is $90.8 million, $10 million of which was paid in advance, exclusive of amounts payable with respect to acquired A&P stores. SuperValu pays NAI fees based on the number of operating SuperValu pharmacies receiving services.
Term . The provision of services commenced in March 2013 and terminates on September 21, 2016. Each of SuperValu, Albertsons and NAI has nine remaining one-year consecutive options to extend the term for receipt of services under the SVU TSAs, exercisable one year in advance.
Transition and Wind Down of SuperValu TSA Services
We are in the process of converting our Albertsons and NAI stores, distribution centers and systems to Safeways IT systems and, in April 2015, we reached an agreement with SuperValu for its support of our implementation of this IT conversion. Specifically, we have agreed to pay SuperValu $50 million in the aggregate, subject to certain conditions, by November 1, 2018 to support the transition and wind down of the SVU TSAs, including the transition of services supporting Albertsons and NAI stores, distribution centers, divisions, back office, general office, surplus properties and other functions and facilities. We also agreed with SuperValu to negotiate in good faith if either the costs associated with the transition and wind down services are materially higher (i.e., 5% or more) than anticipated, or SuperValu is not performing in all material respects the transition and wind down services as needed to support our transition and wind down activities.
SuperValuAlbertsons and NAI Trademark Cross Licenses
In March 2013, NAI and Albertsons each entered into a trademark cross licensing agreement with SuperValu, pursuant to which each party granted the other a non-exclusive, royalty-free license to use certain proprietary rights (e.g., trademarks, trade names, trade dress, service marks, banners, etc.) consistent with the parties past practices and uses of the relevant proprietary rights. The cross license agreements will each remain in effect for so long as and to the extent that either party to the cross-license agreements owns any of the proprietary rights subject to the agreements.
Lancaster Operating and Supply Agreement
In March 2013, NAI entered into an operating and supply agreement with SuperValu for the operation of, and supply of products from, the distribution center located in the Lancaster, Pennsylvania area (the Lancaster Agreement). Under the Lancaster Agreement, NAI owns the Lancaster distribution center and SuperValu manages and operates the distribution center on behalf of NAI. In addition, SuperValu supplies NAIs Acme and Shaws stores from the distribution center under a shared costs arrangement, allocating costs ratably based on each parties use of the distribution center. Unless earlier terminated, the initial term of the Lancaster Agreement continues until March 21, 2018. Subject to either partys right to terminate the Lancaster Agreement for any reason and without cause upon 24 months notice (provided that NAI cannot give a termination notice prior to May 28,
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2016), SuperValu may extend the term of the agreement for up to two consecutive periods of five years each. For fiscal 2014, NAI paid SuperValu approximately $1,154 million under the Lancaster Agreement.
Capital Expenditure Program
Our capital expenditure program funds new stores, remodels, distribution facilities and IT. We apply a disciplined approach to our capital investments, undertaking a rigorous cost-benefit analysis and targeting an attractive return on investment. In fiscal 2015, we expect to spend approximately $850 million for capital expenditures, or 1.5% of our fiscal 2014 sales on a pro forma basis, including 115 remodel and upgrade projects and excluding approximately $300 million of one-time Safeway-related integration-related capital expenditures in fiscal 2015, in advance of anticipated sales of surplus assets. We expect to incur approximately $170 million of one-time opening and transition costs and capital expenditures to remodel and remerchandise the stores and to invest in price and labor.
Trade Names and Trademarks
We have invested significantly in the development and protection of Albertsons and Safeway as both trade names and as trademarks, and consider each to be an important business asset. We also own or license more than 650 other trademarks registered and/or pending in the United States Patent and Trademark Office and other jurisdictions, including trademarks for products and services such as Essential Everyday , Wild Harvest , Baby Basics , Steakhouse Choice , Culinary Circle, Safeway, Safeway SELECT, Ranchers Reserve, O Organics, Lucerne, Primo Taglio, Deli Counter, Eating Right, mom to mom, waterfront BISTRO, Bright Green, Pantry Essentials, Open Nature, Refreshe, Snack Artist, Signature Café, Signature Care, Signature Farms, Signature Kitchens , Signature Home, Signature SELECT, Priority, just for U, My Simple Nutrition, Ingredients for Life and other trademarks such as United Express, United Supermarkets , Amigos , Market Street , Lucky, PakN Save Foods, Vons, Pavilions, Randalls, Tom Thumb, Carrs Quality Centers, ACME, Sav-On, Shaws, Star Market, Super Saver and Jewel-Osco .
Seasonality
Our business is generally not seasonal in nature.
Competition
The food and drug retail industry is highly competitive. The principal competitive factors that affect our business are location, quality, price, service, selection and condition of assets such as our stores.
We face intense competition from other food and/or drug retailers, supercenters, club stores, online providers, specialty and niche supermarkets, drug stores, general merchandisers, wholesale stores, discount stores, convenience stores and restaurants. We and our competitors engage in price and non-price competition which, from time to time, has adversely affected our operating margins.
For more information on the competitive pressures that we face, see Risk FactorsRisks Related to Our Business and IndustryCompetition in our industry is intense, and our failure to compete successfully may adversely affect our profitability and results of operations.
Raw Materials
Various agricultural commodities constitute the principal raw materials used by the company in the manufacture of its food products. We believe that raw materials for our products are not in short supply, and all are readily available from a wide variety of independent suppliers.
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Environmental Laws
Our operations are subject to regulation under environmental laws, including those relating to waste management, air emissions and underground storage tanks. In addition, as an owner and operator of commercial real estate, we may be subject to liability under applicable environmental laws for clean-up of contamination at our facilities. Compliance with, and clean-up liability under, these laws has not had and is not expected to have a material adverse effect upon our business, financial condition, liquidity or operating results. See Legal Proceedings and Risk FactorsRisks Related to Our Business and IndustryUnfavorable changes in, failure to comply with or increased costs to comply with environmental laws and regulations could adversely affect us. The storage and sale of petroleum products could cause disruptions and expose us to potentially significant liabilities.
Employees
As of February 28, 2015 and excluding the effect of divestitures, we employed approximately 265,000 full- and part-time employees, of which approximately 174,000 were covered by collective bargaining agreements. During fiscal 2014, collective bargaining agreements covering approximately 50,000 employees were renegotiated. During fiscal 2015, 233 collective bargaining agreements covering approximately 73,000 employees are scheduled to expire. We believe that our relations with our employees are good.
Legal Proceedings
We are subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes and other matters. Some of these suits purport or may be determined to be class actions and/or seek substantial damages.
It is our managements opinion that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on our business or financial condition.
In the second quarter of 2014, Safeway received two subpoenas from the DEA concerning its record keeping, reporting and related practices associated with the loss or theft of controlled substances. We are not a party to any pending DEA administrative or judicial proceeding arising from or related to these subpoenas. We are cooperating with the DEA in all investigative matters.
In June 2014, Albertsons LLC agreed to settle a California civil enforcement action involving allegations of illegal disposal, storage, reverse logistic transportation and mismanagement of hazardous waste in violation of the California Hazardous Waste Control laws. Albertsons LLC did not admit fault or liability in the settlement agreement and agreed to pay $3.4 million, which includes civil penalties, the cost of the investigation and funding for supplemental environmental projects in California. As part of the settlement, Albertsons LLC also agreed to implement an improved retail hazardous product waste program, to create new, enhanced compliance programs and to provide an annual status report to the specified agencies for five years. The settlement pertains to all Albertsons LLC retail and warehouse facilities in California.
In January 2015, Safeway Inc. agreed to settle a California enforcement action involving allegations of illegal disposal, storage, reverse logistic transportation and mismanagement of hazardous waste in violation of the California Hazardous Waste Control laws. Safeway did not admit
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fault or liability in the settlement agreement and agreed to pay $9.9 million, which includes civil penalties, the cost of investigation and funding for supplemental environmental projects in California. As part of the settlement, Safeway also agreed to continue certain compliance activities with respect to both potential hazardous waste and private health information and to provide an annual status report to the specified agencies for five years. The settlement pertains to all Safeway retail and warehouse facilities in California.
On August 14, 2014, we announced that we had experienced a criminal intrusion by installation of malware on a portion of our computer network that processes payment card transactions for retail store locations for our Shaws , Star Market , Acme , Jewel - Osco and Albertsons retail banners. On September 29, 2014, we announced that we had experienced a second and separate criminal intrusion. We believe these were attempts to collect payment card data. Relying on our IT service provider, SuperValu, we took immediate steps to secure the affected part of the network. We believe that we have eradicated the malware used in each intrusion. We notified federal law enforcement authorities, the major payment card networks, and our insurance carriers and are cooperating in their efforts to investigate these intrusions. As required by the payment card brands, we retained a firm to conduct a forensic investigation into the intrusions. Recently, the firm issued a report for the first intrusion (a copy of which has been provided to the card networks), finding that, although our network had previously been found to be compliant with PCI DSS, not all of these standards had been met, and this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the first intrusion. A report for the second intrusion is still pending. We believe it is probable that the payment card networks will make claims against us following the conclusion of the ongoing forensic investigation and associated analysis. These claims will likely include amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment card networks assert they or their issuing banks have incurred. If the payment card networks assert claims against us, we currently intend to dispute those claims and assert available defenses. At the present time, we cannot reasonably estimate a range of losses because to date no claims have yet been asserted and because significant factual and legal issues remain unresolved. We will continue to evaluate information as it becomes known and will record an estimate of loss when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. As a result of the criminal intrusions, two class action complaints were filed against us by consumers and are currently pending, Mertz v. SuperValu Inc. et al . filed in federal court in the state of Minnesota and Rocke v. SuperValu Inc. et al. filed in federal court in the state of Idaho, alleging deceptive trade practices, negligence and invasion of privacy. Plaintiffs seek unspecified damages. The Judicial Panel on Multidistrict Litigation has consolidated the class actions and transferred the cases to the District of Minnesota. Based on the proceedings to date, we are unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
On August 18, 2001, a group of truck drivers from Safeways Tracy, California distribution center filed an action in California Superior Court, San Joaquin County entitled Cicairos, et al. v. Summit Logistics , alleging that Summit Logistics, the entity with whom Safeway contracted to operate the distribution center until August 2003, failed to provide meal periods, rest periods and itemized wage statements to the drivers in violation of California state law. Under its contract with Summit Logistics, Safeway is obligated to defend and indemnify Summit Logistics in this lawsuit. On February 6, 2007, another group of truck drivers from the Tracy distribution center filed a similar action in the same court, entitled Bluford, et al. v. Safeway Inc. , alleging essentially the same claims against Safeway. Both cases were subsequently certified as class actions. After lengthy litigation in the trial and appellate courts, on February 20, 2015, the parties signed a preliminary agreement of settlement that calls for us to pay approximately $31 million in total. This amount consists of a settlement fund of $30.2 million, out of which will be paid relief to the class, and attorneys fees and costs as awarded by the court. In addition to this settlement fund, we will pay interest of $10,000 if the distribution to the class is made in August 2015, with additional monthly amounts of interest if made after August 2015. We will also pay third-party settlement administrator costs, and our
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employer share of FICA/Medicare taxes. The motion for preliminary court approval of the settlement has been granted. Class members were notified of their right to file objections to the settlement or opt out of the settlement. No class members filed an objection or opted out by the June 15, 2015 deadline. The court approved the settlement and entered final judgment on August 4, 2015. If no appeal is filed within 60 days of the final judgment, Safeway will pay the settlement amount in mid-October 2015.
On June 29, 2015, counsel for Haggen delivered a notice of claims to Albertsons LLC and Albertsons Holdings LLC asserting that those companies had committed fraud and breached the Asset Purchase Agreement under which Haggen purchased 146 divested stores by improperly transferring inventory out of purchased stores, overstocking and understocking inventory, failing to advertise in the ordinary course of business, misusing confidential information and failing to use commercially reasonably efforts to preserve existing relationships. Haggen made no specific monetary demands, but withheld payment of approximately $41.1 million due for purchased inventory at 38 stores on the basis of these allegations. The company believes that the claims asserted by Haggen are without merit. On July 17, 2015, Albertsons LLC and Albertsons Holdings LLC commenced a lawsuit against Haggen in the Superior Court of Los Angeles County, alleging claims for breach of contract and fraud arising out of Haggens failure to pay the approximately $41.1 million due for the purchased inventory. On July 20, 2015, an essentially identical complaint was filed in the Superior Court of the State of Delaware in and for New Castle County. Haggen has not filed a response to either suit.
In connection with the Safeway acquisition, certain holders of Safeway common stock, who held approximately 17.7 million shares of common stock, gave notice of their right under Section 262 of the DGCL to exercise appraisal rights. Five petitions for appraisal were filed in the Court of Chancery of the State of Delaware on behalf of all former holders of Safeway common stock who had demanded appraisal. The petitions for appraisal were consolidated in April 2015. In May 2015, we reached a settlement with respect to five of the seven petitioners, representing approximately 14.0 million shares of Safeway common stock, pursuant to which the former stockholders dismissed their claims and received a total of $44.00 in cash and one Casa Ley CVR for each share of Safeway common stock they owned.
The appraisal action is ongoing with respect to the two remaining petitioners, with trial on the merits set to commence in April 2016. These remaining petitioners, representing approximately 3.7 million shares of Safeway common stock, have previously accepted a tender offer of the cash portion of the merger consideration of $34.92 per share, which stops statutory interest from accruing on any recovery of that amount. A reserve for outstanding appraisal claims has been established by the company. If the remaining petitioners are successful, they could be entitled to more for their stock than the per share merger consideration paid in the Safeway acquisition, which amount may be in excess of the accounting reserve that we have established.
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Executive Officers and Directors
The following table sets forth information regarding our board of directors and executive officers upon completion of this offering.
Name |
Age | Position | ||
Robert G. Miller |
71 | Chairman and Chief Executive Officer | ||
Wayne A. Denningham |
53 | Chief Operating Officer | ||
Justin Dye |
42 | Chief Administrative Officer | ||
Shane Sampson |
50 | Chief Marketing and Merchandising Officer | ||
Robert B. Dimond |
54 | Executive Vice President and Chief Financial Officer | ||
Justin Ewing |
46 |
Executive Vice President, Corporate Development and Real
Estate |
||
Robert A. Gordon |
63 | Executive Vice President, General Counsel and Secretary | ||
Kelly P. Griffith |
51 | Executive Vice President of Operations, West Region | ||
Jim Perkins |
51 | Executive Vice President of Operations, East Region | ||
Andrew J. Scoggin |
53 |
Executive Vice President, Human Resources, Labor
Relations, Public Relations and Government Affairs |
||
Jerry Tidwell |
64 | Executive Vice President, Supply Chain and Manufacturing | ||
Dean S. Adler(a) |
58 | Director | ||
Sharon L. Allen*(a)(b) |
63 | Director | ||
Steven A. Davis*(c)(d) |
57 | Director | ||
Kim Fennebresque*(b)(d) |
65 | Director | ||
Lisa A. Gray(a)(c) |
60 | Director | ||
Hersch Klaff(c) |
61 | Director | ||
Ronald Kravit(c) |
58 | Director | ||
Alan Schumacher*(d) |
68 | Director | ||
Jay L. Schottenstein |
61 | Director | ||
Lenard B. Tessler(a)(b) |
63 | Lead Director | ||
Scott Wille |
34 | Director |
| As of June 20, 2015 |
* | Independent Director |
(a) | Member, Nominating and Corporate Governance Committee |
(b) | Member, Compensation Committee |
(c) | Member, Compliance Committee |
(d) | Member, Audit and Risk Committee |
Executive Officer and Director Biographies
Robert G. Miller , Chairman and Chief Executive Officer . Mr. Miller has served as our Chairman and Chief Executive Officer since April 2015 and has served as a member of our board of directors since 2006. Mr. Miller previously served as our Executive Chairman from January 2015 to April 2015, and as Chief Executive Officer from June 2006 to January 2015. Mr. Miller has over 50 years of retail food and grocery experience. Mr. Miller previously served as Chairman and Chief Executive Officer of Fred Meyer Inc. and Rite Aid Corp. He is the former Vice Chairman of Kroger and former Chairman of Wild Oats Markets, Inc., a nationwide chain of natural and organic food markets. Earlier in his career, Mr. Miller served as Executive Vice President of Operations of Albertsons, Inc. Mr. Miller is a current or former board member of Nordstrom Inc., JoAnn Fabrics, Harrahs Entertainment Inc. and the Jim
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Pattison Group, Inc. Mr. Miller has detailed knowledge and valuable perspective and insights regarding our business and has responsibility for the development and implementation of our business strategy.
Wayne A. Denningham , Chief Operating Officer . Mr. Denningham has been our Chief Operating Officer since April 2015. Mr. Denningham is also a member of the Office of the CEO, a group that reports directly to, and meets frequently with, our Chief Executive Officer to discuss the development and implementation of our business strategy as well as operations, administration and marketing and merchandising priorities. Previously, he served as our Executive Vice President and Chief Operating Officer, South Region, from January 2015 to April 2015 and President of our Southern California division from March 2013 to January 2015. From 2006 to March 2013, he led Albertsons LLCs Rocky Mountain, Florida and Southern divisions. Mr. Denningham began his career with Albertsons, Inc. in 1977 as a courtesy clerk and served in a variety of positions with the company, including Executive Vice President of Marketing and Merchandising and Executive Vice President of Operations and Regional President.
Justin Dye , Chief Administrative Officer . Mr. Dye has been our Chief Administrative Officer since February 2015. Mr. Dye is a member of the Office of the CEO. Mr. Dye joined Albertsons LLC as Chief Strategy Officer in 2006 and served as Chief Operating Officer of NAI from March 2013 until February 2015. Prior to joining Albertsons LLC in 2006, Mr. Dye served as an executive at Cerberus, in various roles at General Electric, and as a consultant at Arthur Andersen.
Shane Sampson , Chief Marketing and Merchandising Officer . Mr. Sampson has been our Chief Marketing and Merchandising Officer since April 2015. Mr. Sampson is a member of the Office of the CEO. Previously, Mr. Sampson served as our Executive Vice President, Marketing and Merchandising from January 2015 to April 2015. He previously served as President of NAIs Jewel-Osco division from March 2014 to January 2015. Previously, in 2013, Mr. Sampson led NAIs Shaws and Star Markets management team. Prior to joining NAI, Mr. Sampson served as Senior Vice President of Operations at Giant Food, a regional American supermarket chain and division of Ahold USA, from 2009 to January 2013. He has over 35 years of experience in the grocery industry at several chains, including roles as Vice President of Merchandising and Marketing and President of numerous Albertsons, Inc. divisions.
Robert B. Dimond , Executive Vice President and Chief Financial Officer . Mr. Dimond has been our Chief Financial Officer since February 2014. Prior to joining our company, Mr. Dimond previously served as Executive Vice President, Chief Financial Officer and Treasurer at Nash Finch Co., a food distributor, from 2007 to 2013. Mr. Dimond has over 26 years of financial and senior executive management experience in the retail food and distribution industry. Mr. Dimond has served as Chief Financial Officer and Senior Vice President of Wild Oats, Group Vice President and Chief Financial Officer for the western region of Kroger, Group Vice President and Chief Financial Officer of Fred Meyer, Inc. and as Vice President, Administration and Controller for Smiths Food and Drug Centers Inc., a regional supermarket chain. Mr. Dimond is a Certified Public Accountant.
Justin Ewing , Executive Vice President, Corporate Development and Real Estate . Mr. Ewing has been our Executive Vice President of Corporate Development and Real Estate since January 2015. Previously, Mr. Ewing had served as Albertsons LLCs Senior Vice President of Corporate Development and Real Estate since 2013, as its Vice President of Real Estate and Development since 2011 and its Vice President of Corporate Development since 2006, when Mr. Ewing originally joined Albertsons LLC from the operations group at Cerberus. Prior to his work with Cerberus, Mr. Ewing was with Trowbridge Group, a strategic sourcing firm. Mr. Ewing also spent over 13 years with PricewaterhouseCoopers LLP. Mr. Ewing is a Chartered Accountant with the Institute of Chartered Accountants of England and Wales.
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Robert A. Gordon , Executive Vice President, General Counsel and Secretary . Mr. Gordon has been our Executive Vice President, General Counsel and Secretary since January 2015. Previously, he served as Safeways General Counsel from June 2000 to January 2015 and as Chief Governance Officer since 2004, Safeways Secretary since 2005 and as Safeways Deputy General Counsel from 1999 to 2000. Prior to joining Safeway, Mr. Gordon was a partner at the law firm Pillsbury Winthrop from 1984 to 1999.
Kelly P. Griffith , Executive Vice President of Operations, West Region . Mr. Griffith has been our Executive Vice President of Operations, West Region, since March 2015. Previously, Mr. Griffith served as our Executive Vice President and Chief Operating Officer, North Region from January 2015 to March 2015 and as Safeways Executive Vice President, Retail Operations from March 2013 to January 2015. From May 2010 to March 2013, Mr. Griffith was President of Merchandising for Safeway. From April 2008 until May 2010, Mr. Griffith served as President and General Manager, Perishables for Safeway. Mr. Griffith previously served as President of the Portland division of Safeway and as its Corporate Senior Vice President of Produce and Floral Divisions.
Jim Perkins , Executive Vice President of Operations, East Region . Mr. Perkins has been our Executive Vice President of Operations, East Region since April 2015. He served as President of NAIs Acme Markets division from March 2013 to April 2015. Previously, he served as regional Vice President of Giant Food, a regional American supermarket chain, from 2009 to 2013. He began his career with Albertsons, Inc. as a clerk in 1982. Mr. Perkins served in roles of increasing responsibility, ultimately being named Vice President of Operations for Albertsons, Inc. In 2006, Mr. Perkins joined Albertsons LLCs southern division as Director of Operations.
Andrew J. Scoggin , Executive Vice President, Human Resources, Labor Relations, Public Relations and Government Affairs . Mr. Scoggin has served as our current Executive Vice President, Human Resources, Labor Relations, Public Relations and Government Affairs since January 2015. Mr. Scoggin has also served as Executive Vice President, Human Resources, Labor Relations and Public Relations for Albertsons LLC since March 2013, and served as the Senior Vice President, Human Resources, Labor Relations and Public Relations for Albertsons LLC from June 2006 to March 2013. Mr. Scoggin joined Albertsons, Inc. in the Labor Relations and Human Resources department in 1993. Prior to that time, Mr. Scoggin practiced law with a San Francisco Bay Area law firm.
Jerry Tidwell , Executive Vice President, Supply Chain and Manufacturing . Mr. Tidwell has been our Executive Vice President, Supply Chain and Manufacturing, since January 2015. Mr. Tidwell previously served as Safeways Senior Vice President of Supply Operations from 2003 to January 2015. Prior to that, Mr. Tidwell served as Safeways Vice President of Milk and Beverage Manufacturing from 2001 to 2003, Director of the Safeway Grocery Business Unit from 2000 to 2001 and Director of the Safeway Beverage Business Unit from 1998 to 2000.
Dean S. Adler , Director . Mr. Adler has been a member of our board of directors since 2006. Mr. Adler is CEO of Lubert-Adler, which he co-founded in 1997. Mr. Adler has served on the board of directors of Bed Bath & Beyond Inc., a nationwide retailer of domestic goods, since 2001, and previously served on the board of directors for Developers Diversified Realty Corp., a shopping center real estate investment trust, and Electronics Boutique, Inc., a mall retailer. Mr. Adlers extensive experience in the retail and real estate industries, as well as his extensive knowledge of our company, provides valuable insight to our board of directors in industries critical to our operations.
Sharon L. Allen , Director . Ms. Allen has been a member of our board since June 2015. Ms. Allen served as U.S. Chairman of Deloitte LLP from 2003 to 2011, retiring from that position in May 2011. Ms. Allen was also a member of the Global Board of Directors, Chair of the Global Risk Committee and U.S. Representative of the Global Governance Committee of Deloitte Touche
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Tohmatsu Limited from 2003 to May 2011. Ms. Allen worked at Deloitte for nearly 40 years in various leadership roles, including partner and regional managing partner, and was previously responsible for audit and consulting services for a number of Fortune 500 and large private companies. Ms. Allen is currently an independent director of Bank of America Corporation. Ms. Allen has also served as a director of First Solar, Inc. since 2013. Ms. Allen is a Certified Public Accountant (Retired). Ms. Allens extensive leadership, accounting and audit experience broadens the scope of our board of directors oversight of our financial performance and reporting and provides our board of directors with valuable insight relevant to our business.
Steven A. Davis , Director . Mr. Davis has been a member of our board since June 2015. Mr. Davis is the former Chairman and Chief Executive Officer of Bob Evans Farms, Inc., a foodservice and consumer products company, where he served from May 2006 to December 2014. Mr. Davis has also served as a director of Marathon Petroleum Corporation, a petroleum refiner, marketer, retailer and transporter, since 2013, Walgreens Boots Alliance, Inc. (formerly Walgreens Co.), a pharmacy-led wellbeing enterprise, from 2009 to 2015, and CenturyLink, Inc. (formerly Embarq Corporation), a provider of communication services, from 2006 to 2009. Prior to joining Bob Evans Farms, Inc. in 2006, Mr. Davis served in a variety of restaurant and consumer packaged goods leadership positions, including president of Long John Silvers LLC and A&W All-American Food Restaurants. In addition, he held executive and operational positions at Yum! Brands, Inc.s Pizza Hut division and at Kraft General Foods Inc. Mr. Davis brings to our board of directors extensive leadership experience. In particular, Mr. Davis leadership of retail and food service companies and pharmacies provides our board of directors with valuable insight relevant to our business.
Kim Fennebresque , Director . Mr. Fennebresque has been a member of our board of directors since March 2015. Mr. Fennebresque has served as a senior advisor to Cowen Group Inc., a diversified financial services firm, since 2008, where he also served as its chairman, president and chief executive officer from 1999 to 2008. He has served on the boards of directors of Ally Financial Inc., a financial services company, since May 2009, BlueLinx Holdings Inc., a distributor of building products, since May 2013 and Delta Tucker Holdings, Inc. (the parent of DynCorp International, a provider of defense and technical services and government outsourced solutions) since May 2015. From 2010 to 2012, Mr. Fennebresque served as chairman of Dahlman Rose & Co., LLC, an investment bank. He has also served as head of the corporate finance and mergers & acquisitions departments at UBS and was a general partner and co-head of investment banking at Lazard Frères & Co. He has also held various positions at First Boston Corporation, an investment bank acquired by Credit Suisse. Mr. Fennebresques extensive experience as a director of several public companies and history of leadership in the financial services industry brings corporate governance expertise and a diverse viewpoint to the deliberations of our board of directors.
Lisa A. Gray , Director. Ms. Gray has been member of our board of directors since July 2014. Ms. Gray has served as Vice Chairman of Cerberus Operations and Advisory Company, LLC (COAC), an affiliate of Cerberus, since May 2015, and has served as General Counsel of COAC since 2004. Prior to joining Cerberus in 2004, she served as Chief Operating Executive and General Counsel for WAM!NET Inc., a provider of content hosting and distribution solutions, from 1996 to 2004. Prior to that, she was a partner at the law firm of Larkin, Hoffman, Daly & Lindgren, Ltd from 1986 to 1996. Ms. Gray serves as Vice Chairman and General Counsel of COAC, an affiliate of our largest beneficial owner, and has extensive experience and familiarity with us. In addition, Ms. Gray has extensive legal and corporate governance skills which broadens the scope of our board of directors experience.
Hersch Klaff , Director . Mr. Klaff has served as a member of our board of directors since 2010. Mr. Klaff is the Chief Executive Officer of Klaff Realty, which he formed in 1984. Mr. Klaff began his career with the public accounting firm of Altschuler, Melvoin and Glasser in Chicago and is a Certified
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Public Accountant. Mr. Klaffs real estate expertise and accounting and investment experience, as well as his extensive knowledge of our company, broadens the scope of our board of directors oversight of our financial performance.
Ronald Kravit , Director . Mr. Kravit has served as a member of our board of directors since 2006. Mr. Kravit is currently a Senior Managing Director and head of real estate investing at Cerberus, which he joined in 1996. Mr. Kravit has currently or previously served on the boards of Chrysler Financial Services Americas LLC, a financial services company, LNR Property LLC, a diversified real estate investment company, and Residential Capital LLC, a real estate finance company. Mr. Kravit joined Cerberus in 1996. Prior to joining Cerberus, Mr. Kravit was a Managing Director at Apollo Real Estate Advisors, L.P., a real estate investment firm, from 1994 to 1996. Prior to his tenure at Apollo, Mr. Kravit was a Managing Director at G. Soros Realty Advisors/Reichmann International, an affiliate of Soros Fund Management, from 1993 to 1994. Mr. Kravit is a Certified Public Accountant. Mr. Kravits experience in the real estate and financial services industries, and his extensive knowledge of our company, provides valuable insight to our board of directors.
Alan Schumacher , Director . Alan H. Schumacher has served as a member of our board of directors since March 2015. He has currently or previously served as a director of BlueLinx Holdings Inc., a distributor of building products, Evertec Inc., a full-service transaction processing business in Latin America, School Bus Holdings Inc., an indirect parent of school-bus manufacturer Blue Bird Corporation, Quality Distribution Inc., a chemical bulk tank truck operator, and Noranda Aluminum Holding Corporation, a producer of aluminum. Mr. Schumacher was a member of the Federal Accounting Standards Advisory Board from 2002 through June 2012. The board of directors has determined that the simultaneous service on more than three audit committees of public companies by Mr. Schumacher does not impair his ability to serve on our audit and risk committee nor does it represent or in any way create a conflict of interest for our company. Mr. Schumachers experience as a board director of several public companies, and his deep understanding of accounting principles, provides our board of directors with experience to oversee our accounting and financial reporting.
Jay Schottenstein , Director . Mr. Schottenstein has served as a member of our board of directors since 2006. Mr. Schottenstein has served as interim Chief Executive Officer of American Eagle Outfitters, Inc. (American Eagle), an apparel and accessories retailer, since January 2014 and as Chairman of their board of directors since March 1992. Mr. Schottenstein previously served as Chief Executive Officer of American Eagle from March 1992 until December 2002. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores since March 1992 and as president since 2001. Mr. Schottenstein also served as chief executive officer of DSW, Inc., a footwear and accessories retailer, from March 2005 to April 2009, and as chairman of the board of directors of DSW since March 2005. Mr. Schottensteins experience as a chief executive officer and a director of other major publically-owned retailers, and his prior experience as a member of our board of directors, gives him and our board of directors valuable knowledge and insight to oversee our operations.
Lenard B. Tessler , Lead Director . Mr. Tessler has served as a member of our board of directors since 2006. Mr. Tessler is currently Co-Head of Global Private Equity and Senior Managing Director at Cerberus, which he joined in 2001. Prior to joining Cerberus, Mr. Tessler served as Managing Partner of TGV Partners, a private equity firm that he founded, from 1990 to 2001. From 1987 to 1990, he was a founding partner of Levine, Tessler, Leichtman & Co. From 1982 to 1987, he was a founder, Director and Executive Vice President of Walker Energy Partners. Mr. Tessler is a member of the Cerberus Capital Management Investment Committee. Mr. Tesslers leadership roles at our largest beneficial owner, his board service and his extensive experience in financing and private equity investments and his in-depth knowledge of our company and its acquisition strategy, provides critical skills for our board of directors to oversee our strategic planning and operations.
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Scott Wille , Director . Mr. Wille has served as a member of our board of directors since January 2015. Mr. Wille has served as a Managing Director at Cerberus since March 2014, where he previously served as a Vice President since 2009. Mr. Wille joined Cerberus in 2006 as an Associate. Prior to joining Cerberus, Mr. Wille worked in the leveraged finance group at Deutsche Bank Securities Inc. from 2004 to 2006. Mr. Wille has served as a director of Remington Outdoor Company, Inc., a designer, manufacturer and marketer of firearms, ammunition and related products, since February 2014 and Keane Group Holdings, LLC, a provider of hydraulic fracturing, wireline technologies and drilling services, since 2011. Mr. Wille previously served as a director of Tower International, Inc., a manufacturer of engineered structural metal components and assemblies, from September 2010 to October 2012. Mr. Wille serves as Managing Director of our largest beneficial owner, and his experience in the financial and private equity industries, and his in-depth knowledge of our company and its acquisition strategy, are valuable to our board of directors understanding of our business and financial performance.
Board of Directors
Family Relationships
None of our officers or directors has any family relationship with any director or other officer. Family relationship for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin.
Board Composition
Our business and affairs are currently managed under the limited liability company board of managers of AB Acquisition. Upon the consummation of the IPO-Related Transactions, prior to the effectiveness of the registration statement of which this prospectus forms a part, the members of the AB Acquisition board of managers will become our board of directors, and we refer to them as such. Upon completion of this offering, our board of directors will have 12 members, comprised of one executive officer, seven directors affiliated with the Sponsors and four independent directors. Members of the board of directors will be elected at our annual meeting of stockholders to serve for a term of one year or until their successors have been elected and qualified, subject to prior death, resignation, retirement or removal from office.
Director Independence
Our board of directors has affirmatively determined that Sharon L. Allen, Steven A. Davis, Kim Fennebresque and Alan Schumacher are independent directors under the applicable rules of the NYSE and as such term is defined in Rule 10A-3(b)(1) under the Exchange Act.
Controlled Company
Upon completion of this offering, Albertsons Investor, Kimco and Management Holdco, as a group, will control a majority of our outstanding common stock. As a result, we are a controlled company within the meaning of the NYSE corporate governance standards. Under NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain NYSE corporate governance requirements, including:
| the requirement that a majority of the board of directors consist of independent directors; |
| the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
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| the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
| the requirement for an annual performance evaluation of the nominating and corporate governance committee and the compensation committee. |
Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.
In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after specified transition periods.
More specifically, if we cease to be a controlled company within the meaning of these rules, we will be required to (i) satisfy the majority independent board requirement within one year of our status change, and (ii) have (a) at least one independent member on each of our nominating and corporate governance committee and compensation committee by the date of our status change, (b) at least a majority of independent members on each committee within 90 days of the date of our status change and (c) fully independent committees within one year of the date of our status change.
Board Leadership Structure
Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of the board of directors should be separate. However, Robert G. Miller currently serves as both Chief Executive Officer and Chairman. Our board of directors has considered its leadership structure and believes at this time that our company and its stockholders are best served by having one person serve in both positions. Combining the roles fosters accountability, effective decision-making and alignment between interests of our board of directors and management. Mr. Miller also is able to use the in-depth focus and perspective gained in his executive function to assist our board of directors in addressing both internal and external issues affecting the company.
Our corporate governance guidelines provide for the election of one of our non-management directors to serve as Lead Director when the Chairman of the board of directors is also the Chief Executive Officer. Lenard B. Tessler currently serves as our Lead Director, and is responsible for serving as a liaison between the Chairman and the non-management directors, approving meeting agendas and schedules for our board and presiding at executive sessions of the non-management directors and any other board meetings at which the Chairman is not present, among other responsibilities.
Our board of directors expects to periodically review its leadership structure to ensure that it continues to meet the companys needs.
Role of Board in Risk Oversight
While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit and risk committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our compliance committee is responsible for overseeing the management of compliance
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and regulatory risks facing our company and risks associated with business conduct and ethics. Our nominating and corporate governance committee oversees risks associated with corporate governance. Pursuant to our board of directors instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by our board of directors and its committees.
Board Committees
Our board of directors has assigned certain of its responsibilities to permanent committees consisting of board members appointed by it. Following this offering, our board of directors will have an audit and risk committee, compensation committee, compliance committee and nominating and corporate governance committee, each of which will have the responsibilities and composition described below:
Audit and Risk Committee
Upon completion of this offering, our audit and risk committee will consist of Kim Fennebresque, Alan Schumacher and Steven Davis, with Mr. Schumacher serving as chair of the committee. The committee assists the board in its oversight responsibilities relating to the integrity of our financial statements, our compliance with legal and regulatory requirements (to the extent not otherwise handled by our compliance committee), our independent auditors qualifications and independence, and the establishment and performance of our internal audit function and the performance of the independent auditor. Upon the completion of this offering, we will have two independent directors serving on our audit and risk committee. We intend to have a completely independent audit and risk committee within one year of this offering. Our board of directors will determine which member of our audit and risk committee qualifies as an audit committee financial expert under SEC rules and regulations.
Our board of directors has adopted a written charter under which the audit and risk committee operates. A copy of the audit and risk committee charter, which will satisfy the applicable standards of the SEC and the , will be available on our website.
Compensation Committee
Upon completion of this offering, our compensation committee will consist of Kim Fennebresque, Lenard B. Tessler and Sharon Allen, with Mr. Fennebresque serving as chair of the committee. The compensation committee of the board of directors is authorized to review our compensation and benefits plans to ensure they meet our corporate objectives, approve the compensation structure of our executive officers and evaluate our executive officers performance and advise on salary, bonus and other incentive and equity compensation. A copy of the compensation committee charter will be available on our website.
Compliance Committee
Upon completion of this offering, our compliance committee will consist of Lisa A. Gray, Hersch Klaff, Ronald Kravit and Steven Davis, with Ms. Gray serving as chair of the committee. The purpose of the compliance committee is to assist the board in implementing and overseeing our compliance programs, policies and procedures that are designed to respond to the various compliance and regulatory risks facing our company, and monitor our performance with respect to such programs, policies and procedures. A copy of the charter for the compliance committee will be available on our website.
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Nominating and Corporate Governance Committee
Upon completion of this offering, our nominating and corporate governance committee will consist of Dean Adler, Sharon Allen, Lisa Gray and Lenard Tessler, with Ms. Allen serving as chair of the committee. The nominating and corporate governance committee is primarily concerned with identifying individuals qualified to become members of our board of directors, selecting the director nominees for the next annual meeting of the stockholders, selection of the director candidates to fill any vacancies on our board of directors and the development of our corporate governance guidelines and principles. A copy of the nominating and corporate governance committee charter will be available on our website.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has at any time during the past year been an officer or employee of ours. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
Corporate Governance Guidelines
Our board of directors will adopt corporate governance guidelines in accordance with the corporate governance rules of the NYSE, as applicable, that serve as a flexible framework within which our board of directors and its committees operate. These guidelines will cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman of our board of directors and Chief Executive Officer, executive sessions, standing board committees, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. A copy of our corporate governance guidelines will be posted on our website.
Director Compensation
None of our directors received compensation for their service on our board of directors or any board committees in fiscal 2014. We reimburse the directors for reasonable documented out-of-pocket expenses incurred by them in connection with attendance at board of directors and committee meetings.
In connection with Robert L. Edwards becoming our Vice Chairman, on April 9, 2015, Mr. Edwards, the company and AB Management Services Corp. entered into a Director and Consultancy Agreement (the Director and Consultancy Agreement), under which Mr. Edwards received compensation for his service as a director through his resignation as a director on June 13, 2015. See Certain Relationships and Related Party Transactions.
In March 2015, the board of directors approved independent director annual fees of $150,000 per year for Kim Fennebresque and Alan Schumacher, and additional annual fees of $25,000 per year for Messrs. Fennebresque and Schumacher for their service as the chairs of the compensation committee and the audit and risk committee, respectively. Upon the commencement of their service on the board of directors in June 2015, Sharon L. Allen and Steven A. Davis became eligible to receive independent director annual fees of $150,000 per year.
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The independent directors have also been granted the number of Phantom Units (as defined herein) under the AB Acquisition LLC Phantom Unit Plan (the Phantom Unit Plan) set forth below (the Director Phantom Units):
Participant |
Units | |||
Sharon L. Allen |
100,000 | |||
Steven A. Davis |
25,000 | |||
Kim Fennebresque |
25,000 | |||
Alan Schumacher |
25,000 |
50% of the Director Phantom Units granted to Messrs. Fennebresque, Schumacher and Davis will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of fiscal 2015, subject to the directors continued service through each vesting date. The remaining 50% of the Director Phantom Units granted to Messrs. Fennebresque, Schumacher and Davis will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of fiscal 2015, subject to the directors continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year (Performance Units). If the performance target for a fiscal year is not met, but is met in a subsequent fiscal year on a cumulative basis along with the applicable performance target for such subsequent fiscal year, any Performance Units that did not vest with respect to the missed year will vest in such subsequent fiscal year. Upon the consummation of the IPO-Related Transactions and this offering, however, any Performance Units (other than those with respect to a missed year) will become vested based solely on the directors continued service. In addition, if, following the consummation of the IPO-Related Transactions and this offering, a directors service is terminated by the company without cause (as defined in the Phantom Unit Plan), or due to the directors death or disability, all of such directors Director Phantom Units will become 100% vested.
100% of the Director Phantom Units granted to Ms. Allen will vest on the last day of fiscal 2015, subject to her continued service through such date. In addition, if Ms. Allens service is terminated by the company without cause, or due to her death or disability, all of Ms. Allens Director Phantom Units will become 100% vested. Upon vesting, 60% of Ms. Allens Director Phantom Units will be settled in Incentive Units and 40% will be settled in a cash amount equal to the fair market value of such number of Incentive Units on the vesting date.
Upon the consummation of the IPO-Related Transactions and this offering, the Director Phantom Units will be converted into restricted stock units that will be settled in shares of our common stock. See Executive CompensationIncentive PlansPhantom Unit Plan for additional information regarding the Phantom Unit Plan.
In August 2015, the board of directors approved a director compensation plan, effective upon the consummation of the IPO-Related Transactions and this offering. Each director will receive an annual cash fee in the amount of $125,000, which the director may elect to receive in the form of a grant of fully vested stock units that will be settled in shares of our common stock upon the termination of the directors service. In addition, each director will receive an annual grant of restricted stock units with a grant date value of $100,000 that, if vested, will be settled in shares of our common stock upon the termination of the directors service. The restricted stock unit grants will be made on the first day of the trading window following the first annual meeting of our stockholders in each calendar year and will vest 100% upon the earlier of the one-year anniversary of the grant date and the first stockholder meeting in the calendar year following the year in which the grant date occurs, subject to the directors continuous service through the vesting date. A director appointed to serve on our board of directors between annual stockholders meetings will receive a pro-rated restricted stock unit grant for the year of appointment, subject to the same terms (including timing of vesting) as the grants made to the other directors for such year, but based on the grant date value of our common stock on the date of grant. In addition, our Lead Director will receive an annual fee in the amount of $20,000 and committee members will receive an annual fee of $20,000, with the committee chairs receiving an additional annual fee in the amount of $20,000.
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Compensation Discussion and Analysis
This Compensation Discussion and Analysis is designed to provide an understanding of our compensation philosophy and objectives, compensation-setting process, and the fiscal 2014 compensation of our named executive officers, or NEOs. Our NEOs for fiscal 2014 are:
| Robert G. Miller, our current Chairman and Chief Executive Officer, who served as our Chief Executive Officer from the commencement of fiscal 2014 (February 21, 2014) through January 29, 2015, and as our Executive Chairman from January 30, 2015 through his appointment as our Chairman and Chief Executive Officer on April 9, 2015; |
| Robert L. Edwards, who joined the company from Safeway on January 30, 2015, the closing date of the Safeway acquisition, and who served as our President and Chief Executive Officer from that date through his transition to Vice Chairman (a non-employee position) on April 9, 2015; |
| Robert B. Dimond, Executive Vice President and Chief Financial Officer; |
| Wayne A. Denningham, our current Chief Operating Officer, who was serving as our Executive Vice President and Chief Operating Officer, South Region, as of the end of fiscal 2014; |
| Justin Dye, Chief Administrative Officer; and |
| Shane Sampson, our current Chief Marketing and Merchandising Officer, who was serving as our Executive Vice President, Marketing and Merchandising as of the end of fiscal 2014. |
Compensation Philosophy and Objectives
Our general compensation philosophy is to provide programs that attract, retain and motivate our executive officers who are critical to our long-term success. We strive to provide a competitive compensation package to our executive officers to reward achievement of our business objectives and align their interests with the interests of our equityholders. We have sought to accomplish these goals through a combination of short- and long-term compensation components that are linked to our annual and long-term business objectives and strategies. To focus our executive officers on the fulfillment of our business objectives, a significant portion of their compensation is performance-based.
The Role of the Compensation Committee
The compensation committee is comprised of members of our board of directors and is responsible for determining the compensation of our executive officers. The compensation committees responsibilities include determining and approving the compensation of the Chief Executive Officer and reviewing and approving the compensation of all other executive officers.
Compensation Setting Process
Prior to the offering, our compensation program reflected our operations as a private company. In determining the compensation for our executive officers, we relied largely upon the experience of our management and our board of directors with input from our Chief Executive Officer.
Following this offering, the compensation committee will be responsible for administering our executive compensation programs. It is anticipated that as part of the process, the Chief Executive Officer will provide the compensation committee with his assessment of the NEOs performance and other factors used in developing his recommendation for their compensation, including salary adjustments, cash incentives and equity grants.
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We have not engaged compensation consultants or established a formal benchmarking process to review our executive compensation practices against those of our peer companies. We are considering the establishment of a peer group to ensure that our executive compensation program is competitive and offers the appropriate retention and performance incentives.
Components of the NEO Fiscal 2014 Compensation Program
The company uses various compensation elements to provide an overall competitive total compensation and benefits package to the NEOs that is tied to creating value and commensurate with our results and aligns with our business strategy. Set forth below are the key elements of the fiscal 2014 compensation program for our NEOs:
| base salary that reflects compensation for the NEOs role and responsibilities, experience, expertise and individual performance; |
| quarterly bonus based on division performance; |
| incentive compensation based on the value of the companys equity; |
| severance protection; and |
| other benefits that are provided to all employees, including healthcare benefits, life insurance, retirement savings plans and disability plans. |
Base Salary
We provide the NEOs with a base salary to compensate them for services rendered during the fiscal year. Base salaries for the NEOs are determined on the basis of each executives role and responsibilities, experience, expertise and individual performance.
The annual base salary of the NEOs employed by us at the beginning of fiscal 2014 had been previously determined based on the NEOs role within the company. The initial annual base salaries for fiscal 2014 were as follows: Mr. Miller$1,500,000; Mr. Dimond$700,000; Messrs. Denningham and Sampson$350,000; and Mr. Dye$750,000. Mr. Edwards annual base salary was $1,500,000 during the period that he served as our President and Chief Executive Officer. This amount was an increase of $275,000 per annum over the base salary Mr. Edwards received as Chief Executive Officer of Safeway, which reflected his assumption of the chief executive position of our larger and more complex company.
Mr. Millers annual base salary was increased to $2,000,000, effective January 30, 2015, in connection with the change of his position to our Executive Chairman and remained at that amount upon his becoming our Chairman and Chief Executive Officer on April 9, 2015. In connection with their promotions and to reflect their increased responsibilities for our larger and more complex company following the Safeway acquisition, the base salaries for Messrs. Denningham and Sampson were increased to $750,000 and $700,000, respectively. Mr. Dyes annual base salary was increased to $800,000, effective February 1, 2015, in connection with his promotion to Chief Administrative Officer.
Bonuses
Performance-Based Bonus Plans
We recognize that our corporate management employees shoulder responsibility for supporting our operating divisions in achieving positive financial results. We therefore believe that a substantial percentage of each executive officers annual compensation should be tied directly to the achievement of performance goals.
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Consistent with our historical practice, all of our executive officers other than Mr. Miller participated in the bonus plans that we implemented for each fiscal quarter in fiscal 2014 (collectively, the 2014 Bonus Plan). Due to his active involvement in the administration of the 2014 Bonus Plan and the bonus plans in place for each fiscal quarter in fiscal 2012 and fiscal 2013, including the setting of performance metrics and the determination of the payments under such plans, Mr. Miller elected not to participate in any of those bonus plans. Mr. Miller is a participant in our fiscal 2015 Corporate Management Bonus Plan (the 2015 Bonus Plan) that will be administered by our board of directors.
Due to his commencement of employment with the company at the end of fiscal 2014, Mr. Edwards was not eligible to participate in the 2014 Bonus Plan.
2014 Bonus Plan . The 2014 Bonus Plan consisted of bonus plans based on the performance achieved by our divisions for each fiscal quarter in fiscal 2014 (each a Quarterly Division Bonus), other than our United Supermarket division, which did not maintain a quarterly bonus structure. We established the fiscal year target bonus percentage for each NEO under the 2014 Bonus Plan as a percentage of his annual base salary based on the NEOs position and responsibilities, as well as the individuals ability to impact our financial performance. This approach placed a proportionately larger percentage of total annual pay at risk based on performance for our NEOs relative to position level and responsibility. The fiscal 2014 target bonuses, as a percentage of base salary for the NEOs participating in the 2014 Bonus Plan, were as follows:
Name |
Fiscal 2014 Target Bonus | |
Robert B. Dimond |
60% | |
Wayne A. Denningham |
50% through January 29, 2015
55% effective January 30, 2015(1) |
|
Justin Dye |
60% | |
Shane Sampson |
50% through January 29, 2015
60% effective January 30, 2015(2) |
(1) | Mr. Denninghams target bonus was increased in connection with the increase of his responsibilities as Executive Vice President and Chief Operating Officer, South Region. |
(2) | Mr. Sampsons target bonus was increased in connection with his promotion to the position of Executive Vice President, Marketing and Merchandising. |
The target amount for each fiscal quarter (the Quarterly Bonus Opportunity) was calculated by dividing the NEOs 2014 fiscal year target bonus by 53 weeks and multiplying the result by the number of weeks in the applicable fiscal quarter. Higher and lower percentages of base salary could be earned if minimum performance levels or performance levels above target were achieved. The maximum bonus opportunity under the 2014 Bonus Plan was 200% of the NEOs 2014 fiscal year target bonus. No amount would be payable for the applicable fiscal quarter if results fell below established threshold levels. We believe that having a maximum cap serves to promote good judgment by the NEOs, reduces the likelihood of windfalls and makes the maximum cost of the plan predictable.
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At the beginning of each fiscal quarter, the management of each division, with approval from our corporate management, established the divisions retail EBITDA goal for the applicable fiscal quarter with threshold, plan, target and maximum goals. After the end of the fiscal quarter, our corporate finance team calculated the financial results for each retail division and reported the division bonus percentage earned, if any. A division earned between 0% to 100% of its bonus target amount for achievement of EBITDA for the fiscal quarter between the threshold and target levels. If the division achieved its target EBITDA for a fiscal quarter, then a higher percentage of the bonus target could be earned by such division for such fiscal quarter if the division also achieved a division sales goal for such fiscal quarter as follows:
Quarterly Sales Goal Percentage Achieved |
Percentage of Quarterly Bonus Target Earned | |
Below 99% |
100% | |
99%-99.99% |
150% | |
100% or greater |
200% |
No bonus amount was earned for a fiscal quarter by a division for achievement below threshold levels. The EBITDA goals set for each division for each quarter were designed to be challenging and difficult to achieve, but still within a realizable range so that achievement was both uncertain and objective. We believe that this methodology created a strong link between our NEOs and our financial performance.
The amount of a Quarterly Bonus Opportunity earned by the participating NEOs under the 2014 Bonus Plan for each applicable fiscal quarter was determined at the end of each fiscal quarter based on the bonus target amounts earned by the division or divisions over which they had authority during the applicable quarter. For Messrs. Dye and Dimond for the full fiscal 2014 and Mr. Sampson for a portion of the third fiscal quarter and the entire fourth fiscal quarter of fiscal 2014, their roles applied across all of our divisions. Therefore, their bonuses for the applicable fiscal quarters were determined by adding together the percentage of the quarterly bonus target amounts earned for all of the divisions and dividing the sum by eight (the number of our divisions in fiscal 2014).
Based on the achievement of our divisions during fiscal 2014, the participating NEOs earned the following amounts under the 2014 Bonus Plan:
Name |
Aggregate Fiscal 2014 Bonus Earned | |
Robert B. Dimond |
$664,482 | |
Wayne A. Denningham |
$371,551 | |
Justin Dye |
$715,379 | |
Shane Sampson |
$358,416 |
2015 Bonus Plan . Our board of directors determined that to more closely align the compensation paid to our executive officers with both division performance and the overall financial performance of the company, the 2015 Bonus Plan will consist of both a Quarterly Division Bonus for each quarter in fiscal 2015 and an annual bonus based on the companys performance for the full fiscal 2015 (Annual Corporate Bonus).
The Quarterly Division Bonus component, which comprises 50% of each executive officers target bonus opportunity, is structured substantially in the same manner as the Quarterly Division Bonus under the 2014 Bonus Plan, including being based on an EBITDA goal. The Quarterly Bonus Opportunity under the 2015 Bonus Plan will be calculated by dividing the NEOs target annual bonus by 52 weeks, multiplying the result by the number of weeks in the applicable fiscal quarter, then dividing by half to account for the Annual Corporate Bonus. The Quarterly Bonus Opportunity earned by all NEOs participating under the 2015 Bonus Plan will be based solely on the average quarterly
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bonus target amounts earned for all of our divisions for the applicable fiscal quarter, other than our United Supermarket division, which does not maintain a quarterly bonus structure.
The Annual Corporate Bonus component, the remaining 50% of each executive officers target bonus opportunity, is based on the companys level of achievement of an annual Adjusted EBITDA target approved by our board of directors. Amounts under the Annual Corporate Bonus may be earned above or below target level. The threshold level above which a percentage of the Annual Corporate Bonus may be earned is achievement above 90% of the Adjusted EBITDA target and 100% of the Annual Corporate Bonus may be earned at achievement of 100% of the Adjusted EBITDA target, with interim percentages earned for achievement between levels. If achievement exceeds 100% of the Adjusted EBITDA target, 10% of the excess Adjusted EBITDA will be added to the bonus pool, but payout will be capped at 200% on the Annual Corporate Bonus component of the NEOs annual target bonus.
The annual target bonus for Mr. Miller was set at 60% of his base salary. The annual target bonus for Mr. Denningham was increased to 60% of his base salary in connection with his promotion to Chief Operating Officer. The annual target bonus, as a percentage of base salary, for the other NEOs participating in the 2015 Bonus Plan remained at the level set under the 2014 Bonus Plan.
Special Bonuses
In addition to the annual cash incentive program, we may from time to time pay our NEOs discretionary bonuses as determined by the board of directors or the compensation committee to provide for additional retention or upon special circumstances. In connection with the NAI acquisition, in January 2013, our board of directors approved a special bonus for Mr. Miller in the amount of $15,000,000 (Special Bonus) which would be earned upon the achievement of the following distribution hurdles:
| $7,500,000 of the Special Bonus would be paid once distributions equal to a return of capital ($550 million), plus an 8% preferred return from the closing date of the NAI acquisition, and an additional $250 million (without any preferred return), were made in the aggregate to the holders of AB Acquisitions membership interests; and |
| the remaining $7,500,000 of the Special Bonus would be paid once distributions equal to $200 million (without any preferred return) in excess of the first hurdle were made to the holders of AB Acquisitions membership interests. |
The company determined that both distribution hurdles were achieved upon the consummation of the Safeway acquisition. Accordingly, the Special Bonus was paid to Mr. Miller upon the closing date of the Safeway acquisition.
In recognition of their efforts in connection with the Safeway acquisition, the company awarded the NEOs set forth below with the following one-time special bonuses:
Name |
Special Bonus | |
Robert B. Dimond |
$250,000 | |
Wayne A. Denningham |
$100,000 | |
Justin Dye |
$500,000 | |
Shane Sampson |
$250,000 |
In connection with the commencement of their employment, Messrs. Dimond and Sampson received retention bonuses in the amounts of $1,500,000 and $1,000,000, respectively. Upon his subsequent transfer to the position of Division President of Jewel-Osco and in recognition of his performance, in March 2014, Mr. Sampsons retention award was increased to $1,240,000. The first
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and second installments of Mr. Dimonds and Mr. Sampsons retention bonuses, each in the amount of $375,000 and $310,000, respectively, were paid to them on April 1, 2014 and 2015, and the remaining installments will be payable on April 1, 2016 and 2017, generally subject to their remaining actively working, without having been demoted, through each applicable payment date.
In recognition of his performance and as an additional incentive, in March 2013, Mr. Denningham received a retention bonus in the amount of $700,000. The first and second installments of Mr. Denninghams retention bonus, each in the amount of $175,000, were paid to Mr. Denningham in April 2014 and April 2015, and the remaining installments will be payable in April 2016 and April 2017, generally subject to Mr. Denningham remaining employed through each applicable payment date.
Incentive Plans
Long-Term Incentive Plans
In fiscal 2006, the company adopted the AB Acquisition LLC Long Term Incentive Plan (LTIP I), and in fiscal 2011, the company adopted the AB Acquisition LLC Senior Executive Retention Plan (LTIP II, and, together with LTIP I, the LTIPs). The LTIPs provided for cash incentive awards that entitled a participant to cash payments equal to a specified percentage of the distributions received by the members of the company. Messrs. Miller, Denningham and Dye received awards under the LTIPs that were subject to vesting based on continued employment (four years under LTIP I and three years under LTIP II), but provided for accelerated vesting upon a change in control. In July 2014, Messrs. Miller, Dye and Denningham became vested in, and were paid, amounts under LTIP II equal to $375,000, $375,000 and $337,500, respectively.
In fiscal 2014, the LTIPs were terminated in connection with our entering into the merger agreement with Safeway, and the participating NEOs became entitled to the payments set forth in the table below. In addition, the additional amounts set forth in the table below that were previously unvested and credited to the NEOs account under LTIP II became vested and were paid in connection with the termination of LTIP II.
LTIP I | LTIP II | |||||||||||||||||||
Name |
Participation
Percentage |
Amount Paid
upon Termination of LTIP I |
Participation
Percentage |
Amount Paid
upon Termination of LTIP II |
Additional
Amount Paid upon Termination of LTIP II |
|||||||||||||||
Robert G. Miller |
20.0 | % | $ | 4,344,067 | 1.0 | % | $ | 7,240,112 | $ | 375,000 | ||||||||||
Wayne A. Denningham |
5.0 | % | $ | 1,086,017 | 0.9 | % | $ | 6,516,101 | $ | 337,500 | ||||||||||
Justin Dye |
10.0 | % | $ | 2,172,034 | 1.0 | % | $ | 7,240,112 | $ | 375,000 |
Each of the participating NEOs subsequently invested 50% of the amount received under the LTIPs in the companys Class A Units.
Class C Incentive Unit Plan
In March 2013, we adopted the Class C Plan in connection with the NAI acquisition. Messrs. Miller and Dye were each granted 17.198 Class C Units under the Class C Plan. The Class C Units were granted as profits interests based on a value of $550 million and subject to an 8% preferred return. The Class C Units were initially subject to a three-year vesting schedule. On March 6, 2014, our board of directors determined that the Class C Plan should be terminated in connection with the Safeway acquisition, and in connection with such termination, the Class C Units held by Messrs. Miller and Dye became fully vested. On the closing date of the Safeway acquisition, the Class C Units held by each of Messrs. Miller and Dye were converted into 440,242 fully vested Class A Units respectively, which Class A Units had an equivalent total value to the Class C Units after taking into account the $550 million and 8% hurdle applicable to Class C Units.
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Miller Incentive Units
Under an amendment to Mr. Millers employment agreement entered into in March 2014, the company agreed that, upon the closing of the Safeway acquisition, Mr. Miller would be granted a fully-vested equity award equal to a 1.0% interest in AB Acquisition. Accordingly, as required under his employment agreement, upon the closing date of the Safeway acquisition, Mr. Miller was granted 3,350,084 fully-vested and non-forfeitable Investor Incentive Units of AB Acquisition (the Miller Incentive Units). The Miller Incentive Units entitle Mr. Miller to participate in cash distributions of Albertsons, NAI and Safeway based on his ownership percentage of the aggregate ABS, NAI and Safeway units, Series 1 Incentive Units and Investor Incentive Units outstanding. All distributions are on a subordinate basis to the $2,308.6 million aggregate distributions to Albertsons, NAI and Safeway unitholders after which Mr. Miller will participate on a pro rata basis. The Miller Incentive Units are convertible to an equal number of ABS units, NAI units and Safeway units reflecting the fair market value of such units as of the conversion date, which is the earlier of (i) January 30, 2020 and (ii) the effective date of consummation of the IPO-Related Transactions and this offering or a sale of all or substantially all of the equity of the company or of the consolidated assets of the company and its subsidiaries. The Miller Incentive Units are fully vested and contain no voting rights.
Incentive Unit Plan
Effective upon the closing of the Safeway acquisition, we adopted the AB Acquisition LLC Incentive Unit Plan (the Incentive Unit Plan). See Incentive PlansIncentive Unit Plan for additional information regarding the Incentive Unit Plan.
Under terms agreed to by Mr. Edwards and the company in August 2014 and further set forth in the employment agreement with Mr. Edwards entered into in December 2014, the company agreed that, upon the closing of the Safeway acquisition, Mr. Edwards would be granted 3,350,083 Incentive Units under the Incentive Unit Plan (the Series 1 Incentive Units). Accordingly, as required under his employment agreement, upon the closing date of the Safeway acquisition, Mr. Edwards was granted Series 1 Incentive Units, which represented 1% of our fully diluted equity above a valuation threshold determined at grant of $2.3 million. 50% of the Series 1 Incentive Units were scheduled to vest in four annual installments of 25% on each of the anniversaries of the date of the closing of the Safeway acquisition, subject to Mr. Edwards continued employment through such date and would become 100% vested upon the completion of an initial public offering by the company or a change in control (the Time-Based Units). The remaining 50% would become vested in four annual installments of 25% on the last day of Safeways fiscal year starting with 2015 if the annual performance targets set by our management board for the respective fiscal year would be achieved and Mr. Edwards remained employed (Performance-Based Units). Performance-Based Units subject to performance targets not attained in any fiscal year could have become vested in a subsequent year if the performance in a subsequent year satisfied the performance target for such year and, on a cumulative basis, the performance target for the earlier fiscal year in which the performance target was not met. In the event of a termination of his employment without Cause or for Good Reason (each as defined in his employment agreement), or due to his death or disability, a pro-rated portion of Mr. Edwards Series 1 Incentive Units would have become vested as if he had remained employed through the next vesting date and the performance targets for the applicable fiscal year had been achieved.
In connection with his transition to the position of Vice Chairman, Mr. Edwards and the company agreed that Mr. Edwards would forfeit 1,675,041.5 of his Series 1 Incentive Units. The remaining 1,675,041.5 Series 1 Incentive Units would vest in full on the first anniversary of the closing date of the Safeway acquisition, subject to his continued service as a consultant through that date and accelerated vesting in the event of a termination of his service due to a breach by the company of his Director and Consultancy Agreement, his death or due to disability.
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Within 180 days following a termination of his service due to death or disability, Mr. Edwards or his estate, as applicable, would have the right to cause the company to repurchase his vested Incentive Units at fair market value determined on the date of termination to the extent that our financing agreements then or thereafter permit such repurchase.
Upon the consummation of the IPO-Related Transactions and this offering, Mr. Edwards Series 1 Incentive Units will be exchanged for restricted units of Albertsons Investor with the same vesting terms as his Series 1 Incentive Units.
Phantom Unit Plan
In fiscal 2015, we adopted the Phantom Unit Plan. See Incentive PlansPhantom Unit Plan for additional information regarding the Phantom Unit Plan.
On March 5, 2015, we granted to the NEOs listed below the number of Phantom Units set forth below (the 2015 Phantom Units):
Participant |
Units | |||
Shane Sampson |
1,200,000 | |||
Justin Dye |
1,000,000 | |||
Robert B. Dimond |
700,000 | |||
Wayne A. Denningham |
600,000 |
50% of the 2015 Phantom Units are Time-Based Units that will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of fiscal 2015, subject to the NEOs continued service through each vesting date. The remaining 50% of the 2015 Phantom Units are Performance-Based Units that will vest in four annual installments of 25% on the last day of the companys fiscal year, commencing with the last day of fiscal 2015, subject to the NEOs continued service through each vesting date, and will also be subject to the achievement of annual performance targets established for each such fiscal year. If the performance target for a fiscal year is not met, but is met in a subsequent fiscal year on a cumulative basis along with the applicable performance target for such subsequent fiscal year, the Performance-Based Units that did not vest with respect to the missed year will vest in such subsequent fiscal year. Upon the consummation of the IPO-Related Transactions and this offering, however, any Performance-Based Units (other than those with respect to a missed year) will become vested based solely on the NEOs continued employment (like Time-Based Units). In addition, if, following the consummation of the IPO-Related Transactions and this offering, an NEOs employment with the company is terminated by the company without Cause, or due to the participants death or disability, all Time-Based Units and Performance-Based Units will become 100% vested.
The 2015 Phantom Units were granted with the right to receive a Tax Bonus that entitles the participant to receive a bonus equal to 4% of the fair market value of the Incentive Units paid to the participant in respect of vested Phantom Units. Upon the consummation of the IPO-Related Transactions and this offering, the 2015 Phantom Units will be converted into restricted stock units that will be settled in shares of our common stock.
Employment Agreements and Offer Letters
Robert G. Miller
During fiscal 2014 Mr. Miller was a party to an employment agreement with AB Acquisition, dated March 13, 2006, as amended (the Miller Employment Agreement). On , 2015, Mr. Miller and the company entered into an agreement pursuant to which, upon the consummation of the IPO-Related Transactions and this offering, the Miller Employment Agreement will be amended and
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restated to reflect the assignment of Mr. Millers employment and the Miller Employment Agreement to the company. The term of Mr. Millers employment under the Miller Employment Agreement will expire on January 30, 2018.
The Miller Employment Agreement provides that Mr. Miller will serve as Chairman and Chief Executive Officer (which will be the senior most executive officer) and a voting member of the board of directors and of any executive or operating committee of the board of directors other than, following the consummation of the IPO-Related Transactions and this offering, the compensation committee, audit committee or any other committee required by the rules of the SEC or the applicable securities exchange to be made up of solely independent directors.
The Miller Employment Agreement provides that Mr. Miller will receive an annual base salary in the amount of $2,000,000 per year.
In the event of a termination of Mr. Millers employment by us without Cause or by Mr. Miller with Good Reason, subject to his execution of a release, Mr. Miller will be entitled to a lump sum payment equal to his base salary for the remainder of the term and his target bonus. In addition, following the term of Mr. Millers employment, Mr. Miller will be entitled to a payment of $50,000 per month (or partial month) during his lifetime and, after his death, his spouse will become entitled to a payment of $25,000 per month for each month (or partial month) during her lifetime. In any event, such payments will cease on the tenth anniversary of the end of the term.
Pursuant to the Miller Employment Agreement, Mr. Miller is entitled to the use of corporate aircraft for up to 100 hours of personal use per year for himself, his family members and guests at no cost to him, other than to pay income tax on such usage at the lowest permissible rate. In addition, pursuant to the Miller Employment Agreement, we assigned $5.0 million of the key man life insurance policy we had obtained on Mr. Millers life to Mr. Miller in favor of one or more beneficiaries designated by him from time to time. We agreed to maintain such policy (or substitute equivalent policies) in effect for a period of at least 10 years following the closing of the Safeway acquisition (whether or not Mr. Miller remains employed with the company).
For purposes of the Miller Employment Agreement, Cause generally means:
| an act of fraud, embezzlement, or misappropriation by Mr. Miller intended to result in substantial personal enrichment at the expense of the company; or |
| Mr. Millers willful or intentional failure to materially comply (to the best of his ability) with a specific, written direction of the board of directors of AB Acquisition that is consistent with normal business practice and not inconsistent with the Miller Employment Agreement and his responsibilities thereunder, and that within 10 business days after the delivery of written notice of the failure is not cured to the best of his ability or that Mr. Miller has not provided notice that the failure was based on his good faith belief that the implementation of such direction would be unlawful or unethical. |
For purposes of the Miller Employment Agreement, Good Reason generally means any of the following occurs:
| a change of control; |
| any material adverse alteration in Mr. Millers titles, positions, duties, authorities, reporting relationships or responsibilities that is not cured within 10 business days of notice from Mr. Miller; or |
| any material failure by us to comply with the Miller Employment Agreement that is not cured within 10 business days of notice from Mr. Miller. |
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Robert L. Edwards
Mr. Edwards was party to an employment agreement with AB Management Services Corp., a subsidiary of the company, dated December 15, 2014 (the Edwards Employment Agreement). The Edwards Employment Agreement became effective as of the closing date of the Safeway acquisition. Pursuant to the Edwards Employment Agreement, Mr. Edwards served as President and Chief Executive Officer of the company, and certain of its subsidiaries. Mr. Edwards annual base salary was $1,500,000 and he was eligible to receive a bonus under a plan established by the company with a target bonus of 100% of his base salary and a maximum bonus of 200% of base salary. The Edwards Employment Agreement also provided for the grant of Series 1 Incentive Units described above under Incentive PlansIncentive Unit Plan. If Mr. Edwards employment would have been terminated by us without Cause or by him for Good Reason, subject to his execution of a release, Mr. Edwards would have been entitled to a lump sum severance payment equal to two times the sum of his base salary and the target bonus, and reimbursement of the cost of continuation coverage of group health coverage for 18 months; but if the termination was within 24 months of the closing of the Safeway acquisition, the severance amount would not be less than he would have received under the Safeway Executive Severance Plan for termination following a Change in Control.
For the purposes of the Edwards Employment Agreement, Cause generally meant:
| conviction of a felony; |
| acts of intentional dishonesty resulting or intending to result in material personal gain or enrichment at the expense of the company, its subsidiaries or its affiliates; |
| Mr. Edwards material breach of his obligations under the Edwards Employment Agreement, including but not limited to breach of the restrictive covenants and fraudulent, unlawful or grossly negligent conduct by Mr. Edwards in connection with his duties under the Edwards Employment Agreement; |
| personal conduct by Mr. Edwards which materially discredited or materially economically damaged the company, its subsidiaries or its affiliates; or |
| contravention of specific lawful direction from our board of directors. |
For the purposes of the Edwards Employment Agreement Good Reason generally meant:
| a reduction in the base salary or target bonus; |
| a material diminution in Mr. Edwards title, duties or responsibilities (including reporting requirements); |
| relocation of Mr. Edwards principal location of work to any location that was in excess of 50 miles from the location thereof on January 30, 2015 (other than Boise, Idaho) or, if we required him to move to Boise, Idaho, any subsequent relocation that was in excess of 50 miles from the location of the company in Boise, Idaho; or |
| a material breach of the Edwards Employment Agreement or an equity award agreement by the company or any of its subsidiaries. |
On April 9, 2015, the company, AB Management Services Corp. and Mr. Edwards entered into the Director and Consultancy Agreement which superseded the Edwards Employment Agreement. See Certain Relationships and Related Party Transactions.
Robert B. Dimond and Justin Dye
During fiscal 2014, Messrs. Dimond and Dye were parties to employment agreements with AB Management Services Corp. and NAI, respectively, that are dated September 9, 2014 and March 21,
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2013, respectively, each as amended (the Executive Employment Agreements). On , 2015, each of Messrs. Dimond and Dye and the company entered into amended and restated Executive Employment Agreements which, effective upon the consummation of the IPO-Related Transactions and this offering, will reflect the assignment of their employment and Executive Employment Agreements to the Company. The Executive Employment Agreements both currently provide for a term through the third anniversary of the closing of the Safeway acquisition. The Executive Employment Agreements provide for an annual base salary of $700,000 for Mr. Dimond and $750,000 (increased to $800,000 under the amended and restated agreement) for Mr. Dye, and both executives are eligible to receive an annual bonus targeted at 60% of his annual base salary.
If the executives employment terminates due to his death or he is terminated due to disability, the executive or his legal representative, as appropriate, will be entitled to receive a lump sum payment in an amount equal to 25% of his base salary. If the executives employment is terminated by the company without Cause or by the executive for Good Reason, subject to his execution of a release, the executive is entitled to a lump sum payment of his base salary and target bonus for the period from the date of such termination through January 30, 2018, if the termination occurs prior to January 30, 2016, or for a period of 24 months if the termination occurs following January 30, 2016, and reimbursement of the cost of continuation coverage of group health coverage for 36 months.
For the purposes of each of the Executive Employment Agreements, Cause generally means:
| conviction of a felony; |
| acts of intentional dishonesty resulting or intending to result in personal gain or enrichment at the expense of the company, its subsidiaries or its affiliates; |
| a material breach of the executives obligations under the Executive Employment Agreement, including but not limited to breach of the restrictive covenants or fraudulent, unlawful or grossly negligent conduct by the executive in connection with his duties under the Executive Employment Agreement; |
| Personal conduct by the executive which seriously discredits or damages the company, its subsidiaries or its affiliates; or |
| contravention of specific lawful direction from the board of directors. |
For the purposes of the Executive Employment Agreements Good Reason generally means:
| a reduction in the base salary or target bonus; or |
| without prior written consent, relocation of the executives principal location of work to any location that is in excess of 50 miles from such location on the date of the applicable Executive Employment Agreement. |
Prior to entering into his Executive Employment Agreement, in connection with the commencement of his employment, Mr. Dimond entered into an offer letter with AB Management Services Corp., dated February 5, 2014. The offer letter provided Mr. Dimond with the same base salary and bonus opportunity provided under his Executive Employment Agreement and the retention bonus described above under BonusesSpecial Bonuses. The remaining payments under Mr. Dimonds retention bonus are provided for under his amended and restated Executive Employment Agreement.
Shane Sampson
In connection with the commencement of his employment, Mr. Sampson entered into an offer letter with Albertsons LLC, dated January 16, 2013, pursuant to which he initially served as President, Shaws and Star Market. The offer letter provided Mr. Sampson with an initial base salary of $350,000 (increased to $700,000 effective as of January 30, 2015) and a bonus opportunity of 50% of base
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salary (increased to 60% effective January 30, 2015). In addition, Mr. Sampsons offer letter provided for a signing bonus in the amount of $200,000 and the retention bonus described above under BonusesSpecial Bonuses. On , 2015, Mr. Sampson and the company entered into a letter agreement which, effective upon the consummation of the IPO-Related Transactions and this offering, will reflect the assignment of his employment to the company and provide that the company will make any further payments remaining under his retention bonus.
Wayne A. Denningham
On , 2015, Mr. Denningham and the company entered into a letter agreement which, effective upon the consummation of the IPO-Related Transactions and this offering, will reflect the assignment of his employment to the company and provide that the company will make any further payments remaining under his retention bonus.
Severance Plan
We maintain the Albertsons LLC Severance Plan for Officers (the Severance Plan) in order to provide severance benefits to certain employees who do not have severance rights under an employment agreement. Messrs. Denningham and Sampson are currently eligible for severance benefits under the Severance Plan. The Severance Plan provides that, subject to the execution of a release of claims and to certain exceptions set forth in the Severance Plan, an eligible employee who incurs an involuntary termination of employment due to certain job restructurings, reductions in force, sale of facilities, or job eliminations (and not due to any other reason including termination for misconduct or unsatisfactory job performance as determined by the company, or voluntary termination) will be eligible to receive:
| a lump sum severance payment in an amount equal to two weeks of pay per year of service, with a minimum of eight weeks of severance pay; and |
| continued health insurance coverage at the active employee rate for a period of up to six months. |
Deferred Compensation Plan
Our subsidiaries Albertsons LLC and NAI maintain the Albertsons LLC Makeup Plan and NAI Makeup Plan, respectively (collectively, the Makeup Plans). The Makeup Plans are unfunded non-qualified deferred compensation arrangements intended to comply with Section 409A of the Code. Designated employees, including our NEOs, may elect to defer the receipt of a portion of their base pay, bonus and incentive payments under the Makeup Plan. For fiscal 2014, Messrs. Dye and Sampson were eligible to participate in the NAI Makeup Plan, and the other NEOs were eligible to participate in the Albertsons LLC Makeup Plan. The amounts deferred are held in a book entry account and are deemed to have been invested by the participant in investment options designated by the participant from among the investment options made available by the committee under the Makeup Plans. Participants are vested in their accounts under the Makeup Plans to the same extent they are vested in their accounts under the 401(k) plan discussed below, except that accounts under the Makeup Plans will become fully vested upon a change in control. No deferral contributions for a year will be credited, however, until the participant has been credited with the maximum amount of elective deferrals permitted by the terms of the 401(k) plans and/or the limitations imposed by the Code. In addition, participants will be credited with an amount equal to the excess of the amount we would contribute to the 401(k) plans as a company contribution on the participants behalf for the plan year without regard to any limitations imposed by the Code based on the participants compensation over the amount of our actual company contributions for the plan year. Generally, payment of the participants account under the Makeup Plans will be made in a lump sum following the participants
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separation from service. Participants may receive a distribution of up to 100% of their account during employment in the event of an emergency. Participants in the Makeup Plans are unsecured general creditors. See the table entitled Nonqualified Deferred Compensation below for information with regard to the participation of the NEOs in the Makeup Plans.
401(k) Plan
The company and NAI maintain 401(k) plans with terms that are substantially identical. For fiscal 2014, Messrs. Dye and Sampson were eligible to participate in the 401(k) plan sponsored by NAI, and the other NEOs were eligible to participate in the companys 401(k) plan. The plans permit eligible employees to make voluntary, pre-tax contributions to the plan up to a specified percentage of compensation, subject to applicable tax limitations. We may make a discretionary matching contribution to the plans equal to a pre-determined percentage of an employees voluntary, pre-tax contributions and may make an additional discretionary profit sharing contribution to the plans, subject to applicable tax limitations. Eligible employees who elect to participate in the plans are generally vested in any matching contribution after one year of service with us and fully vested at all times in their employee contributions to the plans. The plans are intended to be tax-qualified under Section 401(a) of the Code, so that contributions to the plans and income earned on plan contributions are not taxable to employees until withdrawn from the plan, and so that our contributions, if any, will be deductible by us when made. Our board of directors determines the matching contribution rate under the 401(k) plans for each year. For fiscal 2014, our board of directors set a matching contribution rate equal to 50% up to 7% of base salary.
Safeway Retirement Plans
In connection with the Safeway acquisition, we assumed the Safeway Inc. Employee Retirement Plan, a qualified defined benefit pension plan, and the Safeway Inc. Retirement Restoration Plan and Retirement Restoration Plan II, non-qualified and unfunded defined benefit pension plans. See Pension Benefits below for information regarding Mr. Edwards participation in these plans.
Other Benefits
Executives participate in the health and dental coverage, company-paid term life insurance, disability insurance, paid time off and paid holidays programs applicable to other employees in their locality. We also maintain a relocation policy applicable to employees who are required to relocate their residence. Messrs. Dimond and Sampson received relocation benefits under the policy in fiscal 2014. These benefits are designed to be competitive with overall market practices and are in place to attract and retain the necessary talent in the business.
Perquisites
Except as noted below or elsewhere in this Compensation Discussion and Analysis, our NEOs are generally not entitled to any perquisites that are not otherwise available to all of our employees.
Under his employment agreement, Mr. Miller is entitled to the use of corporate aircraft for up to 100 hours per year for himself, his family members and guests at no cost to him, other than to pay income tax on such usage at the lowest permissible rate. Other executives, generally those with the title of executive vice president or above, may request the personal use of a company owned aircraft subject to availability.
The company agreed to continue to maintain life insurance coverage on Mr. Edwards life to the extent Safeway maintained such policy, for a period during his term of employment and beyond his termination, for a period not to exceed five years and an amount not to exceed $5,000,000.
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For fiscal 2014, Messrs. Edwards, Denningham and Dye were eligible for financial and tax planning services. The maximum amount of this benefit for Messrs. Denningham and Dye was increased to, and Mr. Dimond became eligible to receive this benefit for, up to $8,000 per year, effective upon the closing of the Safeway acquisition.
Risk Mitigation
Our compensation committee has assessed the risk associated with our compensation practices and policies for employees, including a consideration of the balance between risk-taking incentives and risk-mitigating factors in our practices and policies. The assessment determined that any risks arising from our compensation practices and policies are not reasonably likely to have a material adverse effect on our business or financial condition.
Impact of Accounting and Tax Matters
As a general matter, the compensation committee will be responsible for reviewing and considering the various tax and accounting implications of compensation vehicles that we utilize. With respect to accounting matters, the compensation committee will examine the accounting cost associated with equity compensation in light of ASC 718.
With respect to tax matters, the compensation committee may consider the impact of Section 162(m) of the Code (Section 162(m)), which generally prohibits any publicly-held corporation from taking a Federal income tax deduction for compensation paid in excess of $1 million in any taxable year to the chief executive officer and any other executive officer (other than the chief financial officer) employed on the last day of the taxable year whose compensation is required to be disclosed to stockholders under SEC rules. Exceptions include qualified performance-based compensation, among other things. Because of a transition period permitted under Section 162(m) in connection with a companys initial public offering, in general, the deduction limit under Section 162(m) does not currently apply to compensation payable by the company under the plans approved by our equityholders prior to the offering. This transition period will continue until the earliest of a material amendment of the plan, all of the stock or other compensation that has been allocated under the plan has been issued and our first annual stockholder meeting at which directors are to be elected that occurs after the close of the third calendar year following the calendar year that the offering occurs. It is the compensation committees policy to maximize the effectiveness of our executive compensation plans in this regard. Nonetheless, the compensation committee retains the discretion to grant awards (such as restricted stock with time-based vesting) that will not comply with the performance-based exception of Section 162(m) if it is deemed in the best interest of the company to do so.
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Summary Compensation Table
Name and
|
Year |
Salary
($)(1) |
Bonus
($)(2) |
Unit
Awards ($)(3) |
Option
Awards ($) |
Non-
Equity Incentive Plan Compensation ($)(4) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings ($)(5) |
All
Other Compensation ($)(6) |
Total
($) |
|||||||||||||||||||||||||||
(a) |
(b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Robert G. Miller Chairman and Chief Executive Officer(7) |
2014 | 1,567,307 | 15,000,000 | 74,070,357 | | 12,334,179 | | 327,912 | 103,299,755 | |||||||||||||||||||||||||||
2013 | 1,482,692 | 700,000 | 3,383,335 | | 381,750 | | 118,823 | 6,066,600 | ||||||||||||||||||||||||||||
2012 | 1,200,000 | | | | 715,037 | | 118,554 | 2,033,591 | ||||||||||||||||||||||||||||
Robert L. Edwards Former President and Chief Executive Officer(8) |
2014 | 127,404 | | 74,070,335 | | | | 17,201 | 74,214,940 | |||||||||||||||||||||||||||
Robert B. Dimond Executive Vice President and Chief Financial Officer(9) |
2014 | 713,462 | 625,000 | | | 664,482 | | 11,676 | 2,014,620 | |||||||||||||||||||||||||||
Wayne A. Denningham Chief Operating Officer(10) |
2014 | 387,500 | 275,000 | | | 8,648,669 | | 34,051 | 9,345,220 | |||||||||||||||||||||||||||
2013 | 341,250 | 24,550 | | | 610,888 | | 47,173 | 1,023,861 | ||||||||||||||||||||||||||||
2012 | 308,942 | | | | 613,099 | | 34,040 | 956,081 | ||||||||||||||||||||||||||||
Justin Dye Chief Administrative Officer(11) |
2014 | 767,308 | 500,000 | | | 10,877,525 | | 81,695 | 12,226,528 | |||||||||||||||||||||||||||
2013 | 727,500 | 700,000 | 3,383,335 | | 885,175 | | 50,482 | 5,746,492 | ||||||||||||||||||||||||||||
2012 | 420,000 | | | | 815,413 | | 60,122 | 1,295,535 | ||||||||||||||||||||||||||||
Shane Sampson Chief Marketing and Merchandising Officer(12) |
2014 | 383,654 | 560,000 | | | 358,416 | | 10,347 | 1,312,417 | |||||||||||||||||||||||||||
|
2013
|
|
324,423 | 200,000 | | | 171,538 | | 41,099 | 737,060 |
1. | Reflects a 53 week year for fiscal 2014 and 52 week years for fiscal 2013 and fiscal 2012. |
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2. | Reflects retention bonuses and special deal bonuses paid to the NEOs, as set forth in the table below. The retention bonuses and special deal bonuses for fiscal 2014 are further described in Compensation Discussion and Analysis. The special deal bonuses paid to Messrs. Miller, Denningham and Dye for fiscal 2013 were paid in recognition of their efforts in connection with the successful completion of the NAI acquisition. In addition, for Mr. Sampson, the amount for fiscal 2013 reflects a sign-on bonus in the amount of $200,000. |
Name |
Fiscal Year | Retention Bonus ($) | Special Deal Bonus ($) | |||||||||
Robert G. Miller |
2014 | | 15,000,000 | |||||||||
2013 | | 700,000 | ||||||||||
2012 | | | ||||||||||
Robert B. Dimond |
2014 | 375,000 | 250,000 | |||||||||
Wayne A. Denningham |
2014 | 175,000 | 100,000 | |||||||||
2013 | | 24,550 | ||||||||||
2012 | | | ||||||||||
Justin Dye |
2014 | | 500,000 | |||||||||
2013 | | 700,000 | ||||||||||
2012 | | | ||||||||||
Shane Sampson |
2014 | 310,000 | 250,000 | |||||||||
2013 | | |
3. | Reflects the grant date fair value calculated in accordance with ASC 718. For Mr. Miller, the amount reflects the Investor Incentive Units granted to him in fiscal 2014 and the Class C Units granted to him in fiscal 2013. For Mr. Edwards, the amount reflects the Series 1 Incentive Units granted to him in fiscal 2014. For Mr. Dye, the amount reflects the Class C Units granted to him in fiscal 2013. See Note 10Equity-Based Compensation in our consolidated financial statements, included elsewhere in this prospectus, for a discussion of the assumptions used in the valuation of equity-based awards. |
4. | Reflects amounts paid to the NEOs under our bonus plan (based on quarterly performance) for the applicable fiscal year and amounts paid to the NEOs with respect to long-term incentive plan awards that vested in the applicable fiscal year or otherwise became payable in fiscal 2014 upon termination of the long-term incentive plan, as set forth in the table below. The amounts paid for fiscal 2014 are further described in Compensation Discussion & Analysis. |
Name |
Fiscal Year |
Fiscal Year Bonus
($) |
LTIP I Bonus
($) |
LTIP II Bonus
($) |
||||||||||||
Robert G. Miller |
2014 | | 4,344,067 | 7,990,112 | ||||||||||||
2013 | | 6,750 | 375,000 | |||||||||||||
2012 | | 340,037 | 375,000 | |||||||||||||
Robert B. Dimond |
2014 | 664,482 | | | ||||||||||||
Wayne A. Denningham |
2014 | 371,551 | 1,086,017 | 7,191,101 | ||||||||||||
2013 | 271,700 | 1,688 | 337,500 | |||||||||||||
2012 | 190,590 | 85,009 | 337,500 | |||||||||||||
Justin Dye |
2014 | 715,379 | 2,172,034 | 7,990,112 | ||||||||||||
2013 | 506,800 | 3,375 | 375,000 | |||||||||||||
2012 | 270,395 | 170,018 | 375,000 | |||||||||||||
Shane Sampson |
2014 | 358,416 | | | ||||||||||||
2013 | 171,538 | | |
5. | For Mr. Edwards, the amount of aggregate change in pension value was ($22,315) from the commencement of his employment with the company through the end of fiscal 2014 under the Safeway Inc. Employee Retirement Plan, Retirement Restoration Plan and Retirement Restoration Plan II. The company assumed these plans in connection with the Safeway acquisition. The aggregate value of Mr. Edwards account under these plans at the end of fiscal 2014 was $682,283. |
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6. | A detailed breakdown of All Other Compensation for fiscal 2014 is provided in the table below: |
Name |
Year |
Aircraft
($)(a) |
Relocation
($) |
Life
Insurance ($) |
Financial
and Tax Planning ($) |
Makeup
Plan Company Contribution ($)(c) |
401(k) Plan
Company Contribution ($) |
Total
($) |
||||||||||||||||||||||||
Robert G. Miller |
2014 | 114,554 | | 125,000 | (b) | | 79,608 | 8,750 | 327,912 | |||||||||||||||||||||||
2013 | 48,489 | | | | 61,834 | 8,500 | 118,823 | |||||||||||||||||||||||||
2012 | | | | | 110,304 | 8,250 | 118,554 | |||||||||||||||||||||||||
Robert L. Edwards |
2014 | 16,239 | | | 962 | | | 17,201 | ||||||||||||||||||||||||
Robert B. Dimond |
2014 | | 11,676 | | | | | 11,676 | ||||||||||||||||||||||||
Wayne A. Denningham |
2014 | | | | 4,500 | 20,801 | 8,750 | 34,051 | ||||||||||||||||||||||||
2013 | | 7,681 | | 4,500 | 26,492 | 8,500 | 47,173 | |||||||||||||||||||||||||
2012 | | | | | 25,790 | 8,250 | 34,040 | |||||||||||||||||||||||||
Justin Dye |
2014 | 6,295 | | | 4,500 | 62,150 | 8,750 | 81,695 | ||||||||||||||||||||||||
2013 | | | | 4,500 | 37,482 | 8,500 | 50,482 | |||||||||||||||||||||||||
2012 | | | | | 51,872 | 8,250 | 60,122 | |||||||||||||||||||||||||
Shane Sampson |
2014 | | 10,347 | | | | | 10,347 | ||||||||||||||||||||||||
2013 | 659 | 40,440 | | | | | 41,099 |
(a) | Represents the aggregate incremental cost to the company for personal use of the companys aircraft. |
(b) | Reflects our payment of premiums for a life insurance policy we maintain for Mr. Miller. |
(c) | Reflects our contributions to the NEOs Makeup Plan account in an amount equal to the excess of the amount we would contribute to the 401(k) plans as a company contribution on the NEOs behalf for the plan year without regard to any limitations imposed by the Code based on the NEOs compensation over the amount of our actual contributions to the 401(k) plans for the plan year. |
7. | Mr. Miller served as our Chief Executive Officer during fiscal years 2012 and 2013 and from the commencement of fiscal 2014 (February 21, 2014) through January 29, 2015. Mr. Miller subsequently served as our Executive Chairman from January 30, 2015 through April 9, 2015, and was appointed as our Chairman and Chief Executive Officer on April 9, 2015. |
8. | Mr. Edwards served as our President and Chief Executive Officer from January 30, 2015 through his transition to Vice Chairman (a non-employee position) on April 9, 2015. |
9. | Mr. Dimond joined the company and was appointed as our Chief Financial Officer in February 2014. |
10. | Mr. Denningham was appointed as our Chief Operating Officer in April 2015. Prior thereto, he served in a variety of executive positions with the company and Albertsons LLC. |
11. | Mr. Dye was appointed as our Chief Administrative Officer in February 2015. Prior thereto, he served in a variety of executive positions with the company, Albertsons LLC and NAI. |
12. | Mr. Sampson was appointed as our Chief Marketing and Merchandising Officer in April 2015. Prior thereto, he served in a variety of executive positions with Albertsons LLC and NAI. |
Grants of Plan Based Awards in Fiscal 2014
Name |
Grant
Date |
Estimated Future Payouts
Under Non-Equity Incentive Plan Awards(1) |
Estimated Future
Payouts Under Equity Incentive Plan Awards |
All Other
Unit Awards: Number of Units (#) |
All
Other Option Awards: Number of Securities Underlying Options (#) |
Exercise
or Base Price of Option Awards ($/Unit) |
Grant
Date Fair Value of Unit and Option Awards ($)(4) |
|||||||||||||||||||||||||||||||||||||
Threshold
($) |
Target
($) |
Maximum
($) |
Threshold
($) |
Target
($) |
Maximum
($) |
|||||||||||||||||||||||||||||||||||||||
(a) |
(b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | (k) | (l) | |||||||||||||||||||||||||||||||||
Robert G. Miller |
1/30/2015 | | | | | | | 3,350,084 | (2) | | | 74,070,357 | ||||||||||||||||||||||||||||||||
Robert L. Edwards |
1/30/2015 | | | | | | | 3,350,083 | (3) | | | 74,070,335 | ||||||||||||||||||||||||||||||||
Robert B. Dimond |
| | 428,077 | 856,154 | | | | | | | | |||||||||||||||||||||||||||||||||
Wayne A. Denningham |
| | 232,500 | 465,000 | | | | | | | | |||||||||||||||||||||||||||||||||
Justin Dye |
| | 460,385 | 920,770 | | | | | | | | |||||||||||||||||||||||||||||||||
Shane Sampson |
| | 230,192 | 460,384 | | | | | | | |
1. |
Amounts represent the range of annual cash incentive awards the NEO was potentially entitled to receive based on the achievement of quarterly division performance goals during fiscal 2014 under the companys 2014 Bonus Plan as more fully described in Compensation Discussion and Analysis. The amounts actually paid are reported in the Non-Equity Incentive Plan column of the Summary Compensation |
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table. Pursuant to the 2014 Bonus Plan, performance below a specific threshold will result in no payment with respect to that performance goal. Performance at or above the threshold will result in a payment from $0 up to the maximum bonus amounts reflected in the table. |
2. | Represents a fully vested and non-forfeitable Investor Incentive Unit granted to Mr. Miller, as described in Compensation Discussion and Analysis. |
3. | Represents an Incentive Unit award made to Mr. Edwards pursuant to the companys Incentive Unit Plan, as described in Compensation Discussion and Analysis. |
4. | Reflects the grant date fair value calculated in accordance with ASC 718. Assumptions used in the valuation of equity based awards are discussed in Note 10Equity-Based Compensation in our consolidated financial statements included elsewhere in this prospectus. |
Outstanding Equity Awards at Fiscal Year End 2014
Option Awards | Unit Awards | |||||||||||||||||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) Exercisable |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
Number
of Units That Have Not Vested (#) |
Market
Value of Units That Have Not Vested ($) |
Equity
Incentive Plan Awards: Number of Unearned Units or Other Rights That Have Not Vested (#) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Units or Other Rights That Have Not Vested ($) |
|||||||||||||||||||||||||||
(a) |
(b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Robert G. Miller |
| | | | | | | | | |||||||||||||||||||||||||||
Robert L. Edwards |
| | | | | 3,350,083 | (1) | | (2) | | | |||||||||||||||||||||||||
Robert B. Dimond |
| | | | | | | | | |||||||||||||||||||||||||||
Wayne A. Denningham |
| | | | | | | | | |||||||||||||||||||||||||||
Justin Dye |
| | | | | | | | | |||||||||||||||||||||||||||
Shane Sampson |
| | | | | | | | |
1. | Reflects the full number of Incentive Units granted to Mr. Edwards. These Incentive Units were granted subject to vesting as described in Compensation Discussion and Analysis. In connection with his transition to the position of Vice Chairman, Mr. Edwards and the company agreed that he would forfeit 1,675,041.5 of his Series 1 Incentive Units. The remaining 1,675,041.5 Series 1 Incentive Units will vest in full on January 30, 2016, the first anniversary of the closing date of the Safeway acquisition, subject to his continued service through that date with accelerated vesting in the event of certain terminations of his service as described in Compensation Discussion and Analysis. |
2. | Because there was no public market for our equity as of February 28, 2015, the market value of the Series 1 Incentive Units as of that date is not determinable. Accordingly, we cannot calculate the market value of the unvested Series 1 Incentive Units as of that date. |
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Option Exercises and Units Vested in Fiscal 2014
Name |
Option Awards | Unit Awards | ||||||||||||||
Number of Shares
Acquired on Exercise (#) |
Value Realized
on Exercise ($) |
Number of Units
Acquired on Vesting (#)(1) |
Value Realized on
Vesting ($)(2) |
|||||||||||||
(a) |
(b) | (c) | (d) | (e) | ||||||||||||
Robert G. Miller |
| | 440,242 | 3,383,335 | ||||||||||||
Robert L. Edwards |
| | | | ||||||||||||
Robert B. Dimond |
| | | | ||||||||||||
Wayne A. Denningham |
| | | | ||||||||||||
Justin Dye |
| | 440,242 | 3,383,335 | ||||||||||||
Shane Sampson |
| | | |
1. | Represents the vesting of Class C Units as described in Compensation Discussion and Analysis. |
2. | The value realized upon vesting of the Class C Units is based on a vesting date per unit value of $7.69. |
Pension Benefits
The following table quantifies the benefits expected to be paid to Mr. Edwards under the ERP, a qualified defined benefit pension plan; and the Safeway Inc. Retirement Restoration Plan and Retirement Restoration Plan II (collectively, the RRP), non-qualified and unfunded defined benefit pension plans, as of June 20, 2015. The company assumed the ERP and the RRP from Safeway in connection with the Safeway acquisition. The terms of the plans are described below the table.
The following actuarial assumptions were employed to derive the calculations shown on the table below: (1) pension economic assumptions consistent with pension financial reporting by Safeway for its 2014 fiscal year were used for calculations at the end of 2014; (2) demographic assumptions are also consistent with pension financial reporting, with the exception of modified retirement and pre-retirement decrements as required by SEC guidance; (3) discount rates of 3.9% for the ERP and 3.8% for the RRP; and (4) a cash balance interest crediting and annuity conversion interest rate of 3.0%.
Additional actuarial assumptions used include the following: (1) mortality table for lump sum conversion2014 IRS Applicable Mortality Table; (2) retirement table for post-retirement mortalityRP2014 fully generational using MP 2014 scale; (3) no pre-retirement mortality, turnover or disability; (4) form of payment assumption of 65% lump sum and 35% single life annuity for ERP and 100% single life annuity for RRP; and (5) retirement age of 65.
Name |
Plan Name(1) |
Number of Years
Credited Service (#)(2) |
Present Value of
Accumulated Benefit ($) |
Payments During
Last Fiscal Year ($) |
||||||||||||
(a) |
(b) | (c) | (d) | (e) | ||||||||||||
Robert L. Edwards |
ERP | 9.9 | 137,422 | | ||||||||||||
RRP | 9.9 | 502,678 | |
1. | In connection with the termination of his employment, Mr. Edwards elected to receive his vested benefit under the ERP in a lump sum. In connection with the termination of his employment, Mr. Edwards vested benefit under the RRP will be paid to him via an annuity paid monthly. |
2. | The number of years of credited service and the present value of accumulated benefits are calculated as of June 20, 2015. |
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Nonqualified Deferred Compensation
The following table shows the executive and company contributions, earnings and account balances for the NEOs under the Makeup Plans during fiscal 2014. The Makeup Plans are non-qualified deferred compensation arrangements intended to comply with Section 409A of the Code. See Compensation Discussion and Analysis for a description of the terms and conditions of the Makeup Plans. The aggregate balance of each participants account consists of amounts that have been deferred by the participant, company contributions, plus earnings (or minus losses). We do not deposit any amounts into any trust or other account for the benefit of plan participants. In accordance with tax requirements, the assets of the Makeup Plan are subject to claims of our creditors.
Name |
Executive
Contributions in Last FY ($)(1) |
Registrant
Contributions in Last FY ($)(2) |
Aggregate
Earnings in Last FY ($)(3) |
Aggregate
Withdrawals/ Distributions ($) |
Aggregate
Balance at Last FYE ($) |
|||||||||||||||
(a) |
(b) | (c) | (d) | (e) | (f) | |||||||||||||||
Robert G. Miller |
2,005,777 | 475,446 | 94,978 | | 4,248,619 | |||||||||||||||
Robert L. Edwards |
| | | | | |||||||||||||||
Robert B. Dimond |
90,124 | | 6,740 | | 93,561 | |||||||||||||||
Wayne A. Denningham |
623,847 | 311,313 | 76,847 | | 1,546,602 | |||||||||||||||
Justin Dye |
828,946 | 396,770 | 114,871 | | 2,623,377 | |||||||||||||||
Shane Sampson |
| | | | |
1. | All executive contributions represent amounts deferred by each NEO under a Makeup Plan and are included as compensation in the Summary Compensation Table under Salary, Bonus and Non-Equity Incentive Plan Compensation. |
2. | All registrant contributions are reported under All Other Compensation in the Summary Compensation Table. |
3. | These amounts are not reported in the Summary Compensation Table as none of the earnings are based on interest above the market rate. |
Incentive Plans
Incentive Unit Plan
Effective upon the closing of the Safeway acquisition, we adopted the Incentive Unit Plan which provided for grants of Incentive Units to the employees, directors and consultants of the company or its subsidiaries selected by the board of directors. A maximum of 20,100,503 Incentive Units were available for issuance under the Incentive Unit Plan, subject to adjustment in the event of a change in the companys capital structure. The Incentive Units represent a membership interest in the company. Any Incentive Units will be granted as profits interests that would only share in the value of the company above its valuation at grant.
The Incentive Unit Plan provides that, unless otherwise provided in an award agreement, in the event of the termination of a participants service for any reason, any unvested Incentive Units will be forfeited without the payment of consideration. In the event of the termination of a participants service for Cause, unless otherwise provided in an award agreement, any vested Incentive Units will be forfeited without the payment of consideration.
For purposes of the Incentive Unit Plan, Cause is as defined in a participants employment agreement, or if not so defined, generally means:
| the commission of a felony or a misdemeanor (excluding petty offenses) involving fraud, dishonesty or moral turpitude; |
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| a participants failure (other than as a result of incapacity due to mental or physical impairment) to perform his material duties; |
| acts of dishonesty resulting or intending to result in personal gain or enrichment at the expense of the company, or its subsidiaries or affiliates; |
| a breach of any material written policy of the company or its subsidiaries; |
| the failure to follow the lawful written directions of our Chief Executive Officer, our Executive Chairman, the board of directors or the person to whom the participant reports; |
| conduct in connection with a participants duties that is fraudulent, grossly negligent or otherwise materially injurious to the company or its subsidiaries or affiliates; or |
| a breach of restrictive covenants under which the participant is subject. |
The Incentive Unit Plan will terminate upon the consummation of the IPO-Related Transactions and this offering.
Phantom Unit Plan
In fiscal 2015, we adopted the Phantom Unit Plan which provides for grants of Phantom Units to the employees, directors and consultants of the company or its subsidiaries selected by the board of directors. Each Phantom Unit provides the participant with a contractual right to receive upon vesting one Incentive Unit under the terms and conditions of the Incentive Unit Plan. A maximum of 20,100,503 Phantom Units, less the number of Incentive Units granted under the Incentive Unit Plan, are available for issuance under the Phantom Unit Plan, subject to adjustment in the event of a change in the companys capital structure.
The Phantom Unit Plan provides that the company may provide for a participants Phantom Unit award to include a separate right to receive a Tax Bonus. A Tax Bonus entitles a participant to receive a bonus equal to 4% of the fair market value of the Incentive Units paid to the participant in respect of vested Phantom Units. Tax Bonuses may be paid in cash, Incentive Units or a combination thereof.
The Phantom Unit Plan provides that, unless otherwise provided in an award agreement, in the event of the termination of a participants service for any reason, any unvested Phantom Units and any rights to a future Tax Bonus will be forfeited without the payment of consideration. In the event of the termination of a participants service for Cause (which for purposes of the Phantom Unit Plan has the same meaning as defined in the Incentive Unit Plan as set forth above), unless otherwise provided in an award agreement, any Incentive Units issued with respect to a vested Phantom Unit and any rights to a future Tax Bonus will be forfeited without the payment of consideration.
Upon the consummation of the IPO-Related Transactions and this offering, all outstanding Phantom Units will automatically be converted to restricted stock units that will be settled upon vesting in shares of our common stock. The restricted stock units will be subject to a Restricted Stock Unit Plan that will have substantially the same terms as, and will supersede, the Phantom Unit Plan except that no new awards may be granted thereunder. As of the date of this prospectus, there are Incentive Units outstanding that, based on an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would automatically convert into restricted stock units.
2015 Equity and Incentive Award Plan
On , 2015, our board of directors adopted the 2015 Incentive Plan, which was subsequently approved by our stockholders on , 2015. The 2015 Incentive Plan became
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effective immediately upon its approval by our stockholders, although no awards will be made under it until the effective date of the registration statement of which this prospectus is a part. The principal features of the 2015 Incentive Plan are summarized below, but the summary is qualified in its entirety by reference to the 2015 Incentive Plan itself, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Securities Subject to the 2015 Incentive Plan . A maximum of shares of our common stock in the aggregate may be issued or transferred pursuant to awards under the 2015 Incentive Plan. The number of shares of our common stock available under the 2015 Incentive Plan will be reduced by one share for each share issued under an award. The shares of our common stock covered by the 2015 Incentive Plan may be treasury shares, authorized but unissued shares or shares purchased in the open market.
In the event of any termination, expiration, lapse or forfeiture of an award, any shares subject to the award will again be made available for future grants under the 2015 Incentive Plan. Any shares of restricted stock repurchased by the company at the same price paid for such shares will be made available for issuance again under the 2015 Incentive Plan.
Eligibility . All of our employees, consultants, and directors, and employees and consultants of our affiliates, will be eligible to receive awards under the 2015 Incentive Plan.
Awards under the 2015 Incentive Plan . The 2015 Incentive Plan provides that the administrator may grant or issue stock options, which may be non-qualified stock options (NQSOs) or, solely to eligible employees, incentive stock options designed to comply with the applicable provisions of Section 422 of the Code, stock appreciation rights (SARs), restricted stock, restricted stock units, deferred stock, performance awards and stock payments, or any combination thereof. The terms and conditions of each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award.
Award Limits . The 2015 Incentive Plan provides that a maximum aggregate amount of shares of common stock may be granted to an employee or consultant in any calendar year, and a maximum aggregate amount of shares of common stock may be granted to a non-employee director in any calendar year, in each case subject to adjustment under certain circumstances in order to prevent the dilution or enlargement of the potential benefits intended to be made available under the 2015 Incentive Plan, as described below. In addition, the annual award limit for performance awards that are payable solely in cash is $ .
Vesting and Exercise of Awards . The applicable award agreement will contain the period during which the right to exercise the award in whole or in part vests, including the events or conditions upon which the vesting of an award may accelerate. No portion of an award which is not vested at the participants termination of employment, termination of directorship or termination of consulting relationship, as applicable, will subsequently become vested, except as may be otherwise provided by the administrator either in the agreement relating to the award or by action following the grant of the award.
Transferability of Awards . Awards generally may not be sold, pledged, assigned or transferred in any manner other than by will or by the laws of descent and distribution or, subject to the consent of the administrator, pursuant to a domestic relations order, unless and until such award has been exercised, or the shares underlying such award have been issued, and all restrictions applicable to such shares have lapsed. Notwithstanding the foregoing, NQSOs may be transferred without consideration to certain family members and trusts with the administrators consent. Awards may be exercised, during the lifetime of the participant, only by the participant or such permitted transferee.
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Forfeiture and Claw-Back Provisions . In the event a participant (i) terminates service with the company prior to a specified date or within a specified time following receipt or exercise of the award, (ii) the company terminates the participants service for cause, or (iii) the participant engages in certain competitive activities with the company, the administrator has the right to require the participant to repay any proceeds, gains or other economic benefit actually or constructively received by the participant or to terminate the award. In addition, all awards (including any proceeds, gains or other economic benefit actually or constructively received by the participant) may be subject to the provisions of any claw-back policy implemented by the company, including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2015 Incentive Plan Benefits . The future benefits that will be received under the 2015 Incentive Plan by our current directors, executive officers and all eligible employees are not currently determinable.
Adjustments for Stock Splits, Recapitalizations, Mergers and Equity Restructurings . In the event of any recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off or other transaction that affects our common stock, the 2015 Incentive Plan will be equitably adjusted, including the number of available shares, in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the 2015 Incentive Plan or with respect to any award.
Administration of the 2015 Incentive Plan . The compensation committee is the administrator of the 2015 Incentive Plan. Subject to certain limitations, the committee may delegate its authority to grant awards to one or more committees consisting of one or more members of the board of directors or one or more of our officers.
Amendment and Termination of the 2015 Incentive Plan . Our board of directors and the compensation committee may amend the 2015 Incentive Plan at any time, subject to stockholder approval to the extent required by applicable law or regulation or the listing standards of the (or any other market or stock exchange on which our common stock is at the time primarily traded).
Additionally, stockholder approval will be specifically required to increase the maximum number of shares of our common stock which may be issued under the 2015 Incentive Plan, change the eligibility requirements or decrease the exercise price of any outstanding option or stock appreciation right granted under the 2015 Incentive Plan. The board of directors and the compensation committee may amend the terms of any award theretofore granted, prospectively or retroactively, however, except as otherwise provided in the 2015 Incentive Plan, no such amendment will, without the consent of the participant, alter or impair any rights of the participant under such award without the consent of the participant unless the award itself otherwise expressly so provides.
Our board of directors and the compensation committee may suspend or terminate the 2015 Incentive Plan at any time. However, in no event may an award be granted pursuant to the 2015 Incentive Plan on or after the tenth anniversary of the effective date of the 2015 Incentive Plan.
Prohibition on Repricing . Except in connection with a corporate transaction involving the company (including, without limitation, any stock distribution, stock split, extraordinary cash distribution, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the administrator will not, without the approval of the stockholders, authorize the amendment of any outstanding award to reduce its price per share, including any amendment to reduce the exercise price per share of outstanding options or SARs.
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Executive Incentive Bonus Plan
On , 2015, our board of directors adopted the Executive Incentive Bonus Plan. The principal features of the Executive Incentive Bonus Plan are summarized below, but the summary is qualified in its entirety by reference to the Executive Incentive Bonus Plan itself, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Plan Administration . The Executive Incentive Bonus Plan is administered by our board of directors or a committee selected by our board of directors to administer the Executive Incentive Bonus Plan and composed of not less than two directors, each of whom is an outside director (within the meaning of Section 162(m) of the Code) (as applicable, the Plan Committee). The Plan Committee selects the officers or key executives who will be eligible to receive awards, establishes the maximum award that may be earned by each participant and establishes the goals for each participant. The Plan Committee calculates and determines each participants level of attainment of such goals, and calculates the bonus award for each participant based upon such level of attainment.
Eligibility . For each performance period, the Plan Committee will select the officers and key executives of the company and its subsidiaries and divisions who are eligible to participate in the Executive Incentive Bonus Plan.
General Description of the Executive Incentive Bonus Plan . Participants in the Executive Incentive Bonus Plan will be eligible to receive cash performance awards based on attainment by the company and/or a subsidiary, division or other operational unit of the company of specified performance goals to be established for each performance period by the Compensation Committee. The maximum amount of any bonus award intended to qualify for the performance-based compensation exception to Section 162(m) of the Code payable to a single participant for any performance period consisting of a 12-month period (including a fiscal or calendar year) will in no event exceed $ , which amount is reduced on a pro rata basis for any performance period of less than 12 months. Unless otherwise provided by the Plan Committee or set forth in a written agreement between the company and a participant, bonus awards are intended to constitute short term deferrals for purposes of Section 409A of the Code and will be paid within the applicable short-term deferral period under Section 409A of the Code. Payment of bonus awards will be made in the form of cash, our common stock or equity awards in respect of our common stock, which common stock or equity awards may be subject to additional vesting provisions as determined by the Plan Committee. Any shares of common stock or equity awards granted in satisfaction of a bonus award will be granted under the 2015 Incentive Plan. To be eligible to receive a payment of a bonus award with respect to a performance period, a participant must satisfy such employment requirements as may be imposed by the Plan Committee. In the event of a participants death prior to the payment of a bonus award which has been earned, such payment will be made to the participants designated beneficiary or, if there is none living, to the estate of the participant.
Performance Criteria . The performance criteria will be measured in terms of one or more of the following objectives, which objectives may relate to company-wide objectives or of the subsidiary, division, department or function of the company or subsidiary: (i) net earnings (either before or after interest, taxes, depreciation and amortization), (ii) gross or net sales or revenue, (iii) net income (either before or after taxes), (iv) operating profit, (v) cash flow (including, but not limited to, operating cash flow and free cash flow), (vi) return on assets, (vii) return on capital, (viii) return on stockholders equity, (ix) return on sales, (x) gross or net profit or operating margin, (xi) costs, (xii) funds from operations, (xiii) expense, (xiv) working capital, (xv) earnings per share, (xvi) price per share of our common stock, (xvii) United States Food and Drug Administration or other regulatory body approval for commercialization of a product, (xviii) market share, (xix) identical store sales, and (xx) identical store sales excluding fuel, any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group.
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Term and Amendment . The Plan Committee may amend, suspend or terminate the Executive Incentive Bonus Plan at any time, except that no amendment may be made without the approval of our stockholders if the effect of such amendment would be to cause outstanding or pending awards intended to qualify for the performance-based compensation exception to Section 162(m) of the Code to cease to qualify for the performance-based compensation exception to Section 162(m) of the Code.
Potential Payments Upon Termination or Change in Control
The tables below describe and estimate the amounts and benefits that our NEOs would have been entitled to receive upon a termination of their employment in certain circumstances or, if applicable, upon a change in control, assuming such events occurred as of February 28, 2015, the last day of fiscal 2014 (based on the plans and arrangements in effect on such date). The estimated payments are not necessarily indicative of the actual amounts any of our NEOs would have received in such circumstances. The tables exclude compensation amounts accrued through February 28, 2015, that would be paid in the normal course of continued employment, such as accrued but unpaid salary, payment for accrued but unused vacation and vested account balances under our retirement plans that are generally available to all of our salaried employees. The tables below do not include any amounts with respect to the Phantom Units which were granted in fiscal 2015.
Robert G. Miller |
||||||||||||
Payments and Benefits |
Death ($) |
For Any Reason other than Death,
Without Cause or for Good Reason ($) |
Without Cause or for
Good Reason ($) |
|||||||||
Cash Payments |
3,000,000 | (1) | 6,000,000 | (2) | 11,833,333 | (3) | ||||||
Total |
3,000,000 | 6,000,000 | 11,833,333 |
(1) | Reflects cash payments of $25,000 per month to Mr. Millers spouse payable for a period of 10 years following his termination due to death. Such payments would cease upon the death of Mr. Millers spouse. |
(2) | Reflects cash payments of $50,000 per month to Mr. Miller payable for a period of 10 years following his termination for any reason. In the event of his death following termination, such payments will cease and thereafter his surviving spouse will become entitled to cash payments of $25,000 per month through the earlier of her death and the 10-year anniversary of Mr. Millers termination. |
(3) | Reflects a lump sum cash payment equal to the sum of (a) $50,000 per month to Mr. Miller payable for a period of 10 years following his termination for any reason and (2) an amount equal to Mr. Millers base salary for the remainder of the term of his employment under his employment agreement (35 months following February 28, 2015). |
Robert L. Edwards(1) |
||||||||||||||||
Payments and Benefits |
Death or
Disability ($) |
For Cause
or Without Good Reason ($) |
Without
Cause or for Good Reason (no Change in Control) ($) |
Change in
Control (no termination) ($) |
||||||||||||
Cash Payments |
3,500,000 | (2) | | 6,000,000 | (3) | | ||||||||||
Health Benefits |
| | 23,494 | (4) | | |||||||||||
Total |
3,500,000 | | 6,023,494 | |
(1) | The table for Mr. Edwards is included in compliance with SEC guidelines. As discussed elsewhere in the registration statement, subsequent to February 28, 2015, Mr. Edwards ceased to be an employee of the company. |
(2) | Reflects a lump sum payout of Mr. Edwards death benefit under the Safeway Inc. Retirement Restoration Plan II. |
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(3) | Reflects a lump sum cash payment equal to two times Mr. Edwards base salary plus target annual bonus. |
(4) | Reflects the cost of reimbursement for up to 18 months continuation of health coverage. |
In addition to the amount set forth in the table above, Mr. Edwards Series 1 Incentive Units would have accelerated and become vested as to (i) upon his death or termination due to disability, without Cause or for Good Reason, a prorated portion of the Series -1 Incentive Units that would have otherwise vested on the next scheduled vesting date, (ii) upon a termination without Cause occurring within 180 days prior to a change in control, 100% of the Time-Based Units and a prorated portion of the Performance-Based Units that would have otherwise vested on the next scheduled vesting date, and (iii) upon a change in control, 100% of the Time-Based Units. Because there was no public market for our equity as of February 28, 2015, the market value of the Series 1 Incentive Units as of that date is not determinable. Accordingly, we cannot calculate the value of accelerated vesting of Series 1 Incentive Units as of that date.
Robert B. Dimond |
||||||||||||
Payments and Benefits |
Death or Disability ($) |
For Cause or Without
Good Reason |
Without Cause or for
Good Reason ($) |
|||||||||
Cash Payments |
175,000 | (1) | | 3,266,667 | (2) | |||||||
Health Benefits |
| | 56,292 | (3) | ||||||||
Total |
175,000 | | 3,322,959 |
(1) | Reflects a lump sum cash payment in an amount equal to 25% of Mr. Dimonds base salary. |
(2) | Reflects a lump sum cash payment equal to the sum of Mr. Dimonds base salary plus target annual bonus, in each case for the remainder of the term of his employment under his employment agreement (35 months following February 28, 2015). |
(3) | Reflects the cost of reimbursement for up to 36 months continuation of health coverage. |
Justin Dye |
||||||||||||
Payments and Benefits |
Death or Disability ($) |
For Cause or Without
Good Reason |
Without Cause or for
Good Reason ($) |
|||||||||
Cash Payments |
187,500 | (1) | | 3,500,000 | (2) | |||||||
Health Benefits |
| | 37,137 | (3) | ||||||||
Total |
187,500 | | 3,537,137 |
(1) | Reflects a lump sum cash payment in an amount equal to 25% of Mr. Dyes base salary. |
(2) | Reflects a lump sum cash payment equal to the sum of Mr. Dyes base salary plus target annual bonus, in each case for the remainder of the term of his employment under his employment agreement (35 months following February 28, 2015). |
(3) | Reflects the cost of reimbursement for up to 36 months continuation of health coverage. |
Wayne A. Denningham |
||||||||||||
Payments and Benefits |
Death or Disability ($) |
For Cause or Without
Good Reason |
Without Cause or for
Good Reason ($) |
|||||||||
Cash Payments |
| | 572,110 | (1) | ||||||||
Health Benefits |
| | 2,063 | (2) | ||||||||
Total |
| | 574,173 |
(1) | Reflects a lump sum cash payment in an amount equal to 70 weeks of Mr. Denninghams base salary. |
(2) | Reflects our cost for continued health insurance coverage above the active employee rate for a period of up to six months. |
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Shane Sampson |
||||||||||||
Payments and Benefits |
Death or Disability ($) |
For Cause or Without
Good Reason |
Without Cause or for
Good Reason ($) |
|||||||||
Cash Payments |
| | 417,260 | (1) | ||||||||
Health Benefits |
| | 3,187 | (2) | ||||||||
Total |
| | 420,447 |
(1) | Reflects a lump sum cash payment in an amount equal to 62 weeks of Mr. Sampsons base salary. |
(2) | Reflects our cost for continued health insurance coverage above the active employee rate for a period of up to six months. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services.
On April 9, 2015, we entered into the Director and Consultancy Agreement with Robert Edwards, our former CEO and a former member of the board of managers of AB Acquisition. Pursuant to the Director and Consultancy Agreement, Mr. Edwards serves as a consultant to the board of directors and, prior to his resignation from the board of managers of AB Acquisition on June 13, 2015, served as Vice Chairman. The Director and Consultancy Agreement provides for us to pay Robert Edwards a consulting fee of $3 million for his service as a consultant through January 31, 2016. Mr. Edwards was also eligible to receive a directors fee of $200,000 for his service on the board through January 31, 2016, of which $60,000 was paid to him for his service prior to his resignation from the AB Acquisition board of managers on June 13, 2015. If the Director and Consultancy Agreement is extended by mutual agreement through January 31, 2017, Mr. Edwards shall be eligible to receive an additional consulting fee of $3 million. If the Director and Consultancy Agreement is not extended through January 31, 2017, or Mr. Edwards service terminates due to his death or disability prior to January 31, 2016, Mr. Edwards will receive an additional payment of $3 million. In addition, under the Director and Consultancy Agreement, we have agreed to maintain any life insurance policy or death benefit, in an amount up to $5 million, provided to Mr. Edwards by Safeway for a period not beyond April 9, 2020, and to reimburse or pay his cost for health coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. Prior to his resignation from the AB Acquisition board of managers, we also agreed to provide him with up to 50 hours of personal use of the company-owned aircraft through December 31, 2015. As of June 20, 2015, we have paid Mr. Edwards approximately $900,000 for services rendered as a consultant under the Director and Consultancy Agreement.
We paid COAC, an affiliate of Cerberus, fees totaling approximately $489,088 and $1,667,692 for fiscal 2013 and fiscal 2014, respectively, for consulting services provided in connection with improving the companys operations. We may retain COAC to provide similar services in the future.
Several of our board members are employees of our Sponsors (excluding Kimco), and funds managed by one or more affiliates of our Sponsors indirectly own a substantial portion of our equity through their respective ownership of Albertsons Investor and Kimco.
IPO-Related Transactions
In connection with our corporate reorganization, we will engage in transactions with affiliates and our Existing Owners. See IPO-Related Transactions and Organizational Structure for a description of these transactions.
AB Acquisition LLC Agreement Management Fees
In March 2013, as then provided for by the third amended and restated limited liability company agreement of AB Acquisition LLC (the 3 rd A&R AB LLC Agreement), we paid Cerberus a transaction fee of $15 million in connection with the NAI acquisition. The 3 rd A&R AB LLC Agreement also provided for the Cerberus-led Consortium to receive annual management fees from our company over a
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42-month period beginning on March 21, 2013. We paid annual management fees under the 3 rd A&R AB LLC Agreement totaling $6 million for fiscal 2013 and $6 million for fiscal 2014. In connection with the Safeway acquisition, the 3 rd A&R AB LLC Agreement was amended and restated. Pursuant to the fourth amended and restated limited liability company agreement of AB Acquisition LLC (the 4 th A&R AB LLC Agreement), we paid the Cerberus-led Consortium the remaining $9 million in annual management fees provided for by the 3 rd A&R AB LLC Agreement.
The 4 th A&R AB LLC Agreement provides for the Cerberus-led Consortium to receive annual management fees of $13.75 million from our company over a 48-month period beginning on January 30, 2015, the date of the consummation of the Safeway acquisition. We have paid management fees to the Cerberus-led Consortium totaling $13.75 million for fiscal 2015. In exchange for the management fees, the Cerberus-led Consortium has provided strategic advice to management, including with respect to acquisitions and financings. As of June 20, 2015, management fees over the remainder of the 48-month period total $41.25 million. Consistent with the terms of the 4 th A&R AB LLC Agreement, the remaining management fees will be paid in full upon the closing of this offering. We do not expect to pay any further management fees to the Cerberus-led Consortium following the completion of this offering.
Management Loans
In connection with the Safeway acquisition, on January 30, 2015, we provided loans (the Management Loans) to nine members of our management to enable them to invest in equity of AB Acquisition. Other than the loan to Robert Butler, who retired in December 2014 as our Chief Operating Officer, the Management Loans were repaid in full on July 2, 2015 from the proceeds of loans provided to Management Holdco by Goldman Sachs Bank USA and secured by a pledge of the equity owned by Management Holdco. The table below provides details for each of the Management Loans:
Name |
Position |
Original
Loan Amount |
Interest Rate |
Aggregate
Amount of Principal Paid |
Aggregate
Amount of Interest Paid |
|||||||||||||
Mark Bates |
Chief Information Officer | $ | 217,203 | 1.75 | % | $ | 217,203 | $ | 1,572 | |||||||||
Robert Butler |
Chief Operating Officer (former) | $ | 500,000 | 1.75 | % | N/A | N/A | |||||||||||
Wayne A. Denningham |
Chief Operating Officer (current) | $ | 3,801,000 | 1.75 | % | $ | 3,801,000 | $ | 27,518 | |||||||||
Shane Dorcheus |
Southwest Division President | $ | 2,000,000 | 1.75 | % | $ | 2,000,000 | $ | 14,479 | |||||||||
Justin Dye |
Chief Administrative Officer | $ | 4,706,073 | 1.75 | % | $ | 4,706,073 | $ | 34,071 | |||||||||
Justin Ewing |
Executive Vice President, Corporate Development and Real Estate | $ | 1,267,020 | 1.75 | % | $ | 1,267,020 | $ | 9,173 | |||||||||
Robert G. Miller |
Chairman and Chief Executive Officer | $ | 5,792,090 | 1.75 | % | $ | 5,792,090 | $ | 41,933 | |||||||||
Paul Rowan |
Assistant Secretary and Deputy General Counsel | $ | 1,000,000 | 1.75 | % | $ | 1,000,000 | $ | 7,240 | |||||||||
Andrew J. Scoggin |
Executive Vice President, Human Resources, Labor Relations, Public Relations and Government Affairs | $ | 2,353,036 | 1.75 | % | $ | 2,353,036 | $ | 17,035 |
Safeway Relationship with Blackhawk and Related Transactions
During Safeways fiscal year ended January 3, 2015, Safeway completed the following transactions with Blackhawk involving amounts in excess of $120,000, including the spin-off of Blackhawk which became effective April 14, 2014.
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Gift Card Transfer and Management Agreement
Under the Gift Card Transfer and Management Agreement Safeway entered into with Blackhawk in February 2006 (the Card Management Agreement), Blackhawk provides Safeway with certain services related to Safeway-branded gift cards. During 2014, Safeway paid Blackhawk $455,688 under the Card Management Agreement.
Gift Card Alliance Partners Program Agreement
Safeway entered into the Amended and Restated Gift Card Alliance Partners Program Agreement with Blackhawk effective December 30, 2012, as amended in February 2014 (the Blackhawk Alliance Partner Agreement). Under the Blackhawk Alliance Partner Agreement, Safeway offers products provided by Blackhawk for sale in our Safeway stores, and Blackhawk provides funds and services relating to the management, marketing and service of products and services offered through the Blackhawk Alliance Partner Agreement, as well as relating to those products.
During Safeways 2014 fiscal year, under the Blackhawk Alliance Partner Agreement, Blackhawk paid an aggregate of $11.3 million to Safeway, and Safeway paid an aggregate of $274.6 million to Blackhawk.
Card Production and Card Services Agreement
In October 2011, Safeway entered into a card production and card services agreement with Blackhawk, under which Blackhawk produces Safeway-branded gift cards and provides Safeway with related services.
During Safeways 2014 fiscal year, Safeway paid Blackhawk $519,330 under this agreement.
Amended and Restated Tax Sharing Agreement
Safeway filed federal income tax returns and certain state income tax returns on a consolidated basis with Blackhawk starting in 2003. On April 11, 2014, Safeway entered into an Amended and Restated Tax Sharing Agreement (the New TSA) with Blackhawk. Prior to Blackhawks initial public offering, Safeway and Blackhawk entered into a prior tax sharing agreement that was last amended effective December 30, 2012 (the Prior TSA). The Prior TSA provided that Safeway and Blackhawk would generally make payments to each other such that, with respect to U.S. federal income tax returns for any taxable period in which Blackhawk or any of its subsidiaries were included in Safeways consolidated group for U.S. federal income tax purposes, the amount of taxes to be paid by Blackhawk was determined, subject to certain adjustments, as if Blackhawk and each of its subsidiaries included in such consolidated group filed their own consolidated federal income tax return. For state and local income tax purposes, the Prior TSA provided that Safeway and Blackhawk would generally make payments to each other such that, with respect to state and local income tax returns for any taxable period in which Blackhawk or any of its subsidiaries were included in Safeways combined, consolidated or unitary group for state or local income tax purposes, the amount of taxes to be paid by Blackhawk was determined, subject to certain limitations, by calculating the excess of any taxes shown due on any such return over the amount that would otherwise be due if the return were recalculated by excluding Blackhawk and any of its included subsidiaries.
In preparation for the pro rata distribution of the shares of Blackhawk Class B common stock owned by Safeway to the Safeway stockholders that occurred on April 14, 2014 (the Distribution), Safeway and Blackhawk entered into the New TSA, which became effective as of the Distribution, to address certain tax matters related to the facts and circumstances of the Distribution, including, among other things, the manner, amount and timing of the tax payments related to the Distribution. The New TSA also provides certain procedures for the allocation of taxes and the filing of returns that are
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consistent with the Prior TSA. In addition, the New TSA contemplates that Blackhawk may be included in Safeways consolidated group for U.S. federal income tax purposes until the date of the Distribution.
During 2014, Blackhawk paid Safeway $0.7 million for prior years taxes due under the New TSA, and Safeway advanced approximately $27.7 million to Blackhawk to fund 2014 estimated state tax payments by Blackhawk. In early 2015, Safeway converted the remaining amount of this advance to Blackhawk to a capital contribution. See Notes A and B to Safeways historical financial statements, included elsewhere in this prospectus, for further information.
Lease Agreements
Safeway leases corporate offices to Blackhawk under a sublease that expires in April 2017. Safeway also leased approximately 6,000 square feet of office space in Phoenix, Arizona to Blackhawk under a lease agreement that expired in 2014. During 2014, Blackhawk paid Safeway an aggregate of $608,727 pursuant to these lease agreements.
Cash Management and Treasury Services Agreement
On April 4, 2013, Safeway entered into a cash management and treasury services agreement with Blackhawk (the CMATSA). Safeway was permitted to borrow cash from Blackhawks operating accounts in excess of its immediate working capital and other operating requirements, calculated in accordance with the CMATSA, on an overnight basis, to meet short-term funding requirements. These advances were evidenced by unsecured promissory notes.
The CMATSA, together with the promissory notes issued thereunder, were terminated effective March 28, 2014.
Stockholders Agreement
In connection with this offering, Albertsons Companies, Inc. will enter into the Stockholders Agreement with Albertsons Investor, Kimco and Management Holdco. The rights of Albertsons Investor, Kimco and Management Holdco under such agreement are described below:
Registration Rights
Under the Stockholders Agreement, Albertsons Investor holds registration rights that allow it at any time after 180 days following the completion of this offering to request that we register the resale under the Securities Act, of all or any portion of the shares of our common stock that Albertsons Investor, Kimco and Management Holdco or a permitted transferee or assignee of such party that succeeds to such partys rights under the Stockholders Agreement (each transferee or assignee, a Holder and, collectively, the Holders) owns on a pro rata and pari passu basis. If Albertsons Investor is no longer a Holder, then any Holder who owns at least 5% of our then outstanding common stock (a Demand Holder) shall have the right to exercise the registration rights referenced in the preceding sentence. Albertsons Investor, or a Demand Holder, may require us to effect a long-form registration provided that the number of securities requested to be registered must have a value equal to at least $75 million based on the closing price of such security on the last trading day prior to the registration request. We may postpone for a reasonable period of time, which may not exceed 90 days, the filing of a registration statement that Albertsons Investor, or a Demand Holder, requested that we file pursuant to the Stockholders Agreement if our board of directors determines that the filing of the registration statement would require us to disclose material non-public information that, in our board of directors good faith judgment, after consultation with independent outside counsel to the company, would be required to be disclosed in such registration statement but which the company has a bona fide
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business purpose for not disclosing publicly, provided that, unless otherwise approved in writing by the Holders of a majority of our common stock that demanded the registration, we may not postpone such filing more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period. In addition, if we propose to register additional shares of common stock, Albertsons Investor and each other Holder will be entitled to notice of the registration and Albertsons Investor will be entitled to include its, Kimcos and Management Holdcos shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Albertsons Investor of all of our common stock it holds as of the completion of this offering to its equityholders, Holders other than Albertsons Investor will not be entitled to include shares of our common stock held by such Holder in a registration proposed by us unless Albertsons Investor also elects to participate in such registration.
Board Representation Rights
Pursuant to the Stockholders Agreement, we will be required to appoint individuals designated by Albertsons Investor (the Albertsons Investor Designees) to our board of directors upon the closing of the IPO-Related Transactions and this offering.
Our certificate of incorporation provides that, prior to the 50% Trigger Date, the authorized number of directors may be increased or decreased by the Designated Controlling Stockholder or a majority of our directors. The Designated Controlling Stockholder shall, immediately prior to the 50% Trigger Date, set the size of the board of directors at 13 directors. On or after the 50% Trigger Date, the authorized number of directors may be increased or decreased by the affirmative vote of not less than two-thirds (2/3) of the then-outstanding shares of capital stock or by resolution of our board of directors. Under the Stockholders Agreement, Albertsons Investor, or any Holder (other than Kimco Realty), will have the following board representation rights:
| from the date on which Albertsons Companies, Inc. is no longer a controlled company under the applicable rules of the but prior to the 35% Trigger Date, Albertsons Investor shall have the right to designate to our board of directors a number of individuals equal to one director fewer than 50% of our board of directors at any time, and will (i) cause its directors appointed to the board of directors to vote in favor of maintaining a 13-person board of directors (unless the management board of Albertsons Investor otherwise agrees by affirmative vote of 80% of the members of the management board of Albertsons Investor) and (ii) appoint three directors designated by Cerberus and three directors in total designated by the other equityholders of Albertsons Investor and Robert Miller (whose contractual right to a seat on the board of directors shall be unaffected); provided , however , that such Albertsons Investor Designees are qualified and suitable to serve as members of our board of directors under all applicable corporate governance policies and guidelines of Albertsons Companies, Inc. and our board of directors, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under regarding director independence) (the Director Requirements); |
| for so long as any Holder has beneficial ownership of less than 35% but at least 20% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) three or (ii) 25% of the size of our board of directors at any time (rounded up to the next whole number); |
| for so long as any Holder has beneficial ownership of less than 20% but at least 15% of our then-outstanding common stock, such Holder shall have the right to designate to our board of directors a number of individuals who satisfy the Director Requirements equal to the greater of (i) two or (ii) 15% of the size of our board of directors at any time (rounded up to the next whole number). |
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| for so long as any Holder has beneficial ownership of less than 15% but at least 10% of our then-outstanding common stock, such Holder shall have the right to designate one individual to our board of directors who satisfies the Director Requirements. |
For so long as any Sponsor (other than Kimco Realty) indirectly beneficially owns at least 10% of our then-outstanding common stock, but does not have a representative (whether an Albertsons Investor Designee or otherwise) on our board of directors, such Sponsor shall have the right to appoint one observer to our board of directors (an Observer). An Observer may attend any meeting of our board of directors provided that no Observer shall have the right to vote or otherwise participate in the board of directors meeting in any way other than to observe any applicable meeting of our board of directors.
Under the Stockholders Agreement, in the event of a vacancy on our board of directors arising through the death, resignation or removal of a Holders board designee, the Holder shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy.
Indemnification; Expenses
We have agreed to indemnify Albertsons Investor, Kimco, Management Holdco or any Holder, against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which it sells our shares, unless such liability arose from Albertsons Investor, Kimco, Management Holdco or any such Holders, misstatement or omission, and Albertsons Investor, Kimco, Management Holdco and the Holders, have agreed to indemnify us against all losses caused by its misstatements or omissions. We also agreed to pay all expenses incident to our performance of or compliance with the registration rights under the Stockholders Agreement, including but not limited to all underwriting discounts, commissions, fees and related expenses of underwriters.
Albertsons Investor Limited Liability Company Agreement
The Cerberus-led Consortium, other than Kimco, and certain other individuals who agreed to co-invest with them through Albertsons Investor, will enter the Albertsons Investor LLC Agreement. The Albertsons Investor LLC Agreement will be entered into upon consummation of the IPO-Related Transactions and this offering. A copy of the form Albertsons Investor LLC Agreement that will be entered into will be filed as an exhibit to the registration statement of which this prospectus is a part.
Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons
Prior to the completion of this offering, our board of directors will adopt a written policy (the Related Party Policy) and procedures for the review, approval or ratification of Related Party Transactions by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a Related Party Transaction is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the company or any of its subsidiaries is a participant, and (3) any Related Party (as defined herein) has or will have a direct or indirect material interest.
The Related Party Policy defines Related Party as any person who is, or, at any time since the beginning of the companys last fiscal year, was (1) an executive officer, director or nominee for election as a director of the company or any of its subsidiaries, (2) a person with greater than five
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percent (5%) beneficial interest in the company, (3) an immediate family member of any of the foregoing individuals or entities identified in (1) or (2) of this paragraph, and (4) any firm, corporation or other entity in which any of the foregoing individuals or entities is employed or is a general partner or principal or in a similar position or in which such person or entity has a five percent (5%) or greater beneficial interest. Immediate family members (each, a Family Member) includes a persons spouse, parents, stepparents, children, stepchildren, siblings, mothers- and fathers- in-law, sons- and daughters-in-law, brothers- and sisters-in-law and anyone residing in such persons home, other than a tenant or employee.
Prior to the company entering into any Related Party Transaction, such Related Party Transaction will be reported to our General Counsel who will report the same to the audit and risk committee. Our General Counsel will conduct an investigation and evaluation of the Related Party Transaction and will report his or her findings to the audit and risk committee, including a summary of material facts. The audit and risk committee will review the material facts of all Related Party Transactions which require the audit and risk committees approval and either approve or disapprove of the Related Party Transaction, subject to the exceptions described below. If advance notice of a Related Party Transaction has been given to the audit and risk committee and it is not possible to convene a meeting of the audit and risk committee, then the chairman of the audit and risk committee will consider whether the Related Party Transaction is appropriate and, if it is, will approve the Related Party Transaction, with the audit and risk committee being asked to ratify the Related Party Transaction at the next regularly-scheduled meeting of the audit and risk committee. In the event the audit and risk committee does not ratify any such Related Party Transaction, management shall make all reasonable efforts to cancel or annul such Related Party Transaction. In determining whether to approve or ratify a Related Party Transaction, the audit and risk committee, or its chairman, as applicable, will consider all factors it deems appropriate, including the factors listed below in Review Criteria.
Entering into a Related Party Transaction without the approval or ratification required by the terms of the Related Party Policy is prohibited and a violation of such policy. In the event the companys directors, executive officers or Chief Accounting Officer become aware of a Related Party Transaction that was not previously approved or ratified under the Related Party Policy, such person will promptly notify the audit and risk committee and its chairman (or, if it is not practicable for the company to wait for the audit and risk committee to consider the matter, the chairman of the audit and risk committee) will consider whether the Related Party Transaction should be ratified or rescinded or other action should be taken, with such review considering all of the relevant facts and circumstances regarding the Related Party Transaction, including the factors listed below in Review Criteria. The chairman of the audit and risk committee will report to the committee at its next regularly-scheduled meeting any actions taken under the Related Party Policy pursuant to the authority delegated in this paragraph. The audit and risk committee will also review all of the facts and circumstances pertaining to the failure to report the Related Party Transaction to the audit and risk committee and will take, or recommend to our board of directors, any action the audit and risk committee deems appropriate.
No member of the audit and risk committee or director of our board will participate in any discussion or approval of a Related Party Transaction for which he or she is a Related Party, except that the audit and risk committee member or board director will provide all material information concerning the Related Party Transaction to the audit and risk committee.
If a Related Party Transaction will be ongoing, the audit and risk committee may establish guidelines for the companys management to follow in its ongoing dealings with the Related Party. Thereafter, the audit and risk committee, on at least an annual basis, will review and assess ongoing relationships with the Related Party to ensure that they are in compliance with the audit and risk committees guidelines and that the Related Party Transaction remains appropriate.
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Review Criteria
All Related Party Transactions will be reviewed in accordance with the standards set forth in the Related Party Policy after full disclosure of the Related Partys interests in the transaction. As appropriate for the circumstances, the audit and risk committee or its chairman, as applicable, will review and consider:
| the Related Partys interest in the Related Party Transaction; |
| the terms of the Related Party Transaction, including the approximate dollar value of the amount involved in the Related Party Transaction and the approximate dollar value of the amount of the Related Partys interest in the transaction without regard to the amount of any profit or loss; |
| whether the transaction was undertaken in the ordinary course of business of the company; |
| whether the transaction with the Related Party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; |
| the purpose of, and the potential benefits to the company of, the Related Party Transaction; |
| description of any provisions or limitations imposed as a result of entering into the Related Party Transaction; |
| whether the proposed transaction includes any potential reputational risk issues for the company which may arise as a result of or in connection with the Related Party Transaction; |
| whether the proposed transaction would violate any requirements of the companys financing or other material agreements; and |
| any other relevant information regarding the Related Party Transaction or the Related Party. |
The audit and risk committee, or its chairman, as applicable, may approve or ratify the Related Party Transaction only if the audit and risk committee, or its chairman, as applicable, determines in good faith that, under all of the circumstances, the transaction is fair as to the company. The audit and risk committee, in its sole discretion, may impose such conditions as it deems appropriate on the company or the Related Party in connection with approval of the Related Party Transaction.
Pre-Approved Related Party Transactions
The audit and risk committee has determined that the following transactions will be deemed pre-approved or ratified and will not require review or approval of the audit and risk committee, even if the aggregate amount involved will exceed $120,000, unless otherwise specifically determined by the audit and risk committee.
| Any employment by the company of an executive officer of the company or any of its subsidiaries if the related compensation conforms with our companys compensation policies and if the executive officer is not a Family Member of another executive officer or of a director of our board; and |
| Any compensation paid to a director of our board if the compensation is consistent with the companys bylaws and any compensation policies. |
Notwithstanding anything to the contrary in the Related Party Policy, in the event the bylaws of the company require review by our board of directors and/or approval of a Related Party Transaction, the audit and risk committee, and its chairman, will not have the authority to review or approve a Related Party Transaction but will provide a recommendation to our board of directors for the boards use in its consideration of a given Related Party Transaction.
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The following table sets forth information regarding the beneficial ownership of our common stock as of June 20, 2015, after giving effect to the IPO-Related Transactions by:
| each person who is known by us to beneficially own 5% or more of our outstanding shares of capital stock; |
| each member of our board of directors; |
| each of our executive officers named in the Summary Compensation Table under Executive Compensation; and |
| all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. None of the persons listed in the following table owns any securities that are convertible into common stock at his or her option currently or within 60 days of , 2015. Unless otherwise indicated, the address for each 5% stockholder, director and executive officer listed below is c/o Albertsons Companies, Inc., 250 Parkcenter Blvd., Boise, Idaho 83706.
Shares
beneficially owned |
Percentage of shares
beneficially owned(1) |
|||||||
Name of Beneficial Owner |
Number | Before Offering(2) | After Offering | |||||
5% Stockholders : |
||||||||
Albertsons Investor Holdings LLC(3)(4) |
83.7 | % | ||||||
KRS AB Acquisition, LLC(5) |
9.5 | % | ||||||
KRS ABS, LLC(5) |
4.9 | % | ||||||
Directors : |
||||||||
Robert G. Miller |
1.5 | % | ||||||
Dean S. Adler(3) |
| |||||||
Sharon L. Allen |
| |||||||
Steven A. Davis |
| |||||||
Kim Fennebresque |
| |||||||
Lisa A. Gray(4) |
| |||||||
Hersch Klaff(3) |
| |||||||
Ronald Kravit(4) |
| |||||||
Alan Schumacher |
| |||||||
Jay L. Schottenstein(3) |
| |||||||
Lenard B. Tessler(4) |
| |||||||
Scott Wille(4) |
| |||||||
Named Executive Officers : |
||||||||
Robert B. Dimond |
| |||||||
Wayne A. Denningham |
* | |||||||
Justin Dye |
* | |||||||
Robert L. Edwards |
| |||||||
Shane Sampson |
| |||||||
All directors and executive officers as a group(3) (22 persons) |
45.8 | % |
* | Represents less than 1%. |
(1) |
Percentage of shares beneficially owned prior to the offering is based on shares of our common stock outstanding as of , 2015 after giving effect to the IPO-Related |
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Transactions. Percentage of shares beneficially owned after the offering assumes exercise of underwriters option to purchase additional shares in full. |
(2) | All the issued and outstanding common stock of Albertsons Companies, Inc. is held by Albertsons Investor, Management Holdco and Kimco. Accordingly, shareholdings of directors and named executive officers reflected in the table above reflect indirect ownership in Albertsons Companies, Inc. held through interests in Albertsons Investor and Management Holdco. The table above does not reflect indirect ownership in Albertsons Companies, Inc. held through profits interests and phantom units in AB Acquisition. Assuming the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus), profits interests in AB Acquisition would convert into % of the equity of Albertsons Investor, and phantom units of AB Acquisition would convert into restricted units of Albertsons Companies, Inc., or ownership of approximately shares, or approximately % of our outstanding common stock upon the completion of this offering. |
(3) | Albertsons Investor is held by a private investor group, including affiliates of Cerberus Capital Management, L.P., Klaff Realty, LP, Schottenstein Stores Corp., Lubert-Adler Partners, L.P and certain members of management. Messrs. Kravit, Tessler, Wille and Ms. Gray are affiliated with Cerberus Capital Management, L.P. Stephen Feinberg exercises voting and investment authority over membership interests in Albertsons Investor owned by the affiliates of Cerberus and may be deemed to have indirect ownership of shares, or 36.9% of our outstanding common stock prior to this offering and % upon the completion of this offering, through Cerberus interests in Albertsons Investor. Mr. Klaff is affiliated with Klaff Realty, LP, whose affiliated entities may be deemed to have indirect ownership of shares, or 14.4% of our outstanding common stock prior to this offering and % upon the completion of this offering, through their interests in Albertsons Investor. Mr. Schottenstein is affiliated with Schottenstein Stores Corp., whose affiliated entities may be deemed to have indirect ownership of shares, or 14.4% of our outstanding common stock prior to this offering and % upon the completion of this offering, through their interests in Albertsons Investor. Mr. Adler is affiliated with Lubert-Adler Partners, L.P., whose affiliated entities may be deemed to have indirect ownership of shares, or 14.4% of our outstanding common stock prior to this offering and % upon the completion of this offering, through their interests in Albertsons Investor. Messrs. Miller, Denningham, Dye and six additional officers together hold approximately shares, or 4.0% of our outstanding common stock prior to this offering and % upon the completion of this offering, through their interests in Albertsons Investor and Management Holdco. Pursuant to the terms of the Stockholders Agreement, Kimco and Management Holdco will vote common stock held by them upon the completion of this offering as instructed by Albertsons Investor and will not transfer their common stock other than in accordance with the terms of the Stockholders Agreement. See Certain Relationships and Related Party Transactions. |
(4) | The address for Albertsons Investor Holdings LLC and Messrs. Kravit, Tessler, Wille and Ms. Gray is c/o Cerberus Capital Management, L.P., 875 Third Avenue, New York, New York 10022. |
(5) | KRS AB Acquisition, LLC and KRS ABS, LLC are affiliates of Kimco Realty Corporation. The address for KRS AB Acquisition, LLC and KRS ABS, LLC is c/o Kimco Realty Corporation, Attention: Ray Edwards and Bruce Rubenstein, 3333 New Hyde Park Road, New Hyde Park, New York 11042. |
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The following summarizes the most important terms of our capital stock and related provisions of the certificate of incorporation and our bylaws that will be in effect upon the closing of the IPO-Related Transactions and this offering. This description also summarizes the principal agreements relating to our common stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our certificate of incorporation and bylaws and the agreements referred to below, copies of which are filed as exhibits to the registration statement of which this prospectus forms a part.
General
After giving effect to the IPO-Related Transactions, our authorized capital stock will consist of 600,000,000 shares of common stock, par value $0.01 per share, and 30,000,000 shares of preferred stock, par value $0.01 per share.
Upon the closing of the IPO-Related Transactions and this offering, there will be shares of our common stock outstanding (assuming no exercise of the underwriters option to purchase additional shares), and no shares of our preferred stock outstanding. If the underwriters option to purchase additional shares is exercised in full, the number of shares of our common stock outstanding will increase by .
Common Stock
Dividend Rights
Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.
Voting Rights
Each holder of our common stock is entitled to one vote for each share owned of record on all matters voted upon by stockholders. A majority vote is required for all action to be taken by stockholders, except as otherwise provided for in our certificate of incorporation and bylaws or as required by law, including the election of directors in an election that is determined by our board of directors to be a contested election, which requires a plurality. Our certificate of incorporation provides that our board of directors and, prior to the 50% Trigger Date, the Designated Controlling Stockholder, are expressly authorized to make, alter or repeal our bylaws and that our stockholders may only amend our bylaws after the 50% Trigger Date with the approval of at least two-thirds of the total voting power of the outstanding shares of our capital stock entitled to vote in any annual election of directors.
Liquidation Rights
In the event of our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all of our debts and liabilities and the liquidation preference of any outstanding preferred stock.
Other Rights
Our common stock has no preemptive rights, no cumulative voting rights and no redemption, sinking fund or conversion provisions.
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Preferred Stock
Our board of directors is authorized, by resolution or resolutions, to issue up to 30,000,000 shares of our preferred stock. Our board of directors is authorized, by resolution or resolutions, to provide, out of the unissued shares of our preferred stock, for one or more series of preferred stock and, with respect to each such series, to fix, without further stockholder approval, the designation, powers, preferences and relative, participating, option or other special rights, including voting powers and rights, and the qualifications, limitations or restrictions thereof, of each series of preferred stock pursuant to Section 151 of the DGCL. Our board of directors could authorize the issuance of preferred stock with terms and conditions that could discourage a takeover or other transaction that some holders of our common stock might believe to be in their best interests or in which holders of common stock might receive a premium for their shares over and above market price. We have no current plan to issue any shares of preferred stock.
Composition of our Board of Directors
Upon the closing of this offering, it is anticipated that we will have 12 directors. The Stockholders Agreement will provide that, except as otherwise required by applicable law, from the date (a) immediately prior to the 50% Trigger Date, the Designated Controlling Stockholder shall set the size of the board of directors at 13 directors; (b) on which we are no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, Albertsons Investor shall have the right to designate a number of individuals who satisfy the Director Requirements equal to one director fewer than 50% of our board of directors at any time and shall cause its directors appointed to our board of directors to vote in favor of maintaining a 13-person board of directors unless the management board of Albertsons Investor otherwise agrees by the affirmative vote of 80% of the management board of Albertsons Investor; (c) on which a Holder has beneficial ownership of at least 20% but less than a 35% of our then-outstanding common stock, the Holder will have the right to designate a number of individuals who satisfy the Director Requirements equal to the greater of three or 25% of the size of our board of directors at any time (rounded up to the next whole number); (d) on which a Holder has beneficial ownership of at least 15% but less than 20% of our then-outstanding common stock, the Holder will have the right to designate the greater of two or 15% of the size of our board of directors at any time (rounded up to the next whole number) and (e) on which a Holder has beneficial ownership of at least 10% but less than 15% of our then-outstanding common stock, it will have the right to designate one individual who satisfies the Director Requirements.
Pursuant to the Albertsons Investor LLC Agreement and the Stockholders Agreement, prior to the 50% Trigger Date, a majority vote of the management board of Albertsons Investor is required to designate directors to our board of directors if the designated directors consist of four designees of Cerberus (if Cerberus so requests) and one designee from each other member of the Cerberus-led Consortium (other than Kimco) and Robert Miller (if such member and Mr. Miller so requests). From the date on which we are no longer a controlled company under the applicable rules of the NYSE but prior to the 35% Trigger Date, then a majority vote of the management board of Albertsons Investor is required to designate nominees to be included in the slate for election to our board of directors if the designated nominees consist of three nominees of Cerberus and three nominees in total from the other members of the Cerberus-led Consortium and Robert Miller. The nominees shall include persons that are independent for purposes of the Listed Company Rules of the NYSE if required to comply with such rules.
Our certificate of incorporation provides that our board of directors will consist of not less than seven directors and not more than 15 directors, and that the exact number of directors will be determined by our board of directors. Our certificate of incorporation also provides that, prior to the 50% Trigger Date, the Designated Controlling Stockholder may increase or decrease the authorized
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number of directors on our board of directors. Following the 50% Trigger Date, the authorized number of directors may be increased or decreased only by the affirmative vote of two-thirds of our then-outstanding capital stock.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Some provisions of Delaware law and of our certificate of incorporation and bylaws could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our bylaws establish advance notice procedures with respect to stockholder proposals, other than proposals made by or at the direction of our board of directors or, prior to the 35% Trigger Date, by the Designated Controlling Stockholder. Our bylaws also establish advance notice procedures with respect to the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or by a committee appointed by our board of directors. These provisions may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed, and may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of us.
Calling Special Stockholder Meetings
Our certificate of incorporation and bylaws provide that special meetings of our stockholders may be called only by our board of directors or by stockholders owning at least 25% in amount of our entire capital stock issued and outstanding, and entitled to vote.
Stockholder Action by Written Consent
The DGCL permits stockholder action by written consent unless otherwise provided by our certificate of incorporation. Our certificate of incorporation precludes stockholder action by written consent after the 50% Trigger Date.
Undesignated Preferred Stock
Our board of directors is authorized to issue, without stockholder approval, preferred stock with such terms as our board of directors may determine. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue one or more series of preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the company.
Delaware Anti-Takeover Statute
We have elected not to be governed by Section 203 of the DGCL, an anti-takeover law (Section 203). This law prohibits a publicly-held Delaware corporation from engaging under certain circumstances in a business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
| prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
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| upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
| on or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. |
Section 203 defines business combination to include: any merger or consolidation involving us and the interested stockholder; any sale, transfer, pledge or other disposition of 10% or more of our assets involving the interested stockholder; in general, any transaction that results in the issuance or transfer by us of any of our stock to the interested stockholder; or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through us. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any such entity or person. A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. We have opted out of this provision. Accordingly, we will not be subject to any anti-takeover effects of Section 203.
Removal of Directors; Vacancies
Our certificate of incorporation provides that, following the 50% Trigger Date, directors may be removed with or without cause upon the affirmative vote of holders of at least two-thirds of the total voting power of the outstanding shares of the capital stock of the company entitled to vote in any annual election of directors or class of directors, voting together as a single class. In addition, our certificate of incorporation provides that vacancies, including those resulting from newly created directorships or removal of directors, may only be filled (i) by the Designated Controlling Stockholder or by a majority of the directors then in office, prior to the 50% Trigger Date, and (ii) after the 50% Trigger Date, by a majority of the directors then in office, in each case although less than a quorum, or by a sole remaining director. This may deter a stockholder from increasing the size of our board of directors and gaining control of the board of directors by filling the remaining vacancies with its own nominees.
Limitation on Directors Liability
Our certificate of incorporation and bylaws will indemnify our directors to the fullest extent permitted by the DGCL. The DGCL permits a corporation to limit or eliminate a directors personal liability to the corporation or the holders of its capital stock for breach of duty. This limitation is generally unavailable for acts or omissions by a director which (i) were in bad faith, (ii) were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated or (iii) involved a financial profit or other advantage to which such director was not legally entitled. The DGCL also prohibits limitations on director liability for acts or omissions which resulted in a violation of a statute prohibiting certain dividend declarations, certain payments to stockholders after dissolution and particular types of loans. The effect of these provisions is to eliminate the rights of our company and our stockholders (through stockholders derivative suits on behalf of our company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches
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resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors under the federal securities laws of the United States.
Credit Facility
Under our credit agreements, a change of control may lead the lenders to exercise remedies, such as acceleration of their loans, termination of their obligations to fund additional advances and collection against the collateral securing such loan.
Notes
Under the indentures governing the CoC Notes, a change of control may require us to offer to repurchase all of the outstanding CoC Notes for cash at a price equal to 101% of the principal amount of the CoC Notes, plus accrued and unpaid interest, if any, to the date of repurchase.
Choice of Forum
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; or (d) any action asserting a claim governed by the internal affairs doctrine. However, it is possible that a court could find our forum selection provision to be inapplicable or unenforceable.
Stockholders Agreement
Registration Rights
Upon the closing of this offering, Albertsons Investor or, if Albertsons Investor is no longer a holder of registrable securities, Holders owning more than 5% of our then-outstanding common stock, will have the right to require us to register their shares (and in the case of Albertsons Investor, such registration shall also include shares held by Kimco and Management Holdco on a pro rata and pari passu basis) under the Securities Act under specified circumstances.
Demand and Form S-3 Registration Rights
Beginning 180 days after the closing of this offering, Albertsons Investor or, if Albertsons Investor is no longer a holder of registrable securities, the Holders, subject to specified limitations, may require that we register all or part of their shares of our common stock (and in the case of Albertsons Investor, such registration shall also include shares held by Kimco and Management Holdco on a pro rata and pari passu basis) for sale under the Securities Act on an unlimited number of occasions. In addition, Albertsons Investor or, if Albertsons Investor is no longer a holder of registrable securities, the Holders, may from time to time make demand for registrations on Form S-1, a long-form registration statement, or Form S-3, a short form registration statement, when we are eligible to use those forms.
Piggyback Registration Rights
If we propose to register any of our common stock, either for our own account or for the account of other securityholders, Albertsons Investor and each other Holder will be entitled to notice of the registration and Albertsons Investor will be entitled to include its, Kimcos and Management Holdcos shares of common stock (on a pro rata and pari passu basis) in that registration with all registration expenses paid by us. Prior to the distribution by Albertsons Investor of all of our common stock it holds as of the completion of this offering to its equityholders, Holders other than Albertsons Investor will not be entitled to include shares of our common stock held by such Holder in a registration proposed by us unless Albertsons Investor also elects to participate in such registration.
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Limitations and Expenses
Other than in a demand registration, with specified exceptions, the rights of Albertsons Investor, Kimco and Management Holdco or, if Albertsons Investor is no longer a Holder, the Holders, to include shares in a registration are subject to the right of the underwriters to limit the number of shares included in the offering. All fees, costs and expenses of any registrations made pursuant to the Stockholders Agreement, including demand registrations, registrations on Form S-3 and piggyback registrations, will be paid by us, and all selling expenses, including underwriting discounts and commissions, will be paid by us.
Listing
We expect our common stock to be approved for listing on the NYSE under the symbol ABS.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our capital stock. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.
Based on the number of shares outstanding as of , 2015, after giving effect to the IPO-Related Transactions, upon the closing of this offering, shares of common stock will be outstanding, assuming the number of shares sold in this offering is the number of shares set forth on the cover of this prospectus and assuming no exercise of the underwriters option to purchase additional shares. All of the shares sold in this offering will be freely tradable. Shares held by our affiliates, as that term is defined in Rule 144, including shares held by Albertsons Investor, Kimco and Management Holdco, may only be sold in compliance with the limitations described below.
The remaining shares of our common stock outstanding after this offering are restricted securities, as such term is defined in Rule 144, or are subject to lock-up agreements with the underwriters of this offering, as described below. Following the expiration of the lock-up period pursuant to any such lock-up agreements, restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, described in greater detail below.
Rule 144
In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:
| 1% of the number of shares of our common stock outstanding at the time of such sale, which will equal shares as of the closing of this offering (assuming no exercise of the underwriters option to purchase additional shares); or |
| the average weekly trading volume of our common stock on the during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale, current public information, and notice provisions of Rule 144.
Notwithstanding the availability of Rule 144, the holders of all of our restricted shares will have entered into lock-up agreements as described under Underwriting, and their restricted shares will become eligible for sale only following expiration of the restrictions set forth in those agreements.
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Rule 701
Rule 701 under the Securities Act (Rule 701), as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our team members, executive officers, directors, or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under Underwriting, and will become eligible for sale only following expiration of those agreements.
Lock-Up Agreements
We and our officers, directors, and holders of substantially all of our common stock on the date of this prospectus will have entered into lock-up agreements with the underwriters providing, subject to certain exceptions, that we and they will not, subject to certain exceptions, dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus unless extended pursuant to its terms. For a more complete description of the lock-up restrictions and specified exceptions, see Underwriting.
Transfer Restrictions under the Albertsons Investor LLC Agreement
The Albertsons Investor LLC Agreement will restrict the distribution of our common stock held by Albertsons Investor to the members of Albertsons Investor for a period that is the earlier of (x) four years beginning on , 2015 and (y) the 35% Trigger Date (subject to extension by vote of holders of the equity interests in Albertsons Investor and Kimco, voting together as a single class, that directly or indirectly own our common stock issued to Albertsons Investor and Kimco on , 2015 representing at least 70% of such common stock, provided , that any extension of greater than one year shall require the consent of 100% of the equity interests of Albertsons Investor, Kimco and Management Holdco (so long as Kimco and Management Holdco own our common stock)). If any equityholder of Albertsons Investor does not wish to participate in a private block sale or resale by Albertsons Investor (a Sell-Down), Albertsons Investor shall, subject to compliance with securities laws, distribute to such equityholder such equityholders pro rata share of our common stock that would have otherwise been sold in such Sell-Down (the Distributed Stock); provided that the Distributed Stock shall be subject to the same restrictions on transfer, market stand-off and lock-up provisions to which Albertsons Investor is subject with respect to such Sell-Down and the Stockholders Agreement (the Transaction Transfer Restrictions). Subject to compliance with applicable securities laws, the Distributed Stock may be sold or otherwise disposed of by the holder thereof so long as no Transaction Transfer Restriction period is in effect. Albertsons Investor shall provide notice to such holder or its representatives of its intention to effect a Sell-Down not more than 30 calendar days prior to the intended date for the completion of such Sell-Down, in which event the holder of the Distributed Stock shall have the right to participate in such Sell-Down with Albertsons Investor pro rata based on such holders beneficial ownership of our common stock, or, if not participating in such Sell-Down, shall not sell or otherwise dispose of the Distributed Stock (or other of our common stock beneficially owned by such holder) during such 30 calendar day period or such longer transfer, market stand-off or lock up provision that Albertsons Investor shall become subject to in connection with such Sell-Down.
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Registration Rights
Upon the closing of this offering, Albertsons Investor, which will hold an aggregate of shares of our common stock, will have the right to require us to register the shares of our common stock held by Albertsons Investor, Kimco and Management Holdco (on a pro rata and pari passu basis) under the Securities Act under specified circumstances. After registration and sale pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. We will bear the expenses incurred in connection with the filing of any such registration statements. Please see Certain Relationships and Related Party TransactionsStockholders Agreement for additional information regarding these registration rights.
Incentive Plans
As soon as practicable after the closing of this offering, we intend to file a Form S-8 registration statement under the Securities Act to register shares of our common stock issued or reserved for issuance under our 2015 Incentive Plan. The Form S-8 registration statement will become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above, and Rule 144 limitations applicable to affiliates. For a more complete discussion of our equity compensation plans, see Executive CompensationIncentive Plans.
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The following is a summary of the material provisions of the instruments and agreements evidencing the material indebtedness of Albertsons, Safeway, NAI Holdings and certain of their subsidiaries. It does not include all of the provisions of our material indebtedness, does not purport to be complete and is qualified in its entirety by reference to the instruments and agreements described. Pursuant to the IPO-Related Transactions, Albertsons Companies, Inc., as the surviving corporation of the merger of Albertsons Holdings LLC into it, will become a guarantor under the Albertsons/Safeway Term Loan Agreement and the Albertsons/Safeway ABL Agreement and a co-obligor under the ABS/Safeway Indenture, each as defined below.
Albertsons/Safeway Term Loan Agreement
Albertsons and Safeway entered into a second amended and restated term loan agreement, dated as of August 25, 2014 and effective of January 30, 2015 (the ABS/Safeway Term Loan Agreement) among Albertsons LLC, Safeway and the other co-borrowers, as borrowers, Albertsons Holdings and the other guarantors from time to time party thereto, as guarantors, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent.
Structure . The ABS/Safeway Term Loan Agreement provides for a $6,300 million term loan facility, consisting of a $1,437 million term loan tranche B-2 as of June 20, 2015 (the ABS/Safeway Term Loan B-2), a $950 million term loan tranche B-3 as of June 20, 2015 (the ABS/Safeway Term Loan B-3) and a $3,909 million term loan tranche B-4 as of June 20, 2015 (the ABS/Safeway Term Loan B-4 and, together with the ABS/Safeway Term Loan B-2 and the ABS/Safeway Term Loan B-3, the ABS/Safeway Term Loan Facilities). In addition, the borrowers are entitled to increase the term loan commitments under the ABS/Safeway Term Loan Agreement in an aggregate principal amount up to $450 million, plus an unlimited additional principal amount subject to satisfaction of a consolidated first lien net leverage ratio test.
Maturity . The ABS/Safeway Term Loan B-2 has a maturity date of March 21, 2019, the ABS/Safeway Term Loan B-3 has a maturity date of August 25, 2019 and the ABS/Safeway Term Loan B-4 has a maturity date of August 25, 2021.
Amortization . (a) The ABS/Safeway Term Loan B-2 amortizes on a quarterly basis at a rate of 1% of the original principal amount of the ABS/Safeway Term Loan B-2 per year (which payments shall be reduced as a result of the application of prepayments in accordance with the terms therewith); (b) the ABS/Safeway Term Loan B-3 amortizes on a quarterly basis at a rate of 5% of the original principal amount of the ABS/Safeway Term Loan B-3 during the first year, 7.5% of the original principal amount of the ABS/Safeway Term Loan B-3 during the second year, 12.5% of the original principal amount of the ABS/Safeway Term Loan B-3 during the third year and 15% of the original principal amount of the ABS/Safeway Term Loan B-3 during each year thereafter (which payments, in each case, shall be reduced as a result of the application of prepayments in accordance with the terms therewith) and (c) the ABS/Safeway Term Loan B-4 amortizes on a quarterly basis at a rate of 1% of the original principal amount of the ABS/Safeway Term Loan B-4 per year (which payments shall be reduced as a result of the application of prepayments in accordance with the terms therewith).
Prepayment . The ABS/Safeway Term Loan Facilities are required to be prepaid with: (i) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement between the agent for the ABS/Safeway Term Loan Facilities and the agent for the ABS/Safeway ABL Agreement (as defined and described below) and certain exceptions and reinvestment rights; (ii) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the ABS/Safeway Term Loan Agreement) and (iii) 75% (subject to step-downs to zero, in accordance with a consolidated first lien net leverage ratio test) of excess cash flow minus certain payments made under the ABS/Safeway ABL Agreement and voluntary prepayments of, and purchases of loans under, the ABS/Safeway Term Loan Facilities.
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Interest . (a) The ABS/Safeway Term Loan B-2 bears interest, at our option, at a rate per annum equal to either (i) the base rate plus 3.375%; or (ii) LIBOR (subject to a 1.00% floor) plus 4.375%; (b) the ABS/Safeway Term Loan B-3 bears interest, at our option, at a rate per annum equal to either (i) the base rate plus 3% or (ii) the LIBOR rate (subject to a 1.00% floor) plus 4% and (c) the ABS/Safeway Term Loan B-4 bears interest, at our option, at a rate per annum equal to either (i) the base rate plus 3.5% or the LIBOR rate (subject to a 1.00% floor) plus 4.5%. At the election of the agent or a majority of the lenders, the interest rate may increase by 2% with respect to any portion of the ABS/Safeway Term Loan Facilities or other obligations not paid on the due date thereof, until such amount due is paid in full.
Guarantees . Subject to certain exceptions, the amounts outstanding under the ABS/Safeway Term Loan Agreement are guaranteed by Albertsons Holdings and each of its existing and future direct and indirect wholly-owned domestic subsidiaries that are not borrowers.
Security . Subject to certain exceptions, the obligations under the ABS/Safeway Term Loan Agreement are secured by (i) a first-priority security interest in and lien on substantially all of the assets of the borrowers and guarantors (other than the ABS/Safeway ABL Priority Collateral (as defined below)), including real property and the equity interests of Albertsons Holdings and its Restricted Subsidiaries (as defined in the ABS/Safeway Term Loan Agreement), and (ii) a second-priority security interest in and lien on substantially all of the accounts receivable, inventory, documents of title related to inventory, instruments, general intangibles (excluding any equity interests of Albertsons Holdings or any of its subsidiaries), chattel paper, and supporting obligations, in each case, relating solely to or constituting proceeds of other ABS/Safeway ABL Priority Collateral, and certain related assets of the borrowers and guarantors and all proceeds thereof (the ABS/Safeway ABL Priority Collateral).
Fees . Certain customary fees are payable to the lenders and the agents under the ABS/Safeway Term Loan Agreement, including a call premium of 1% if the ABS/Safeway Term Loan Facilities are repriced or are refinanced with debt having a lower effective yield than the ABS/Safeway Term Loan Facilities within one year and 31 days following August 11, 2014.
Covenants . The ABS/Safeway Term Loan Agreement contains various affirmative and negative covenants (in each case, subject to customary exceptions), including, but not limited to, restrictions on the ability of (a) the subsidiaries of Albertsons Holdings to: (i) dispose of assets; (ii) incur additional indebtedness, issue preferred stock and guarantee obligations; (iii) prepay certain indebtedness; (iv) pay certain restricted payments and dividends; (v) create liens on assets or agree to restrictions on the creation of liens on assets; (vi) make investments, loans or advances; (vii) restrict distributions from subsidiaries; (viii) engage in mergers or consolidations; (ix) engage in certain transactions with affiliates; (x) amend the terms of any of our organizational documents or material indebtedness; (xi) change lines of business or (xii) make certain accounting changes, and (b) Albertsons Holdings to engage in material operating or business activities. The ABS/Safeway Term Loan Agreement contains no financial covenants.
Events of Default . The ABS/Safeway Term Loan Agreement contains customary events of default (subject to customary exceptions, thresholds and grace periods), including, but not limited to: (i) nonpayment of principal, interest or other amounts; (ii) failure to perform or observe covenants; (iii) inaccuracy or breaches of representations and warranties; (iv) cross-defaults and cross-acceleration with certain other indebtedness; (v) certain bankruptcy related events; (vi) impairment of security interests in collateral; (vii) actual or asserted invalidity of guarantees or other security documents or other term facilities documentation; (viii) material judgments; (ix) certain ERISA matters; (x) certain change of control events (including after completion of this offering (other than (a) Cerberus; (b) Lubert-Adler Real Estate Fund V, L.P.; (c) Klaff Realty; (d) Schottenstein Stores and (e) Kimco
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Realty, and their affiliates, related funds and managed accounts (the Equity Investors) owning more than 50% of the equity interests of Albertsons Holdings or (c) Albertsons Holdings failing to own 100% of the equity interests of Albertsons LLC or Safeway) and (xi) loss of lien priority.
Albertsons/Safeway ABL Agreement
On January 30, 2015, Albertsons LLC and Safeway entered into an amended and restated asset-based revolving credit agreement among Albertsons LLC, Safeway and the other co-borrowers, as borrowers (collectively, the ABS/Safeway ABL Borrowers), Albertsons Holdings and the other guarantors from time to time party thereto, as guarantors, the lenders from time to time party thereto and Bank of America N.A., as administrative and collateral agent (the ABS/Safeway ABL Agreement).
Structure . The ABS/Safeway ABL Agreement provides for a $3,000 million revolving credit facility (with subfacilities for letters of credit and swingline loans) (the ABS/Safeway ABL Facility). The ABS/Safeway ABL Facility may be used to fund working capital and general corporate purposes, including permitted acquisitions and other investments. Subject to customary conditions, amounts available under the ABS/Safeway ABL Facility may be borrowed, repaid and reborrowed until the maturity date thereof. The maximum amount that may be borrowed and outstanding at any time under the ABS/Safeway ABL Facility (including undrawn letters of credit) may not exceed a borrowing base, as described below. In addition, the ABS/Safeway ABL Borrowers are entitled to increase the commitments under the ABS/Safeway ABL Agreement in an aggregate principal amount of up to an additional $750 million.
Borrowing Base . The amount of loans and letters of credit available under the ABS/Safeway ABL Facility is limited to the lesser of the aggregate commitments under the ABS/Safeway ABL Facility or an amount determined pursuant to a borrowing base. The borrowing base at any time is equal to 90% of eligible credit card receivables, plus 90% of the net amount of eligible health care receivables, plus 90% of the net recovery percentage of eligible inventory (other than perishable inventory) multiplied by the book value thereof, plus 90% of the net recovery percentage of eligible perishable inventory multiplied by the book value thereof (subject to a cap of 25% of the borrowing base), plus 85% of the product of the average per script net orderly liquidation value of the eligible prescription files of the borrowers and the guarantors thereunder (ABS/Safeway Eligible Pharmacy Scripts) multiplied by the number of such ABS/Safeway Eligible Pharmacy Scripts (subject to a cap of 30% of the borrowing base), minus eligibility reserves. The eligibility of accounts receivable, inventory and prescription files for inclusion in the borrowing base is determined in accordance with certain customary criteria specified in the ABS/Safeway ABL Agreement, including periodic appraisals. The terms of the ABS/Safeway ABL Agreement provide that appraisals of assets included in the borrowing base are to be conducted annually, twice per year if excess availability falls below 25% of the aggregate commitments and quarterly during the continuance of an event of default.
Maturity . The ABS/Safeway ABL Facility matures on the earlier to occur of (a) January 30, 2020, and (b) the date that is 91 days prior to the final maturity of certain material indebtedness (if such other indebtedness has not been repaid or extended prior to such 91st day).
Prepayment . The ABS/Safeway ABL Facility is required to be repaid (or, in the case of letters of credit, cash collateralized) (a) to the extent that extensions of credit outstanding under the ABS/Safeway ABL Facility exceed (i) the aggregate commitments or (ii) the then-current borrowing base, and (b) in an amount equal to 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions of ABS/Safeway ABL Priority Collateral (to the extent of the type included in the borrowing base) (or under certain circumstances, the amount advanced or available to be advanced against the ABS/Safeway ABL Priority Collateral subject to the sale, casualty or other disposition).
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Interest . Amounts outstanding under the ABS/Safeway ABL Agreement bear interest at a rate per annum equal to, at our option (a) the base rate, plus an applicable margin equal to (i) 0.50% (if daily average excess availability during the most recently ended fiscal quarter is greater than 66% of the aggregate commitments), (ii) 0.75% (if daily average excess availability during the most recently ended fiscal quarter is less than or equal to 66% of the aggregate commitments, but greater than or equal to 20% of the aggregate commitments), or (iii) 1.00% (if daily average excess availability during the most recently ended fiscal quarter is less than 20% of the aggregate commitments), or (b) the LIBOR rate, plus an applicable margin equal to (i) 1.50% (if daily average excess availability during the most recently ended fiscal quarter is greater than 66% of the aggregate commitments), (ii) 1.75% (if daily average excess availability during the most recently ended fiscal quarter is less than or equal to 66% of the aggregate commitments, but greater than or equal to 20% of the aggregate commitments), or (iii) 2.00% (if daily average excess availability during the most recently ended fiscal quarter is less than 20% of the aggregate commitments). If not paid when due, the ABS/Safeway ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2% per annum during the continuance of such payment event of default and the letter of credit fees increase by 2%. Other overdue amounts bear interest at a rate equal to the rate otherwise applicable to such revolving loans bearing interest at the base rate at such time, plus 2% until such amounts are paid in full.
Guarantees . Subject to certain exceptions, the amounts outstanding under the ABS/Safeway ABL Agreement are guaranteed by Albertsons Holdings and each of its existing and future direct and indirect wholly-owned domestic subsidiaries that are not borrowers.
Security . Subject to certain exceptions, the obligations under the ABS/Safeway ABL Agreement are secured by (a) a first-priority security interest in and lien on ABS/Safeway ABL Priority Collateral and (b) a third-priority security interest in and lien on substantially all other assets (other than real property).
Fees . Certain customary fees are payable to the lenders and the agents under the ABS/Safeway ABL Agreement, including a commitment fee on the average daily unused amount of the ABS/Safeway ABL Facility, in an amount equal to (a) 0.25% per annum if such average daily excess availability amount during the most recently ended fiscal quarter is less than 50% of the aggregate commitments and (b) 0.375% per annum if such average daily excess availability amount during the most recently ended fiscal quarter is greater than or equal to 50% of the aggregate commitments.
Affirmative and Negative Covenants . The ABS/Safeway ABL Agreement contains various affirmative and negative covenants (in each case, subject to customary exceptions), including, but not limited to, restrictions on the ability of (a) the subsidiaries of Albertsons Holdings to (i) dispose of assets, (ii) incur additional indebtedness, issue preferred stock and guarantee obligations, (iii) prepay other indebtedness, (iv) pay certain restricted payments and dividends, (v) create liens on assets or agree to restrictions on the creation of liens on assets, (vi) make investments, loans or advances, (vii) restrict distributions from our subsidiaries, (viii) engage in mergers or consolidations, (ix) engage in certain transactions with affiliates, (x) amend the terms of any of our organizational documents or material indebtedness, (xi) change lines of business or (xii) make certain accounting changes, and (b) Albertsons Holdings to (i) incur additional indebtedness, issue preferred stock and guarantee obligations, (ii) prepay other indebtedness, or (iii) engage in material operating or business activities.
Financial Covenants . The ABS/Safeway ABL Agreement provides that if (a) excess availability is less than (i) 10% of the aggregate commitments at any time or (ii) $200 million at any time or (b) an event of default is continuing, Albertsons Holdings and its subsidiaries must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.
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Events of Default . The ABS/Safeway ABL Agreement contains customary events of default (subject to customary exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal or interest; (ii) failure to perform or observe covenants; (iii) inaccuracy or breaches of representations and warranties; (iv) cross-defaults and cross-accelerations with certain other indebtedness; (v) certain bankruptcy related events; (vi) impairment of security interests in collateral; (vii) invalidity of guarantees; (viii) material judgments; (ix) certain ERISA matters and (x) certain change of control events (including after completion of this offering, any person or group (other than the Equity Investors) owning directly or indirectly more than 50% of the equity interests of Albertsons Holdings, or Albertsons Holdings failing to own 100% of the equity interests of Albertsons LLC or Safeway).
ABS/Safeway Indenture
Albertsons Holdings and Safeway (collectively, the ABS/Safeway Issuers), are co-obligors under an indenture, dated as of October 23, 2014 (the ABS/Safeway Indenture), by and among the ABS/Safeway Issuers, certain subsidiaries of the ABS/Safeway Issuers, as guarantors, and Wilmington Trust, National Association, as trustee and collateral agent, under which the ABS/Safeway Issuers have $609.6 million of 7.750% senior secured notes due October 15, 2022 (outstanding as of June 20, 2015) (such notes, the ABS/Safeway Notes).
Interest . Interest is payable on April 15 and October 15 of each year.
Guarantees . Subject to certain exceptions, the obligations under the ABS/Safeway Indenture are guaranteed by each of the existing and future direct and indirect wholly-owned domestic subsidiaries of Albertsons Holdings (other than Safeway).
Security . Subject to certain exceptions, the obligations under the ABS/Safeway Indenture are secured by (i) a second-priority security interest in and lien on substantially all of the assets of the ABS/Safeway Issuers and the guarantors (other than the ABS/Safeway ABL Priority Collateral), and (ii) a third-priority security interest in and lien on the ABS/Safeway ABL Priority Collateral.
Optional Redemption . Prior to October 15, 2017, the ABS/Safeway Notes may be redeemed in whole or in part at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, plus an applicable make-whole premium equal to the greater of (a) 1.0% and (b) the excess of (i) the sum of the present value of 105.813% of the principal amount being redeemed, plus all required interest payments due on the note through October 15, 2017 (exclusive of interest accrued to the date of redemption) discounted to the date of redemption at the then-current interest rate on U.S. Treasury Securities of comparable maturities, plus 50 basis points. In addition, prior to October 15, 2017, the ABS/Safeway Issuers may redeem up to 40% of the outstanding notes with the net proceeds of certain equity offerings at 107.750% of the principal amount of the notes plus accrued and unpaid interest.
After October 15, 2017, the ABS/Safeway Notes may be redeemed in whole or in part at the following redemption prices: (a) 105.813% if such notes are redeemed between October 15, 2017 and October 14, 2018, (b) 103.875% if such notes are redeemed between October 15, 2018 and October 14, 2019, (c) 101.938% if such notes are redeemed between October 15, 2019 and October 14, 2020, and (d) at par thereafter.
Mandatory Redemption . The ABS/Safeway Notes do not require the making of any mandatory redemption or sinking fund payments.
Repurchase of Notes at the Option of Holders . If a change of control occurs, the ABS/Safeway Issuers will be required to offer to purchase all of the ABS/Safeway Notes from the holders of such
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notes at a price equal to 101% of the principal amount outstanding, plus all accrued interest thereon. A change of control includes (i) subject to certain exceptions, the sale, lease or transfer, in one or a series of related transactions, of all or substantially all the assets of Albertsons Holdings and its subsidiaries, taken as a whole, to a person other than the Equity Investors, (ii) Albertsons Holdings becomes aware of the acquisition by any person or group, other than any of the Equity Investors, of more than 50% of the voting power of Albertsons Holdings or any of its direct or indirect parent companies or (iii) Albertsons Holdings ceases to own 100% of the capital stock of Safeway.
Covenants . The ABS/Safeway Indenture contains various affirmative and negative covenants (subject to customary exceptions), including, but not limited to, restrictions on the ability of Albertsons Holdings and its subsidiaries to: (i) dispose of assets; (ii) incur additional indebtedness, issue preferred stock and guarantee obligations; (iii) make certain restricted payments, investments and payments in respect of subordinated indebtedness; (iv) create liens on assets or agree to restrictions on the creation of liens on assets, (v) restrict distributions from Albertsons Holdings subsidiaries; (vi) engage in mergers or consolidations and (vii) engage in certain transactions with affiliates.
Events of Default . The ABS/Safeway Indenture contains events of default (subject to customary exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal, interest or premium; (ii) failure to perform or observe covenants; (iii) cross-acceleration with certain other indebtedness; (iv) certain judgments; (v) certain bankruptcy related events; (vi) impairment of security interests in collateral and (vii) invalidity of guarantees.
Safeway Indenture
Safeway is party to an indenture, dated September 10, 1997 (the Safeway Indenture), with The Bank of New York, as trustee, under which Safeway has the following seven outstanding issues of notes (amounts as of June 20, 2015):
a) $80,000,000 of 3.40% Senior Notes due December 2016 (the 2016 Safeway Notes);
b) $100,000,000 of 6.35% Senior Notes due August 2017 (the 2017 Safeway Notes);
c) $268,557,000 of 5.00% Senior Notes due August 2019 (the 2019 Safeway Notes);
d) $136,826,000 of 3.95% Senior Notes due August 2020 (the 2020 Safeway Notes);
e) $130,020,000 of 4.75% Senior Notes due December 2021 (the 2021 Safeway Notes);
f) $150,000,000 of 7.45% Senior Debentures due September 2027 (the 2027 Safeway Notes); and
g) $600,000,000 of 7.25% Senior Debentures due February 2031 (the 2031 Safeway Notes).
The 2016 Safeway Notes, 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes are collectively referred to as the Safeway Notes.
Interest . Interest is payable on (a) February 15 and August 15 of each year for the 2017 Safeway Notes, 2019 Safeway Notes and 2020 Safeway Notes, (b) June 1 and December 1 of each year for the 2016 Safeway Notes and 2021 Safeway Notes, (c) March 15 and September 15 of each year for the 2027 Safeway Notes and (d) February 1 and August 1 of each year for the 2031 Safeway Notes.
Guarantees . The 2016 Safeway Notes, 2017 Safeway Notes and 2019 Safeway Notes are guaranteed by Albertsons Holdings and its subsidiaries. The 2020 Safeway Notes, the 2021 Safeway Notes, the 2027 Safeway Notes and the 2031 Safeway Notes are not guaranteed.
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Security . The 2016 Safeway Notes, 2017 Safeway Notes and 2019 Safeway Notes are secured on a pari passu basis with the ABS/Safeway Notes by all of the collateral that secures the ABS/Safeway Notes. The 2020 Safeway Notes, 2021 Safeway Notes, 2027 Safeway Notes and 2031 Safeway Notes are equally and ratably secured on a pari passu basis with the ABS/Safeway Notes to the extent of certain of the collateral owned by Safeway and its subsidiaries.
Optional Redemption . The Safeway Notes are redeemable at our option at a redemption price equal to the greater of (i) 100% of the principal amount of the Safeway Notes to be redeemed and (ii) an amount equal to the sum of the present values of the remaining scheduled payments of principal and interest on the Safeway Notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis at the then-current interest rate on U.S. Treasury Securities of comparable maturities, plus the following:
2016 Safeway Notes: 40 basis points;
2017 Safeway Notes: 25 basis points;
2019 Safeway Notes: 30 basis points;
2020 Safeway Notes: 20 basis points;
2021 Safeway Notes: 45 basis points;
2027 Safeway Notes: 10 basis points; and
2031 Safeway Notes: 25 basis points.
Mandatory Redemption . The Safeway Notes do not require the making of any mandatory redemption or sinking fund payments.
Repurchase of Notes at the Option of Holders . If a change of control transaction (which includes (a) the disposition of all or substantially all of Safeways and its subsidiaries properties or assets, (b) the consummation of any transaction pursuant to which any person owns more than 50% of the voting stock of Safeway or (c) a majority of the members of Safeways board of directors not constituting continuing directors), and as a result thereof, a rating event occurs (i.e., the rating on a series of Safeway Notes is lowered by each of the rating agencies then rating the Safeway Notes below an investment grade rating within 60 days after the change of control or announcement of an intention to effect a change of control), Safeway is required to offer to purchase all of the 2016 Safeway Notes, 2017 Safeway Notes, 2019 Safeway Notes, 2020 Safeway Notes and 2021 Safeway Notes from the holders at a price equal to 101% of the principal amount outstanding plus all accrued interest thereon.
Covenants . The Safeway Indenture contains various affirmative and negative covenants (subject to customary exceptions), including, but not limited to, restrictions on the ability of Safeway and its subsidiaries to (i) create liens on assets, (ii) engage in mergers or consolidations or (iii) enter into sale and leaseback transactions.
Events of Default. The Safeway Indenture contains events of default (subject to customary exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal or interest; (ii) failure to perform or observe covenants; (iii) cross-acceleration with certain other indebtedness and (iv) certain bankruptcy related events.
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NAI Term Loan Agreement
On June 27, 2014, NAI Holdings and NAI entered into a term loan agreement (the NAI Term Loan Agreement) by and among NAI, NAI Holdings and the other guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative and collateral agent.
Structure . The NAI Term Loan Agreement provides for a $850 million term loan facility (the NAI Term Loan Facility), consisting of a term loan (the NAI Term Loan) extended by the lenders on the closing date of the NAI Term Loan Agreement. In addition, NAI is entitled to increase the term loan commitments under the NAI Term Loan Agreement in an aggregate principal amount of up to $300 million, plus an unlimited amount subject to satisfaction of a consolidated first lien net leverage ratio test.
Maturity . The NAI Term Loan has a maturity date of June 27, 2021.
Amortization . The NAI Term Loan amortizes on a quarterly basis at a rate of 0.25% of the aggregate principal amount of the NAI Term Loan outstanding (which payments shall be reduced as a result of the application of prepayments in accordance with the terms thereof).
Prepayment . The NAI Term Loan Facility is required to be prepaid with: (i) 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions, subject to the terms of an intercreditor agreement with the lenders under the NAI ABL Agreement (as defined herein) and certain exceptions and reinvestment rights; (ii) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the NAI Term Loan Agreement) and (iii) 50% (subject to step-downs to zero, in accordance with a consolidated first lien net leverage ratio test) of excess cash flow minus certain payments made under the NAI ABL Agreement and voluntary prepayments of, and purchases of loans under, the NAI Term Loan Facility.
Interest . The NAI Term Loan bears interest, at our option, at a rate per annum equal to either: (i) the base rate, plus 2.75% or (ii) the LIBOR rate (subject to a 1.00% floor) plus 3.75%. If not paid when due, the NAI Term Loan bears interest at the rate otherwise applicable to such NAI Term Loan at such time, plus an additional 2% per annum during the continuance of such payment event of default. Other overdue amounts bear interest at a rate equal to the rate otherwise applicable to the NAI Term Loan bearing interest at the base rate at such time, plus 2% until such amounts are paid in full.
Guarantees . Subject to certain exceptions, the amounts outstanding under the NAI Term Loan Agreement are guaranteed by NAI Holdings and each of its existing and future direct and indirect wholly-owned domestic subsidiaries that are not borrowers (collectively, with NAI, the NAI Term Loan Parties).
Security . Subject to certain exceptions, the obligations under the NAI Term Loan Agreement are secured by (i) a first-priority security interest in and lien on (a) all real property, equipment, fixtures and intellectual property, all documents, instruments, commercial tort claims, general intangibles of the NAI Term Loan Parties and supporting obligations relating solely to or constituting proceeds of such assets, and all other proceeds of the foregoing to the extent and only for so long as such proceeds constitute or consist of cash, instruments or deposit accounts that contain solely such proceeds and (b) equity interests in NAI and subsidiaries of NAI and intercompany notes and all voting and other rights, and certain dividends and distributions with respect thereto, and proceeds thereof (collectively, the NAI Pari Debt Term Loan Priority Collateral) and (ii) a second-priority security interest in and lien on all accounts, goods, documents, letter of credit and letter of credit rights, investment property (excluding equity interests in NAI and its subsidiaries), commercial tort claims, general intangibles (excluding
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intellectual property), deposit accounts, books and records, supporting obligations, scripts and prescription files of the NAI Term Loan Parties and all proceeds related to the foregoing (collectively, the NAI ABL Priority Collateral).
Fees . Certain customary fees are payable to the lenders and the agents under the NAI Term Loan Agreement.
Covenants . The NAI Term Loan Agreement contains various affirmative and negative covenants (in each case, subject to customary exceptions), including, but not limited to, restrictions on the ability of NAI Holdings and its subsidiaries to: (i) dispose of assets; (ii) incur additional indebtedness, issue preferred stock and guarantee obligations; (iii) repay other indebtedness; (iv) pay certain restricted payments and dividends; (v) create liens on assets or agree to restrictions on the creation of liens on assets; (vi) make investments, loans or advances; (vii) restrict distributions from subsidiaries; (viii) engage in mergers or consolidations; (ix) engage in certain transactions with affiliates; (x) amend the terms of any of our organizational documents or material indebtedness; (xi) change lines of business or (xii) make certain accounting changes. The NAI Term Loan Agreement contains no financial covenants.
Events of Default . The NAI Term Loan Agreement contains customary events of default (subject to customary exceptions, thresholds and grace periods), including, but not limited to: (i) nonpayment of principal, interest or other amounts; (ii) failure to perform or observe covenants; (iii) inaccuracy or breaches of representations and warranties; (iv) cross-defaults and cross-acceleration with certain other indebtedness; (v) certain bankruptcy related events; (vi) impairment of security interests in collateral; (vii) actual or asserted invalidity of guarantees or other security documents or other term facilities documentation; (viii) material judgments; (ix) certain ERISA matters; (x) certain change of control events (including the Equity Investors failing to own more than 50% of the voting power of NAI Holdings, any change in control or other similar event as defined in any document governing other material indebtedness of any of the NAI Term Loan Parties, or NAI Holdings failing to own 100% of the equity interests of NAI free and clear of all liens) and (xi) loss of lien priority.
NAI ABL Agreement
On January 24, 2014, NAI Holdings and NAI entered into an asset-based revolving credit agreement among NAI, NAI Holdings, the other borrowers from time to time (the NAI ABL Borrowers), the guarantors from time to time party thereto, the lenders from time to time party thereto (such borrowers and guarantors, collectively, the NAI ABL Loan Parties) and Bank of America N.A., as administrative and collateral agent (the NAI ABL Agreement).
Structure . The NAI ABL Agreement provides for a $1,000 million asset-based revolving loan facility (with subfacilities for letters of credit and swingline loans) (the NAI ABL Facility). The NAI ABL Facility may be utilized for working capital and general corporate purposes, including permitted acquisitions and other investments. Subject to customary conditions, amounts available under the NAI ABL Facility may be borrowed, repaid and reborrowed until the maturity date thereof. The maximum amount that may be borrowed and outstanding at any time under the NAI ABL Facility (including undrawn letters of credit) may not exceed a borrowing base, as described below. In addition, the NAI ABL Borrowers are entitled to increase the commitments under the NAI ABL Agreement in an aggregate principal amount of up to an additional $100 million.
Borrowing Base . The amount of loans and letters of credit available under the NAI ABL Facility is limited to the lesser of the aggregate commitments under the NAI ABL Facility or an amount determined pursuant to a borrowing base. The borrowing base at any time is equal to 90% of eligible credit card receivables of the NAI ABL Loan Parties, plus 90% of the net amount of eligible health care receivables of the NAI ABL Loan Parties, plus 90% of the net recovery percentage of eligible
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inventory of the NAI ABL Loan Parties (other than perishable inventory) multiplied by the book value thereof, plus 90% of the net recovery percentage of eligible perishable inventory of the NAI ABL Loan Parties multiplied by the book value thereof (subject to a cap of 25% of the borrowing base), plus 85% of the product of the average per script net orderly liquidation value of the eligible prescription files of the NAI ABL Loan Parties thereunder (NAI Eligible Pharmacy Scripts) multiplied by the number of such NAI Eligible Pharmacy Scripts (subject to a cap of 30% of the borrowing base), plus the lesser of (i) the applicable real estate advance rate set forth in the NAI ABL Agreement multiplied by the appraised value of eligible real estate, if any, of the NAI ABL Loan Parties (net of any reserves) or (ii) the cap set on real estate (as set forth in the NAI ABL Agreement) (subject to certain conditions), minus eligibility reserves. Currently, the real estate of NAI and its subsidiaries secures only the obligations under the NAI Term Loan Facility and therefore is not included in the borrowing base under the NAI ABL Facility. The eligibility of accounts receivable, inventory and prescription files for inclusion in the borrowing base is determined in accordance with certain customary criteria specified in the NAI ABL Agreement, including periodic appraisals. The terms of the NAI ABL Agreement provide that appraisals of assets included in the borrowing base are to be conducted annually, twice per year if excess availability falls below 25% of the aggregate commitments, and quarterly during the continuance of an event of default.
Maturity . The NAI ABL Facility matures on the earlier to occur of (a) January 24, 2019 or (b) the date that is 91 days prior to the final maturity of certain material indebtedness (if such other indebtedness has not been repaid or extended prior to such 91st day).
Prepayment . The NAI ABL Facility is required to be repaid (or, in the case of letters of credit, cash collateralized) (a) to the extent that extensions of credit outstanding under the NAI ABL Facility exceed (i) the aggregate commitments or (ii) the then-current borrowing base and (b) in an amount equal to 100% of the net cash proceeds of certain asset sales, casualty events and other dispositions of NAI ABL Priority Collateral (to the extent of the type included in the borrowing base) (or under certain circumstances, if less, the amount advanced or available to be advanced against the NAI ABL Priority Collateral subject to the sale, casualty or other disposition).
Interest . Amounts outstanding under the NAI ABL Agreement bear interest at a rate equal to, at our option, the base rate or the LIBOR rate, plus an applicable margin equal to (i) 2.50% for LIBOR loans and 1.50% for base rate loans if the average excess availability under the NAI ABL Facility during the most recently ended fiscal quarter is greater than 66% of the aggregate commitments, (ii) 2.75% for LIBOR loans and 1.75% for base rate loans if the average excess availability under the NAI ABL Facility during the most recently ended fiscal quarter is less than or equal to 66% but greater than or equal to 20% of the aggregate commitments or (iii) 3.00% for LIBOR loans and 2.00% for base rate loans if the average excess availability under the NAI ABL Facility during the most recently ended fiscal quarter is less than 20% of the aggregate commitments. If not paid when due, the NAI ABL Facility bears interest at the rate otherwise applicable to such loans at such time plus an additional 2% per annum during the continuance of such payment event of default, and the letter of credit fees increase by 2%. Other overdue amounts bear interest at a rate equal to the rate otherwise applicable to such revolving loans bearing interest at the base rate at such time, plus 2% until such amounts are paid in full.
Guarantees . Subject to certain exceptions, the amounts outstanding under the NAI ABL Agreement are guaranteed by NAI Holdings and each of its existing and future direct and indirect wholly-owned domestic subsidiaries that are not borrowers, excluding any real estate subsidiary unless it owns or ground-leases real estate that is eligible real estate included in the borrowing base or has been designated as collateral for incremental term loans under the NAI ABL Facility.
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Security . Subject to certain exceptions, the obligations under the NAI ABL Agreement are secured by (a) a first-priority security interest in and lien on NAI ABL Priority Collateral and (b) a second-priority security interest in and lien on any NAI Pari Debt Term Loan Priority Collateral (excluding any real estate that NAI has not elected to include in the borrowing base).
Fees . Certain customary fees are payable to the lenders and the agents under the NAI ABL Agreement, including a commitment fee on the average daily unused amount of the NAI ABL Facility, in an amount equal to (a) 0.375% per annum if such average daily excess availability amount during the most recently ended fiscal quarter is less than 50% of the aggregate commitments and (b) 0.50% per annum if such average daily excess availability amount during the most recently ended fiscal quarter is greater than or equal to 50% of the aggregate commitments.
Affirmative and Negative Covenants . The NAI ABL Agreement contains various affirmative and negative covenants (in each case, subject to customary exceptions), including, but not limited to, restrictions on the ability of NAI Holdings and its subsidiaries to (i) dispose of assets, (ii) incur additional indebtedness, issue preferred stock and guarantee obligations, (iii) repay other indebtedness, (iv) pay certain restricted payments and dividends, (v) create liens on assets or agree to restrictions on the creation of liens on assets, (vi) make investments, loans or advances, (vii) restrict distributions from our subsidiaries, (viii) engage in mergers or consolidations, (ix) engage in certain transactions with affiliates, (x) amend the terms of any of our organizational documents or material indebtedness, (xi) change lines of business or (xii) make certain accounting changes.
Financial Covenant . The NAI ABL Agreement provides that if (a) excess availability is less than 10% of the aggregate commitments at any time or (b) an event of default is continuing, NAI Holdings and its subsidiaries must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th consecutive day that the trigger under clause (a) no longer exists.
Events of Default . The NAI ABL Agreement contains customary events of default (subject to customary exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal or interest; (ii) failure to perform or observe covenants; (iii) inaccuracy or breaches of representations and warranties; (iv) cross-defaults and cross-accelerations with certain other indebtedness; (v) certain bankruptcy related events; (vi) impairment of security interests in collateral; (vii) invalidity of guarantees; (viii) material judgments; (ix) certain ERISA matters and (x) certain change of control events (including the Equity Investors failing to own more than 50% of the voting power of our company, any change in control or other similar event as defined in any document governing other material indebtedness of any of the NAI ABL Loan Parties, our company failing to own 100% of the equity interests of NAI Holdings, or NAI Holdings failing to own 100% of the equity interests of NAI free and clear of all liens).
Letter of Credit Facility Agreement
On March 23, 2013, NAI and Bank of America, N.A., entered into a Letter of Credit Facility Agreement, as amended and restated as of January 24, 2014 (the LC Facility), which provides for the issuance of standby letters of credit in an aggregate undrawn face amount at any time outstanding not to exceed $125 million. The LC Facility expires on January 24, 2019. As of June 20, 2015, no letters of credit were outstanding under the LC Facility.
NAI Indenture
NAI (as successor to Albertsons, Inc.) is party to an indenture, dated as of May 1, 1992 with U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York) (as supplemented by Supplemental Indenture No. 1, dated as of May 7, 2004; Supplemental Indenture
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No. 2, dated as of June 1, 2006; and Supplemental Indenture No. 3, dated as of December 29, 2008; collectively, the NAI Indenture), under which NAI has the following outstanding issues of notes:
a) $301,000,000 6.47% to 7.15% Medium-Term Notes, due July 2017June 2028 (the NAI Medium-Term Notes)
b) $200,000,000 of 7.75% Debentures due June 2026 (the 2026 NAI Notes);
c) $650,000,000 of 7.45% Senior Debentures due August 2029 (the 2029 NAI Notes);
d) $225,000,000 of 8.70% Senior Debentures due May 2030 (the 2030 NAI Notes); and
e) $400,000,000 of 8.00% Senior Debentures due May 2031 (the 2031 NAI Notes).
The NAI Medium-Term Notes, 2026 NAI Notes, 2029 NAI Notes, 2030 NAI Notes and 2031 NAI Notes are collectively referred to as the NAI Notes.
Interest . Interest on the NAI Notes is payable semiannually.
Guarantees . The NAI Notes are not guaranteed.
Security . The NAI Notes are unsecured.
Optional Redemption . The NAI Medium-Term Notes and the 2026 NAI Notes are not redeemable or repayable prior to maturity. The 2029 NAI Notes, 2030 NAI Notes, and 2031 NAI Notes are redeemable in whole or in part at any time, at a price equal to the greater of (i) 100% of the principal amount to be redeemed and (ii) an amount equal to the sum of the present values of the remaining scheduled payments of principal and interest on the applicable notes to be redeemed (excluding any portion of payments of interest accrued as of the redemption date) discounted to the redemption date on a semiannual basis at the Adjusted Treasury Rate plus, in the case of:
(i) the 2031 NAI Notes, 30 basis points and
(ii) the 2029 NAI Notes and 2030 NAI Notes, 20 basis points.
Mandatory Redemption . The NAI Notes do not require the making of any mandatory redemption or sinking fund payments.
Covenants . The NAI Indenture contains certain covenants restricting the ability of NAI and its subsidiaries (subject to customary exceptions) to (i) create liens on certain assets, (ii) engage in mergers or consolidations or (iii) enter into sale and leaseback transactions.
Events of Default . The NAI Indenture contains events of default (subject to customary exceptions, thresholds and grace periods), including, without limitation: (i) nonpayment of principal or interest; (ii) failure to perform or observe covenants; (iii) cross-acceleration with certain other indebtedness and (iv) certain bankruptcy related events.
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American Stores Company Indenture
American Stores Company, LLC (ASC) is party to an indenture, dated as of May 1, 1995 with Wells Fargo Bank, National Association (as successor to The First National Bank of Chicago), as trustee (as further supplemented; together the ASC Indenture), under which ASC has the following four outstanding issues of notes:
a) $1,741,000 of 7.90% Debentures due May 2017 (the 2017 ASC Notes);
b) $2,902,000 of 8% Debentures due June 2026 (the 2026 ASC Notes);
c) $746,000 of 7.10% Medium Term Notes due March 2028 (the 2028 ASC MT Notes); and
d) $143,000 of 7.5% Debentures due May 2037 (the 2037 ASC Notes).
The 2017 ASC Notes, 2026 ASC Notes, the 2028 ASC MT Notes, and the 2037 ASC Notes are collectively referred to as the ASC Notes. Interest on the ASC Notes is payable semiannually. The ASC Notes are guaranteed by SuperValu. The 2017 ASC Notes, 2026 ASC Notes and 2037 ASC Notes are not redeemable prior to maturity. The 2028 ASC MT Notes are redeemable in whole or in part, at the option of ASC, subject to certain conditions. The ASC Notes do not require the making of any mandatory redemption or sinking fund payments.
Concurrently with the acquisition of NAI in March 2013, ASC, SuperValu, and JPMorgan Chase Bank, N.A., as escrow agent, entered into an escrow agreement pursuant to which ASC has deposited into escrow an amount equal to the outstanding principal balance of the ASC Notes plus funds sufficient to pay interest thereon for three years. ASC granted to SuperValu a security interest in its rights under the escrow agreement to secure reimbursement to SuperValu of any amounts paid by SuperValu under its guarantee of the ASC Notes. The ASC Indenture contains, solely for the benefit of the 2037 ASC Notes (but not any other series of the ASC Notes) certain covenants restricting the ability of ASC and its subsidiaries (subject to customary exceptions) to (i) create liens on certain assets, (ii) engage in mergers or consolidations or (iii) enter into sale and leaseback transactions.
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CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS TO NON-U.S. HOLDERS
The following is a summary of certain United States federal income and estate tax consequences to a non-U.S. holder (as defined herein) of the purchase, ownership and disposition of our common stock as of the date hereof. This summary deals only with common stock that is held as a capital asset.
Except as modified for estate tax purposes (as discussed below), a non-U.S. holder means a beneficial owner of our common stock that, for United States federal income tax purposes, is an individual, corporation, estate or trust that is not any of the following:
| an individual who is a citizen or resident of the United States; |
| a corporation organized under the laws of the United States, any state thereof or the District of Columbia; |
| an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person. |
This summary is based upon provisions of the Internal Revenue Code of 1986, as amended (the Code) and regulations, rulings and judicial decisions, all as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income and estate tax consequences different from those summarized below. This summary does not address all aspects of United States federal income and estate taxes and does not address the effects of any other United States federal tax laws (including gift tax or the Medicare tax on certain investment income) and does not deal with foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light of their particular circumstances. In addition, it does not represent a detailed description of the United States federal income or estate tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws (including if you are a United States expatriate, controlled foreign corporation, passive foreign investment company or a partnership or other pass-through entity for United States federal income tax purposes). We cannot assure you that a change in law will not alter significantly the tax considerations that we describe in this summary.
If an entity treated as a partnership for United States federal income tax purposes holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership considering an investment in our common stock, you should consult your tax advisors.
If you are considering the purchase of our common stock, you should consult your own tax advisors concerning the particular United States federal tax consequences to you of the ownership of the common stock, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
Dividends
Subject to the discussion of backup withholding and FATCA (as defined herein) below, dividends paid to a non-U.S. holder of our common stock generally will be subject to United States federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
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However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States are generally not subject to the United States federal withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to United States federal income tax on a net income basis in generally the same manner as if the non-U.S. holder were a United States person as defined under the Code, unless an applicable income tax treaty provides otherwise. Any such effectively connected dividends received by a foreign corporation may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, on its effectively connected earnings and profits, subject to adjustments.
A non-U.S. holder of our common stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to complete the applicable Internal Revenue Service Form W-8 and certify under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if our common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable United States Treasury regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.
A non-U.S. holder of our common stock eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the Internal Revenue Service.
Gain on Disposition of Common Stock
Subject to the discussion of backup withholding and FATCA below, any gain realized on the sale, exchange or other taxable disposition of our common stock generally will not be subject to United States federal income or withholding tax unless:
| the gain is effectively connected with a trade or business of the non-U.S. holder in the United States; |
| the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or |
| we are or have been a United States real property holding corporation for United States federal income tax purposes. |
A non-U.S. holder described in the first bullet point immediately above will be subject to United States federal income tax on the net gain derived from the disposition on a net income basis in generally the same manner as if the non-U.S. holder were a United States person as defined under the Code, unless an applicable income tax treaty provides otherwise. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it may also be subject to the branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits, subject to adjustments.
Unless an applicable income tax treaty provides otherwise, an individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat 30% United States federal income tax on the gain derived from the disposition, which may be offset by United States source capital losses, even though the individual is not considered a resident of the United States.
We believe we are not and do not anticipate becoming a United States real property holding corporation for United States federal income tax purposes. However, even if we become a United States real property holding corporation, if our common stock is considered to be regularly traded on
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an established securities market for United States federal income tax purposes, only a non-U.S. holder who, actually or constructively, holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holders holding period) more than 5% of our common stock will be subject to United States federal income tax on any gain derived from the disposition of our common stock.
Federal Estate Tax
Common stock held (or deemed held) at the time of death by an individual non-U.S. holder who is neither a citizen or resident of the United States (as specifically defined for United States estate tax purposes) will be included in such holders gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
We must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.
A non-U.S. holder will be subject to backup withholding for dividends paid to such holder unless such holder certifies under penalty of perjury that it is a non-U.S. holder, or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a disposition of our common stock within the United States or conducted through certain United States-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder, or such owner otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holders United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.
Additional Withholding Requirements
Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as FATCA), a 30% United States federal withholding tax may apply to any dividends paid on our common stock and, for a disposition of our common stock occurring after December 31, 2016, the gross proceeds from such disposition, in each case paid to (i) a foreign financial institution (as specifically defined in the Code), whether such foreign financial institution is the beneficial owner or an intermediary, which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) its compliance (or deemed compliance) with FATCA (which may alternatively be in the form of compliance with an intergovernmental agreement with the United States) in a manner which avoids withholding, or (ii) a non-financial foreign entity (as specifically defined in the Code), whether such non-financial foreign entity is the beneficial owner or an intermediary, which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) adequate information regarding certain substantial United States beneficial owners of such entity (if any). If a dividend payment is both subject to withholding under FATCA and subject to the withholding tax discussed above under Dividends, the withholding under FATCA may be credited against, and therefore reduce, such other withholding tax. You should consult your own tax advisor regarding these requirements and whether they may be relevant to your purchase, ownership and disposition of our common stock.
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The company and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC are the representatives of the underwriters.
Underwriters |
Number of Shares | |
Goldman, Sachs & Co. |
||
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
||
Citigroup Global Markets Inc. |
||
Morgan Stanley & Co. LLC |
||
Lazard Frères & Co. LLC |
||
|
||
Total |
||
|
The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.
The underwriters have an option to buy up to an additional shares from the company. They may exercise that option for 30 days from the date hereof. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by the company. Such amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
Paid by the Company |
No Exercise | Full Exercise | ||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares, the representatives may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part.
The company and its officers, directors and holders of substantially all of the companys common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. See Shares Eligible for Future Sale for a discussion of certain transfer restrictions.
The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period the company issues an earnings release or announces material news or a material event; or (2) prior to the expiration of the
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180-day restricted period, the company announces that it will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
At our request, the underwriters have reserved up to 5% of the shares offered by this prospectus for sale within the United States to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.
Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among the company and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be the companys historical performance, estimates of the business potential and earnings prospects of the company, an assessment of the companys management and the consideration of the above factors in relation to market valuation of companies in related businesses.
An application will be made to list the common stock on the NYSE under the symbol ABS. In order to meet one of the requirements for listing the common stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial holders.
In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A covered short position is a short position that is not greater than the amount of additional shares for which the underwriters option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. Naked short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the companys stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. The
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underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.
The company estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . The company has agreed to reimburse the underwriters for certain expenses, including the reasonable fees and disbursements of counsel for the underwriters in connection with any required review of the terms of the offering by the Financial Industry Regulatory Authority in an amount not to exceed $35,000.
The company has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the company and to persons and entities with relationships with the company, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the company (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the company. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments. Affiliates of certain of the underwriters act as lenders and/or agents under our existing credit facilities. In addition, affiliates of certain of the underwriters hold a position in our debt securities. Affiliates of the underwriters who hold senior secured notes and/or are lenders under the Senior Secured Credit Facilities may receive a portion of the net proceeds from this offering.
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations . Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts ( NI 33-105 ), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
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In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;
(c) to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or
(d) in any other circumstances which do not require the publication by the company of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of shares to the public in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA would not apply to the company; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.
The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder or (iii) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only
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to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, the company, the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
200
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia of the shares may only be made to persons (the Exempt Investors) who are sophisticated investors (within the meaning of section 708(8) of the Corporations Act), professional investors (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.
The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
201
Schulte Roth & Zabel LLP, New York, New York, will pass upon the validity of the common stock offered hereby. Cahill Gordon & Reindel LLP , New York, New York, is counsel for the underwriters in connection with this offering.
The consolidated financial statements of AB Acquisition as of February 28, 2015 and February 20, 2014, and for each of the three years in the period ended February 28, 2015 and the balance sheet of the Albertsons Companies, Inc. as of June 23, 2015 included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein. Such consolidated financial statements and balance sheet have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Safeway as of January 3, 2015 and December 28, 2013 and for the 53 weeks ended January 3, 2015, and the 52 weeks ended December 28, 2013 and December 29, 2012, included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The combined financial statements of the New Albertsons business of SUPERVALU INC. and subsidiaries as of February 21, 2013 and February 23, 2012 and for each of the fiscal years in the three-year period ended February 21, 2013 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of United for the 48 weeks ended December 28, 2013 and the year ended January 26, 2013 included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of McGladrey LLP, independent certified public accountants, upon the authority of said firm as experts in accounting and auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act to register our common stock being offered in this prospectus. This prospectus, which forms part of the registration statement, does not contain all the information included in the registration statement and the amendments, exhibits and schedules thereto. For further information about us and the common stock being offered in this prospectus, we refer you to the registration statement and the exhibits and schedules thereto. We are not currently subject to the informational requirements of the Exchange Act. As a result of the offering of the shares of our common stock, we will become subject to the informational requirements of the Exchange Act, and, in accordance therewith, will file quarterly and annual reports and other information with the SEC. The registration statement, including the exhibits and schedules thereto, such reports and other information may be read and copied at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site ( http://www.sec.gov ) that contains our SEC filings. Statements made in this prospectus about legal documents may not necessarily be complete, and you should read the documents which are filed as exhibits to the registration statement otherwise filed with the SEC.
202
Albertsons Companies, Inc. |
||||
Audited Consolidated Financial Statements |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
AB Acquisition |
||||
Unaudited Interim Condensed Consolidated Financial Statements |
||||
F-5 | ||||
Condensed Consolidated Statements of Operations and Comprehensive Loss |
F-6 | |||
F-7 | ||||
F-8 | ||||
Audited Consolidated Financial Statements |
||||
F-26 | ||||
F-27 | ||||
Consolidated Statements of Operations and Comprehensive (Loss) Income |
F-28 | |||
F-29 | ||||
F-31 | ||||
F-32 | ||||
Safeway |
||||
Audited Consolidated Financial Statements |
||||
F-89 | ||||
F-90 | ||||
F-91 | ||||
F-92 | ||||
F-93 | ||||
F-95 | ||||
F-97 | ||||
NAI |
||||
Audited Combined Financial Statements |
||||
F-147 | ||||
F-148 | ||||
Combined Statements of Operations and Comprehensive Income (Loss) |
F-149 | |||
F-150 | ||||
F-151 | ||||
F-152 | ||||
United |
||||
Audited Consolidated Financial Statements |
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F-186 | ||||
F-187 | ||||
F-188 | ||||
F-189 | ||||
F-190 | ||||
F-191 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management Board of
Albertsons Companies, Inc.:
We have audited the accompanying balance sheet of Albertsons Companies, Inc. (the Company) as of June 23, 2015. The financial statement is the responsibility of the Companys management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects, the financial position of Albertsons Companies, Inc. as of June 23, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boise, Idaho
July 7, 2015
F-2
Balance Sheet as of June 23, 2015
The accompanying notes are an integral part of this Balance Sheet.
F-3
Notes to the Balance Sheet
Note 1Organization
Albertsons Companies, Inc. (the Company) was formed as a Delaware corporation on June 23, 2015. Pursuant to a planned reorganization and initial public offering, the Company will become a holding corporation for AB Acquisition LLC, and its subsidiaries, Albertsons Holdings LLC and NAI Holdings LLC.
Note 2Summary of Significant Accounting Policies
Basis of Accounting The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America. Separate statements of operations, changes in stockholders equity and cash flows have not been presented in the financial statements because there have been no activities of this entity.
Underwriting Commissions and Offering Costs Underwriting commissions and offering costs to be incurred in connection with the Companys common share offerings will be reflected as a reduction of additional paid-in capital. Underwriting commissions and offering costs are not recorded in the Companys consolidated balance sheet because such costs are not the Companys liability until the Company completes a successful initial public offering.
Organizational Costs Organizational costs are not recorded in the Companys consolidated balance sheet because such costs are not the Companys liability until the Company completes a successful initial public offering. Thereafter, costs incurred to organize the Company will be expensed as incurred.
Note 3Stockholders Equity
The Company is authorized to issue 600,000,000 shares of common stock, par value $0.01 per share (Common Stock) and 30,000,000 shares of preferred stock, par value $0.01 per share (Preferred Stock). Under the Companys certificate of incorporation as in effect as of June 23, 2015, all shares of common stock are identical.
Note 4Subsequent Events
The Company has evaluated all subsequent events as of July 7, 2015 which represents the date of issuance of this balance sheet. The Company did not note any subsequent events requiring disclosure or adjustments to the balance sheet.
F-4
AB ACQUISITION LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in millions, except unit amounts)
(unaudited)
June 20,
2015 |
February 28,
2015 |
|||||||
ASSETS | ||||||||
Current assets |
|
|||||||
Cash and cash equivalents |
$ | 989.3 | $ | 1,125.8 | ||||
Receivables, net |
644.3 | 631.9 | ||||||
Inventories, net |
4,185.1 | 4,156.6 | ||||||
Other current assets |
549.8 | 1,190.4 | ||||||
|
|
|
|
|||||
Total current assets |
6,368.5 | 7,104.7 | ||||||
Property and equipment, net |
11,886.1 | 12,024.2 | ||||||
Intangible assets, net |
4,093.0 | 4,235.0 | ||||||
Goodwill |
1,028.6 | 1,028.6 | ||||||
Other assets |
1,093.2 | 1,369.3 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 24,469.4 | $ | 25,761.8 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 2,787.7 | $ | 2,763.5 | ||||
Accrued salaries and wages |
938.6 | 1,136.4 | ||||||
Current maturities of long-term debt and capitalized lease obligations |
246.4 | 624.0 | ||||||
Current portion of self-insurance liability |
312.5 | 311.6 | ||||||
Deferred tax liabilities |
168.7 | 145.4 | ||||||
Taxes other than income taxes |
291.2 | 287.5 | ||||||
Other current liabilities |
409.7 | 933.0 | ||||||
|
|
|
|
|||||
Total current liabilities |
5,154.8 | 6,201.4 | ||||||
Long-term debt and capitalized lease obligations |
11,898.9 | 11,945.0 | ||||||
Deferred income taxes |
1,714.9 | 1,790.8 | ||||||
Long-term self-insurance liability |
1,127.2 | 1,133.7 | ||||||
Other long-term liabilities |
2,509.6 | 2,522.4 | ||||||
Commitments and contingencies |
||||||||
Members equity |
||||||||
Tracking units, 300,000,000 units issued and 297,188,332 outstanding each of Albertsons, NAI and Safeway units as of both June 20, 2015 and February 28, 2015 |
| | ||||||
Residual units, 14,907,871 units issued and outstanding of convertible Investor incentive units as of both June 20, 2015 and February 28, 2015 |
| | ||||||
Members investment |
1,904.2 | 1,848.7 | ||||||
Accumulated other comprehensive income |
52.9 | 59.6 | ||||||
Retained earnings |
106.9 | 260.2 | ||||||
|
|
|
|
|||||
Total members equity |
2,064.0 | 2,168.5 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 24,469.4 | $ | 25,761.8 | ||||
|
|
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-5
AB ACQUISITION LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
($ in millions, except per unit amounts)
(unaudited)
16 weeks ended | ||||||||
June 20, 2015 | June 12, 2014 | |||||||
Net sales and other revenue |
$ | 18,051.0 | $ | 7,211.7 | ||||
Cost of sales |
13,132.8 | 5,220.9 | ||||||
|
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|
|
|||||
Gross profit |
4,918.2 | 1,990.8 | ||||||
Selling and administrative expenses |
4,821.3 | 1,958.9 | ||||||
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|
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Operating income |
96.9 | 31.9 | ||||||
Interest expense |
283.8 | 140.0 | ||||||
Other (income) expense, net |
(4.6 | ) | 22.8 | |||||
|
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|
|||||
Loss before income taxes |
(182.3 | ) | (130.9 | ) | ||||
Income tax benefit |
(29.0 | ) | (14.0 | ) | ||||
|
|
|
|
|||||
Net loss |
$ | (153.3 | ) | $ | (116.9 | ) | ||
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|
|
|
|||||
Other comprehensive (loss) income: |
||||||||
Loss on interest rate swaps, net of tax |
(7.3 | ) | (10.2 | ) | ||||
Other, net of tax |
0.6 | 0.3 | ||||||
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|
|
|
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Comprehensive loss |
$ | (160.0 | ) | $ | (126.8 | ) | ||
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|
|
|
|||||
Basic net loss per unit attributable to: |
||||||||
Tracking group basic earnings per unit |
$ | (0.52 | ) | $ | (0.91 | ) | ||
Residual group basic earnings per unit |
$ | | $ | | ||||
Diluted net loss per unit attributable to: |
||||||||
Tracking group diluted earnings per unit |
$ | (0.52 | ) | $ | (0.91 | ) | ||
Residual group diluted earnings per unit |
$ | | $ | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-6
AB ACQUISITION LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in millions and unaudited)
16 weeks ended | ||||||||
June 20, 2015 | June 12, 2014 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (153.3 | ) | $ | (116.9 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Net gain on property dispositions, asset impairment and lease exit costs |
(5.9 | ) | (12.3 | ) | ||||
Depreciation and amortization |
478.0 | 207.9 | ||||||
LIFO expense |
6.2 | 7.2 | ||||||
Deferred income tax |
(54.3 | ) | (17.3 | ) | ||||
Pension and post-retirement benefits expense |
6.8 | 2.3 | ||||||
Contributions to pension and post-retirement benefit plans |
(1.8 | ) | (3.2 | ) | ||||
(Gain) loss on interest rate swaps and commodity hedges, net |
(0.8 | ) | 22.8 | |||||
Amortization and write-off of deferred financing costs |
14.9 | 27.4 | ||||||
Non-cash equity-based compensation expense |
55.5 | 2.1 | ||||||
Other |
14.2 | 10.6 | ||||||
Changes in operating assets and liabilities, net of effects of acquisition of businesses: |
||||||||
Receivables, net |
27.1 | 20.1 | ||||||
Inventories, net |
(30.2 | ) | (40.6 | ) | ||||
Accounts payable, accrued salaries and wages and other accrued liabilities |
(269.8 | ) | 122.5 | |||||
Self-insurance liabilities |
(13.2 | ) | (57.9 | ) | ||||
Other operating assets and liabilities |
122.7 | (28.3 | ) | |||||
|
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|
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Net cash provided by operating activities |
196.1 | 146.4 | ||||||
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|
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|
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Cash flows from investing activities: |
||||||||
Business acquisition(1) |
(387.2 | ) | | |||||
Purchases of property and equipment |
(214.7 | ) | (97.1 | ) | ||||
Proceeds from sale of divestitures |
453.6 | | ||||||
Proceeds from sale of assets |
11.9 | 5.7 | ||||||
Changes in restricted cash |
254.4 | 10.5 | ||||||
Other |
26.6 | (1.1 | ) | |||||
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|
|
|
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Net cash provided by (used in) investing activities |
144.6 | (82.0 | ) | |||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of long-term debt |
| 130.0 | ||||||
Payments on long-term borrowings |
(441.8 | ) | (230.9 | ) | ||||
Payments of obligations under capital leases |
(29.7 | ) | (6.8 | ) | ||||
Payments for debt financing costs |
(4.7 | ) | (3.6 | ) | ||||
Other |
(1.0 | ) | | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(477.2 | ) | (111.3 | ) | ||||
|
|
|
|
|||||
Net decrease in cash and cash equivalents |
(136.5 | ) | (46.9 | ) | ||||
Cash and cash equivalents at beginning of period |
1,125.8 | 307.0 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 989.3 | $ | 260.1 | ||||
|
|
|
|
(1) | See Appraisal of Safeway Inc. in Note 9 - Commitments and contingencies and off balance sheet arrangements. |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
F-7
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim Condensed Consolidated Financial Statements include the accounts of AB Acquisition LLC and Subsidiaries (the Company). All significant intercompany balances and transactions were eliminated. The Condensed Consolidated Balance Sheet as of February 28, 2015 is derived from the Companys annual audited Consolidated Financial Statements for the fiscal year ended February 28, 2015, included within this Form S-1, which should be read in conjunction with these Condensed Consolidated Financial Statements. These Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for the year. The Companys first quarters ended June 20, 2015 and June 12, 2014 consisted of 16 weeks.
Significant Accounting Policies
Restricted cash: Restricted cash primarily relates to collateralized surety bonds and letters of credit. During the 16 weeks ended June 20, 2015, restricted cash was reduced by $254.4 million primarily due to collateral requirements that were eliminated. The Company had $15.8 million and $270.2 million of restricted cash as of June 20, 2015 and February 28, 2015, respectively, included in Other assets within the Condensed Consolidated Balance Sheets.
Inventories, net: Substantially all of the Companys inventories consist of finished goods valued at the lower of cost or market and net of vendor allowances.
The Company uses either item-cost or the retail inventory method to value discrete inventory items at lower of cost or market before application of any last-in, first-out (LIFO) reserve. Interim LIFO inventory costs are based on managements estimates of expected year-end inventory levels and inflation rates. LIFO expense was $6.2 million and $7.2 million for the 16 weeks ended June 20, 2015 and June 12, 2014, respectively.
Company-Owned life insurance policies (COLI): The Company has COLI policies that have a cash surrender value. The Company has loans against these policies and has no intention of repaying the loans prior to maturity or cancellation of the policies. Therefore, the Company offsets the cash surrender value by the related loans. As of June 20, 2015 and February 28, 2015, the cash surrender values of the policies were $196.1 million and $194.7 million, and the balance of the policy loans were $120.7 million and $120.0 million, respectively. The net balance of the COLI policies is included in Other assets.
Segments: The Company and its subsidiaries operate food and drug retail stores that offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel, and other items and services. The Companys retail operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance and are reported in one reportable segment. The Companys operating segments and reporting units are its 14 divisions, which
F-8 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
have been aggregated into one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Across all operating segments, the Company operates primarily one store format. Each store offers the same general mix of products with similar pricing to similar categories of customers, have similar distribution methods, operate in similar regulatory environments and purchase merchandise from similar or the same vendors. Except for an equity method investment in Casa Ley, S.A. de C.V. (Casa Ley), all of the Companys retail operations are domestic.
The following table represents sales revenue by type of similar product (in millions):
First Quarter | ||||||||||||||||
Fiscal 2015 | Fiscal 2014 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Non-perishables(1) |
$ | 7,989.8 | 44.3 | % | $ | 3,452.1 | 47.9 | % | ||||||||
Perishables(2) |
7,276.6 | 40.3 | % | 2,923.1 | 40.5 | % | ||||||||||
Pharmacy |
1,544.1 | 8.6 | % | 703.9 | 9.8 | % | ||||||||||
Fuel |
1,010.2 | 5.6 | % | 67.6 | 0.9 | % | ||||||||||
Other(3) |
230.3 | 1.2 | % | 65.0 | 0.9 | % | ||||||||||
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|
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|
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|
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Net sales and other revenue |
$ | 18,051.0 | 100.0 | % | $ | 7,211.7 | 100.0 | % | ||||||||
|
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(1) | Consists primarily of general merchandise, grocery and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, deli, floral and seafood. |
(3) | Consists primarily of lottery and various other commissions and other miscellaneous income. |
Recently Adopted Accounting Standards: In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The objective of this ASU is to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 for publicly traded companies and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company adopted ASU 2015-03 on March 1, 2015. As a result of the adoption, the Company reclassified unamortized deferred financing costs from Other assets to a reduction in Long-term debt. The adoption did not have an impact on the Companys Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flow.
Recently Issued Accounting Standards: In May 2014, the FASB issued authoritative guidance through ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1) Identify the contract(s) with a customer, 2) Identify the performance obligations in the contract, 3) Determine the transaction price, 4) Allocate the transaction price to the performance obligations in the contract, and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, this pronouncement is effective for annual reporting periods beginning after December 15, 2017. Early application is not permitted. The Company is currently evaluating the impact of this pronouncement.
F-9 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. This amendment updates Topic 330 to require an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact of this pronouncement.
In July 2015, the FASB also issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960); Defined Contribution Benefit Plans (Topic 962); and Health and Welfare Benefit Plans (Topic 965) , a three-part update with the objective of simplifying benefit plan reporting to make the information presented more useful to the reader. All three parts are effective for fiscal years beginning after December 15, 2015. The Company is currently evaluating the impact of this pronouncement.
NOTE 2PROPERTIES HELD FOR SALE
On December 19, 2014, in connection with the acquisition of Safeway Inc. (Safeway, the Safeway acquisition), the Company announced that they entered into agreements to sell 111 Albertsons Holdings LLC (Albertsons) and 57 Safeway stores across eight states to four separate buyers. Divestiture of these stores was required by the Federal Trade Commission (FTC) as a condition of closing the Safeway acquisition, and the divestiture of these stores was completed during the 16 weeks ended June 20, 2015 in accordance with the asset purchase agreements. The aggregate sales price from these stores was $525.8 million, including the book value of inventory. The proceeds from the sale were used to reduce outstanding borrowings under the Albertsons Asset-Based Loan Facility (ABL) by $439.0 million. Revenue and income before taxes associated with the divested Albertsons stores for the 16 weeks ended June 20, 2015 were $298.8 million and $14.9 million, respectively. Revenue and income before taxes associated with the divested Safeway stores for the 16 weeks ended June 20, 2015 were $145.7 million and $8.2 million, respectively.
Assets held for sale and liabilities held for sale are recorded in Other current assets and Other current liabilities, respectively, and consisted of the following (in millions):
June 20, 2015 | February 28, 2015 | |||||||
Assets held for sale: |
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Beginning balance |
$ | 521.2 | $ | 9.3 | ||||
Transfers in |
1.3 | 558.1 | ||||||
Disposals |
(508.5 | ) | (46.2 | ) | ||||
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Ending balance |
$ | 14.0 | $ | 521.2 | ||||
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Liabilities held for sale: |
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Beginning balance |
$ | 90.4 | $ | 2.1 | ||||
Other |
(0.2 | ) | 103.2 | |||||
Disposals |
(61.4 | ) | (14.9 | ) | ||||
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Ending balance |
$ | 28.8 | $ | 90.4 | ||||
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F-10 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 3FAIR VALUE MEASUREMENTS
The accounting guidance for fair value established a framework for measuring fair value and established a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability at the measurement date. The three levels are defined as follows:
Level 1 | Quoted prices in active markets for identical assets or liabilities; | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 | Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability. |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table presents assets and liabilities which were measured at fair value on a recurring basis as of June 20, 2015 (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices
in active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
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Assets: |
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Cash equivalents: |
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Money market |
$ | 318.0 | $ | 318.0 | $ | | $ | | ||||||||
Short-term investments(1) |
45.2 | 41.5 | 3.7 | | ||||||||||||
Non-current investments(2) |
58.9 | 9.5 | 49.4 | | ||||||||||||
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Total |
$ | 422.1 | $ | 369.0 | $ | 53.1 | $ | | ||||||||
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Liabilities: |
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Derivative contracts(3) |
$ | 131.7 | $ | | $ | 131.7 | $ | | ||||||||
Contingent consideration(4) |
277.5 | | | 277.5 | ||||||||||||
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Total |
$ | 409.2 | $ | | $ | 131.7 | $ | 277.5 | ||||||||
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(1) | Classified as held for sale and are included in Other current assets on the Condensed Consolidated Balance Sheets. |
(2) | Classified as held for sale and are included in Other assets on the Condensed Consolidated Balance Sheets. Change in market value of available for sale securities is recognized in Other comprehensive loss. |
(3) | Primarily relates to interest rate swaps and is included in Other current liabilities on the Condensed Consolidated Balance Sheets. |
(4) | Primarily relates to Casa Ley CVR and is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. |
F-11 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
The following table presents assets and liabilities which were measured at fair value on a recurring basis as of February 28, 2015 (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices
in active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
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Assets: |
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Cash equivalents: |
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Money market |
$ | 565.0 | $ | 565.0 | $ | | $ | | ||||||||
Short-term investments(1) |
24.1 | 17.1 | 7.0 | | ||||||||||||
Non-current investments(2) |
55.3 | 8.4 | 46.9 | | ||||||||||||
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Total |
$ | 644.4 | $ | 590.5 | $ | 53.9 | $ | | ||||||||
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Liabilities: |
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Derivative contracts(3) |
$ | 121.7 | $ | | $ | 121.7 | $ | | ||||||||
Contingent consideration(4) |
270.9 | | | 270.9 | ||||||||||||
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Total |
$ | 392.6 | $ | | $ | 121.7 | $ | 270.9 | ||||||||
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(1) | Classified as held for sale and are included in Other current assets on the Condensed Consolidated Balance Sheets. |
(2) | Classified as held for sale and are included in Other assets on the Condensed Consolidated Balance Sheets. Change in market value of available for sale securities is recognized in Other comprehensive loss. |
(3) | Primarily relates to interest rate swaps and is included in Other current liabilities on the Condensed Consolidated Balance Sheets. |
(4) | Primarily relates to Casa Ley CVR and is included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. |
A reconciliation of the beginning and ending balances for Level 3 liabilities for the 16 weeks ended June 20, 2015 follows (in millions):
Contingent
consideration |
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Beginning balance |
$ | 270.9 | ||
Changes in fair value |
9.2 | |||
Payments |
(2.6 | ) | ||
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Ending balance |
$ | 277.5 | ||
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The estimated fair value of the Companys debt, including current maturities, were based on Level 2 inputs, being market quotes or values for similar instruments, and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. As of June 20, 2015 and February 28, 2015, the fair value of total debt was $11,728.8 million and $12,095.2 million compared to a carrying value of $11,182.2 million and $11,594.3 million, respectively.
F-12 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
Assets Measured at Fair Value on a Nonrecurring Basis
As of June 20, 2015 and February 28, 2015, except for assets classified as held for sale, no other amounts of assets had been adjusted to fair value on a non-recurring basis. The Companys held for sale assets are classified as Level 3 of the fair value hierarchy and are valued primarily based on estimated selling prices less costs of disposal.
NOTE 4LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
The Companys long-term debt as of June 20, 2015 and February 28, 2015, net of unamortized debt discounts of $363.4 million and $376.4 million, respectively, and deferred financing costs of $183.3 million and $187.8 million, respectively, consisted of the following (in millions):
June 20,
2015 |
February 28,
2015 |
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Albertsons Term Loans, Due 2019 to 2021, interest range of 4.75% to 5.5% |
$ | 6,084.3 | $ | 6,077.0 | ||||
Albertsons Asset-Based Loan Facility, average interest rate of 1.94% |
541.0 | 980.0 | ||||||
NAI 4.75% Senior Secured Term Loan Due 2021 |
820.9 | 822.9 | ||||||
NAI 7.45% Debentures Due 2029 |
534.3 | 530.3 | ||||||
Albertsons 7.75% Senior Secured Notes Due 2022 |
584.4 | 583.6 | ||||||
Safeway 7.25% Debentures Due 2031 |
574.1 | 573.8 | ||||||
NAI 8.00% Debentures Due 2031 |
348.3 | 346.5 | ||||||
NAI 6.47% to 7.15% Medium Term Notes Due 20172028 |
246.6 | 244.1 | ||||||
Safeway 5.0% Senior Notes Due 2019 |
271.1 | 271.2 | ||||||
NAI 8.70% Debentures Due 2030 |
205.4 | 204.6 | ||||||
NAI 7.75% Debentures Due 2026 |
167.4 | 166.1 | ||||||
Safeway 7.45% Senior Debentures Due 2027 |
152.9 | 153.0 | ||||||
Safeway 3.95% Senior Notes Due 2020 |
138.1 | 138.2 | ||||||
Safeway 4.75% Senior Notes Due 2021 |
131.2 | 131.3 | ||||||
Safeway 6.35% Notes Due 2017 |
106.0 | 106.8 | ||||||
Safeway 3.4% Senior Notes Due 2016 |
80.0 | 79.9 | ||||||
American Stores 8.00% Debentures Due 2026 |
3.6 | 3.6 | ||||||
American Stores 7.90% Debentures Due 2017 |
1.9 | 1.9 | ||||||
Other Notes Payable, Unsecured |
167.0 | 155.1 | ||||||
Mortgage Notes Payable, Secured |
23.7 | 24.4 | ||||||
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Total debt |
11,182.2 | 11,594.3 | ||||||
Less current maturities |
(140.2 | ) | (502.9 | ) | ||||
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Long-term portion |
$ | 11,042.0 | $ | 11,091.4 | ||||
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The Albertsons and New Albertsons, Inc. (NAI) Term Loans, Albertsons and NAI ABL facilities and certain of the outstanding notes and debentures have restrictive covenants, subject to the right to cure in certain circumstances, calling for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain debt arrangements. The Company was in compliance with all such covenants and provisions as of and for the 16 weeks ended June 20, 2015.
F-13 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
Albertsons ABL: Borrowings outstanding under the Albertsons ABL as of June 20, 2015 consisted of loans of $541.0 million and letters of credit (LOC) issued under the LOC sub-facility of $130.1 million. Borrowings outstanding under the Albertsons ABL as of February 28, 2015, consisted of loans of $980.0 million and letters of credit issued under the LOC sub-facility of $272.1 million.
NAI ABL: The NAI ABL had no outstanding loan borrowings as of June 20, 2015 or February 28, 2015. The NAI ABL LOC sub-facility had outstanding issued letters of credit of $530.0 million and $418.7 million as of June 20, 2015 and February 28, 2015, respectively.
The amended NAI LOC facility had no outstanding issued letters of credit as of June 20, 2015 and $104.6 million outstanding issued letters of credit as of February 28, 2015.
The Albertsons ABL contains no covenants unless and until (i) an event of default under the Albertsons ABL has occurred and is continuing or (ii) the failure of Albertsons to maintain excess availability of at least 10.0% of the aggregate commitments at any time or (iii) excess availability is less than $200 million. If any of such events occur, then Albertsons is required to maintain a fixed charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30 th day after the other trigger event ceases to exist.
The NAI ABL contains no covenants unless and until (i) an event of default under the NAI ABL has occurred and is continuing or (ii) the failure of NAI to maintain excess availability of at least 10.0% of the aggregate commitments at any time. If any of such events occur, NAI is required to maintain a fixed charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30 th day after the other trigger event ceases to exist.
The Company did not trigger any defaults during the 16 weeks ended June 20, 2015.
Capitalized Lease Obligations
The Companys total capitalized lease obligations were $963.1 million and $974.7 million as of June 20, 2015 and February 28, 2015, respectively. Current maturities of capitalized lease obligations were $106.2 million and $121.1 million and long-term maturities were $856.9 million and $853.6 million, as of June 20, 2015 and February 28, 2015, respectively.
NOTE 5EQUITY-BASED COMPENSATION
Phantom Units
During the 16 weeks ended June 20, 2015, the Company issued 11.5 million Phantom Units to its employees and directors, of which 7.2 million Phantom Units were granted. Fifty percent of the Phantom Units are time-based and will vest in four annual installments on the last day of the companys fiscal year, commencing with the last day of the fiscal year in which the Phantom Units are granted, subject to continued service through each vesting date. The remaining fifty percent of the Phantom Units are performance-based units that will vest in four annual installments on the last day of the companys fiscal year, commencing with the last day of the fiscal year in which the Phantom Units are granted, subject to continued service through each vesting date, and the achievement of annual performance targets. Notwithstanding the foregoing, one director received a grant of 100,000 Phantom Units that will vest 100% on the last day of fiscal year 2015 subject to the directors continued service through such vesting date, or earlier upon the directors death or termination without cause.
F-14 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
Under the Phantom Unit Plan, each Phantom Unit provides the participant with a contractual right to receive, upon vesting, one incentive unit. Holders of the incentive units are entitled to participate in cash distributions of Albertsons, NAI and Safeway based on their respective ownership percentages of the aggregate ABS, NAI and Safeway units, vested Series 1 Incentive Units, Investor Incentive Units and vested Phantom Units outstanding. Distributions are on a subordinate basis to the $2,308.6 million aggregate distributions to Albertsons, NAI and Safeway unitholders; after which they participate on a pro rata basis. The Phantom Units contain no voting rights.
For the Phantom Units subject solely to a service condition, the estimated total fair value is charged to compensation expense on a straight-line basis over the requisite service period. For the phantom units subject to a performance condition, compensation cost will be recognized based on the estimated quantity of awards for which it is probable that the performance conditions will be achieved. All performance-based Phantom Units that have not vested as of the fiscal year commencing in 2018 shall terminate. Upon the consummation of an IPO, the unvested Phantom Units subject to performance conditions are converted into Phantom Units subject solely to a continuation of service condition.
Series-1 Incentive Units
On April 9, 2015, the Company and a member of management entered into a consultancy agreement that outlined a transition of roles from an employee executive position to a non-employee consulting position. As part of this transition, the Company and the former employee agreed that 1.675 million of the previously granted Series-1 Incentive Units would be immediately forfeited; however, the former employee would still be entitled to receive and vest in the remaining 1.675 million of previously granted units, subject to the ongoing performance of a specific set of outlined consulting services through January 30, 2016. As of April 9, 2015, the Company had recognized a cumulative amount of $2.2 million in compensation expense associated with the original January 30, 2015 Series-1 Incentive Unit grant.
The Company has accounted for the April 2015 consulting arrangement transition as a modification to the originally granted award of 3.3 million Series-1 Incentive Units. 1.675 million Series-1 Incentive Units, or the newly agreed upon maximum number of shares to be received by the former employee, were valued as of April 9, 2015 at a per unit price of $23.76, or a total award value of $39.8 million. As a result of this modification, the Company recorded a total charge of $37.6 million during the 16 weeks ended June 20, 2015, representing the entire fair value of 1.675 million Series-1 Incentive Units on the modification date less cumulative amounts previously recognized as compensation expense prior to the modification. As of June 20, 2015, there is no amount of unrecognized compensation expense associated with previously granted Series-1 Incentive Units.
Equity-based Compensation Expense
Equity-based compensation expense is recognized, net of any estimated forfeitures. Equity-based compensation expense recognized in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss was $55.5 million and $2.1 million for the 16 weeks ended June 20, 2015 and June 12, 2014, respectively. The Company recorded a tax benefit of $3.7 million related to equity-based compensation for the 16 weeks ended June 20, 2015. No tax benefit was recorded for the 16 weeks ended June 12, 2014.
F-15 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
The following weighted-average assumptions were used to value the Companys equity-based awards granted March 5, 2015:
June 20, 2015 | ||||
Dividend yield |
% | |||
Expected volatility |
41.7% | |||
Risk-free interest rate |
0.61% | |||
Time to liquidity |
1.9 years | |||
Discount for lack of marketability |
16.0% |
NOTE 6NET LOSS PER UNIT
The following table sets forth the computation of basic and diluted net loss per Tracking group unit and per Residual group unit (in millions):
16 weeks ended | ||||||||
June 20, 2015 | June 12, 2014 | |||||||
Net loss |
$ | (153.3 | ) | $ | (116.9 | ) | ||
Less: distributions to Tracking group |
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Less: undistributed loss available to Tracking group up to Distribution Targets |
(153.3 | ) | (116.9 | ) | ||||
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Net loss from continuing operations available to Tracking group and Residual group unitholders |
$ | | $ | | ||||
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Net loss and distributions attributable to: |
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Tracking group unitholdersbasic |
$ | (153.3 | ) | $ | (116.9 | ) | ||
Residual group unitholdersbasic |
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Tracking group unitholdersdiluted |
(153.3 | ) | (116.9 | ) | ||||
Residual group unitholdersdiluted |
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Weighted average Tracking group units outstanding used in computing net loss attributable to Tracking group unitholdersbasic and diluted |
297.19 | 127.80 | ||||||
Weighted average Residual group units outstanding used in computing net loss attributable to Residual group unitholdersbasic |
14.91 | 0.66 | ||||||
Net loss per unit attributable to: |
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Tracking groupbasic |
$ | (0.52 | ) | $ | (0.91 | ) | ||
Residual groupbasic |
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Tracking groupdiluted |
(0.52 | ) | (0.91 | ) | ||||
Residual groupdiluted |
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For the 16 weeks ended June 20, 2015, 2.8 million units and 9.0 million units for the Tracking group and Residual group, respectively, have been excluded from diluted weighted-average units outstanding because their inclusion would be anti-dilutive. The units excluded for the Tracking group represent the units collateralizing the loans to members. For the 16 weeks ended June 12, 2014, 2.0 million units for the Residual group have been excluded from diluted weighted-average units outstanding because their inclusion would be anti-dilutive.
F-16 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 7EMPLOYEE BENEFIT PLANS
Pension Plans
The Company sponsors a defined benefit pension plan (the Shaws Plan) covering union employees under the Shaws banner. The Company also sponsors a defined benefit pension plan (the Safeway Plan) for substantially all of its employees under the Safeway banners not participating in multiemployer pension plans. The Company also sponsors a frozen plan covering certain employees under the United banner and a Retirement Restoration Plan that provides death benefits and supplemental income payments for certain senior executives after retirement. The Retirement Restoration Plan is unfunded. The Safeway Plan and the Retirement Restoration Plan were acquired as part of the Safeway acquisition in fiscal 2014.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.
Other Post-Retirement Benefits
In addition to the Companys pension plans, the Company acquired plans as part of the Safeway acquisition that provide post-retirement medical and life insurance benefits to certain employees. Retirees share a portion of the cost of the post-retirement medical plans. The Company pays all the cost of the life insurance plans. The plans are unfunded.
The following table provides the components of net pension and post-retirement expense (in millions):
Pension |
Other post-
retirement benefits |
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16 weeks ended
June 20, 2015 |
16 weeks ended
June 12, 2014 |
16 weeks ended
June 20, 2015 |
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Estimated return on plan assets |
$ | (43.0 | ) | $ | (5.1 | ) | $ | | ||||
Service cost |
18.5 | 2.8 | | |||||||||
Interest cost |
31.1 | 4.6 | 0.2 | |||||||||
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Net expense |
$ | 6.6 | $ | 2.3 | $ | 0.2 | ||||||
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The Company contributed $1.8 million to its defined benefit pension plans and post-retirement benefit plans during the 16 weeks ended June 20, 2015. For the 16 weeks ended June 12, 2014, the Company contributed $3.2 million to its defined benefit pension plan. For the remainder of fiscal 2015, the Company currently anticipates contributing an additional $6.1 million to these plans.
Defined Contribution Plans and Supplemental Retirement Plans
Total contributions for these plans were $11.2 million and $12.2 million for the 16 weeks ended June 20, 2015 and June 12, 2014, respectively.
F-17 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 8RELATED PARTIES
Symphony Investors LLC Tender Offer
On March 21, 2013, associated with the NAI acquisition, Symphony Investors LLC (Symphony), which is owned by a consortium of investors led by Cerberus Capital Management, L.P. (Cerberus), acquired 21.1% of SUPERVALU INC. (SuperValu) common shares. On April 23, 2015, Symphony distributed all of the SuperValu common shares held by it to the members of Symphony. As of April 23, 2015, Symphony did not own any SuperValu common shares.
Contractual Agreements with SuperValu
On April 16, 2015, the Company entered into a letter agreement regarding the Transition Service Agreement (TSA) with SuperValu (the TSA Letter Agreement) pursuant to which SuperValu will provide services to the Company as needed to transition and wind down the TSA and the services SuperValu provides under the TSA. In exchange for these transition and wind down services, the agreement calls for eight payments of $6.3 million every six months for aggregate fees of $50.0 million. These payments are separate from and incremental to the fixed and variable fees the Company pays to SuperValu under the TSA. The parties also agreed to negotiate in good faith if either the costs associated with the transition and wind down services are materially higher (i.e. 5.0% or more) than anticipated, or SuperValu is not performing in all material respects the transition and wind down services as needed to support the Companys transition and wind down activities.
On May 28, 2015, the Company reached an agreement with SuperValu to resolve certain matters. As part of the agreement, SuperValu paid the Company $34.5 million. The Company will record the payment as a deferred liability and amortize it as a reduction of expense over four years.
Summary of SuperValu activity
Related party activities with SuperValu that are included in the Condensed Consolidated Statements of Operations and Comprehensive Loss consisted of the following (in millions):
16 weeks ended | ||||||||
June 20, 2015 | June 12, 2014 | |||||||
Supply agreements included in Cost of sales |
$ | 397.0 | $ | 452.5 | ||||
Selling and administrative expenses |
59.2 | 63.8 | ||||||
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Total |
$ | 456.2 | $ | 516.3 | ||||
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Cerberus
In connection with the Safeway acquisition, the original management agreement with Cerberus was terminated. A new management agreement with Cerberus and the consortium of investors commenced on January 30, 2015, requiring a management fee of $13.8 million, payable annually beginning January 30, 2015. The agreement is for four years.
F-18 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 9COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS
Guarantees
California Department of Industrial Relations : On October 24, 2012, the Office of Self-Insurance Plans, a program within the directors office of the California Department of Industrial Relations (the DIR), notified SuperValu that additional security was required to be posted in connection with the Companys, and certain other subsidiaries, California self-insured workers compensation obligations pursuant to applicable regulations. The notice from the DIR stated that the additional security was required as a result of an increase in estimated future liabilities, as determined by the DIR pursuant to a review of the self-insured California workers compensation claims with respect to the applicable businesses, and a decline in SuperValus net worth. A security deposit of $271.0 million was demanded in addition to security of $427.0 million provided through SuperValus participation in Californias Self-Insurers Security Fund (the Fund). SuperValu appealed this demand. The Fund has attempted to create a secured interest in certain assets of the Company for the total amount of the additional security deposit. The dispute with the Fund and the DIR was resolved through a settlement agreement as part of the NAI acquisition on March 21, 2013 and the primary obligation to the Fund and the DIR was retained by the Company following the NAI acquisition. Subsequent to the NAI acquisition, the Company set up a fund of $75.0 million to be used for the payment of future claims. In addition, the Company provided to the DIR a $225.0 million LOC to collateralize any of the self-insurance workers compensation future obligations in excess of the $75.0 million fund. As of November 27, 2014, the entire fund has been used to pay claims. Prior to January 21, 2014, the California Self Insurers Security Fund also held mortgage liens against the Jewel real estate assets as collateral. On January 21, 2014, the Company entered into a Collateral Substitution Agreement with the California Self-Insurers Security Fund to provide an irrevocable LOC to replace the mortgage liens against the Jewel real estate assets and the previously issued $225.0 million LOC. The amount of the LOC is adjusted semi-annually based on annual filings of an actuarial study reflecting liabilities as of December 31 of each year reduced by claim closures and settlements. The related LOC were $284.1 million and $338.0 million as of June 20, 2015 and February 28, 2015, respectively.
The Company is contingently liable for leases that have been assigned to various third parties, including those in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill its lease obligations. Our recent FTC mandated divestiture transactions involved the sale of 93 leased stores to Haggen. On August 14, 2015, Haggen announced that it intended to close 27 stores, including 20 leased stores, that we sold to it and that it may close or sell additional stores in the future. If Haggen defaults on its lease obligations relating to these stores, the Company could be responsible for the obligations of Haggen under the leases if the leases are not assigned to third parties. The Company does not know whether Haggen will default on its lease obligations to third parties or whether Haggen will be successful in selling the store leases to third-parties. We also do not know what defenses may be available to us, including any loss mitigation obligations of Haggens landlords. As a result, the Company is currently unable to estimate its losses, if any, with respect to its contingent liability with respect to the Haggen leases. With respect to the remainder of the leases the Company assigned to third parties, the Companys total lease assignments continue to remain widely distributed across a number of third parties and involve complex legal factors where there are various remedies available to cure potential lease guarantee obligations. Based on these factors and considerations, the Company has not recorded any liabilities in its Consolidated Balance Sheets associated with potential guarantee obligations.
F-19 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
The Company also provides guarantees, indemnifications and assurances to others in the ordinary course of its business.
Legal Contingencies
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain wage and hour or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where the loss contingency can be reasonably estimated and an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for the Companys exposure in excess of amounts accrued is expected to be immaterial to the Company. It remains possible that despite managements current belief, material differences in actual outcomes or changes in managements evaluation or predictions could arise that could have a material effect on the Companys financial condition, results of operations, or cash flows.
Action against Haggen: Subsequent to the end of the Companys fiscal 2015 first quarter, on June 29, 2015, counsel for Haggen delivered a notice of claims to Albertsons LLC and Albertsons Holdings LLC asserting that those companies had committed fraud and breached the Asset Purchase Agreement under which Haggen purchased 146 divested stores by improperly transferring inventory out of purchased stores, overstocking and understocking inventory, failing to advertise in the ordinary course of business, misusing confidential information and failing to use commercially reasonable efforts to preserve existing relationships. Haggen made no specific monetary demands, but withheld payment of approximately $41.1 million due for purchased inventory at 38 stores on the basis of these allegations. The Company believes that the claims asserted by Haggen are without merit. On July 17, 2015, Albertsons LLC and Albertsons Holdings LLC commenced a lawsuit against Haggen in the Superior Court of Los Angeles County, alleging claims for breach of contract and fraud arising out of Haggens failure to pay the approximately $41.1 million due for the purchased inventory. On July 20, 2015, an essentially identical complaint was filed in the Superior Court of the State of Delaware in and for New Castle County. Haggen has not filed a response to either suit. The withheld proceeds are recorded within Receivables, net in our Condensed Consolidated Balance Sheet. If the Company is unable to prevail in the lawsuit or if it is determined that Haggen is unable to pay the amount due, the Company could be required to impair a portion or all of the receivable.
Appraisal of Safeway Inc.: Certain stockholders of Safeway common stock sought appraisal rights under Section 262 of the Delaware General Corporation Law, requesting a determination that the per share acquisition consideration payable in the acquisition does not represent fair value for their shares. Five separate actions have been filed in Delaware Chancery Court, now consolidated under the title In re Appraisal of Safeway Inc. , by stockholders claiming to hold approximately 17.7 million shares. In May 2015, the Company settled with stockholders holding approximately 14.0 million shares for $621 million plus one Casa Ley contingent value right (CVR) for each Safeway share. The settlement consisted of $487 million ($34.92 per share) of purchase consideration and $134 million of expense, both recorded in fiscal 2014. Of the $621 million, approximately $100 million was paid in fiscal 2014, and the remainder was paid in the first quarter of 2015, including $387 million in acquisition
F-20 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
consideration. Still remaining as petitioners are holders of approximately 3.7 million shares. These remaining petitioners have previously accepted a tender offer of the $34.92 per share acquisition consideration, which stops statutory interest from accruing on that amount of any recovery. A reserve for outstanding appraisal claims has been established by the Company. If the remaining petitioners are successful in the appraisal proceeding, they could be entitled to more for their stock than the per share acquisition consideration payable in the acquisition, plus statutory interest on that additional amount.
Security Breach: On August 14, 2014, AB Acquisition announced that it had experienced a criminal intrusion by installation of malware on a portion of its computer network that processes payment card transactions for retail store locations for its Shaws , Star Market , Acme , Jewel - Osco and Albertsons retail banners. On September 29, 2014, the Company announced that it had experienced a second and separate criminal intrusion. The Company believes these were attempts to collect payment card data. The Company, relying on its IT service provider, SuperValu, took immediate steps to secure the affected part of its network. The Company believes that it has eradicated the malware used in each intrusion. The Company has notified federal law enforcement authorities, the major payment card networks, and its insurance carriers and is cooperating in their efforts to investigate these intrusions. As required by the payment card networks, the Company retained a firm to conduct a forensic investigation into the intrusions. Recently, the firm issued a report for the first intrusion (a copy of which has been provided to the card networks), finding that, although the Companys network had previously been found to be compliant with payment card industry data security standards (PCI DSS), not all of these standards had been met, and this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the first intrusion. A report for the second intrusion is still pending.
The Company believes it is probable that the payment card networks will make claims against the Company following the conclusion of the ongoing forensic investigation and associated analysis. These claims will likely include amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment card networks assert they or their issuing banks have incurred. If the payment card networks assert claims against it, the Company currently intends to dispute those claims and assert available defenses. At the present time, the Company cannot reasonably estimate a range of losses because to date no claims have yet been asserted and because significant factual and legal issues remain unresolved. The Company will continue to evaluate information as it becomes known and will record an estimate of loss when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
As a result of the criminal intrusions, two class action complaints were filed against the Company by consumers and are currently pending, Mertz v. SuperValu Inc. et a l. filed in federal court in the state of Minnesota and Rocke v. SuperValu Inc. et al. filed in federal court in the state of Idaho, alleging deceptive trade practices, negligence and invasion of privacy. Plaintiffs seek unspecified damages. The Judicial Panel on Multidistrict Litigation has consolidated the class actions and transferred the cases to the District of Minnesota. Based on the proceedings to date, the Company is unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
Cicairos, et al / Bluford: On August 18, 2001, a group of truck drivers from Safeways Tracy, California distribution center filed an action in California Superior Court, San Joaquin County entitled Cicairos, et al. v. Summit Logistics , alleging that Summit Logistics, the entity with whom Safeway contracted to operate the distribution center until August 2003, failed to provide meal periods, rest periods and itemized wage statements to the drivers in violation of California state law. Under its contract with Summit, Safeway is obligated to defend and indemnify Summit Logistics in this lawsuit. On February 6, 2007, another group of truck drivers from the Tracy distribution center filed a similar
F-21 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
action in the same court, entitled Bluford, et al. v. Safeway Inc., alleging essentially the same claims against Safeway. After lengthy litigation in the trial and appellate courts, both cases were certified as class actions and assigned to a single judge for all purposes in October 2013. On February 18, 2015, the parties signed a preliminary agreement of settlement that calls for Safeway to pay approximately $31.0 million in total. This amount consists of a settlement fund of $30.2 million, out of which will be paid relief to the class, and attorneys fees and costs as awarded by the court. Safeway will also pay third-party settlement administrator costs, and its employer share of FICA/Medicare taxes. The motion for preliminary approval of the settlement has been granted. Class members were notified of their right to file objections to the settlement or opt out of the settlement. No class members filed an objection or opted out by the June 15, 2015 deadline. The court approved the settlement and entered final judgment on August 4, 2015. If no appeal is filed within 60 days of the final judgment, Safeway will pay the settlement amount in mid-October 2015. At this time, the Company does not believe that financial exposure to loss in excess of the amount accrued is probable.
Drug Enforcement Agency : The Company has received two subpoenas from the Drug Enforcement Administration (DEA) concerning Safeways record keeping, reporting and related practices associated with the loss or theft of controlled substances. The two subpoenas have resulted in essentially a single investigation by the DEA. The Company continues to cooperate with the DEA on this matter.
Newman Development Group of Pottstown : On March 20, 2002, Safeways Genuardis subsidiary was sued by a real estate developer for breach of a lease in the Court of Common Pleas, Chester County (Pa.), in a case entitled Newman Development Group of Pottstown, LLC v. Genuardis Family Markets, Inc. and Safeway Inc. On December 19, 2006, the trial court entered a judgment in favor of Newman in the amount of $0.3 million. On April 25, 2008, the appellate court remanded the case to the trial court for recalculation of damages. On February 25, 2010, the trial court entered a judgment in favor of Newman in the amount of $18.5 million. Safeway appealed, and on March 18, 2011, the appellate court held that Safeway had waived its right to appeal. The Pennsylvania Supreme Court vacated this order on November 1, 2012. On July 29, 2013, an appellate court panel reversed three key elements of the trial courts damages calculation in Safeways favor. On August 19, 2014, a rehearing by the appellate court en banc rejected the panels July 29, 2013 ruling, effectively reinstating the $18.5 million judgment. The Pennsylvania Supreme Court declined to hear Safeways appeal on June 24, 2015. In early July 2015, the Company paid the judgment, and the matter is concluded.
Rodman : On June 17, 2011, a customer of Safeways home delivery business (safeway.com) filed a class action complaint in the United States District Court for the Northern District of California entitled Rodman v. Safeway Inc. , alleging that Safeway had inaccurately represented on its home delivery website that the prices paid there were the same as the prices in the brick-and-mortar retail store. Rodman asserted claims for breach of contract and unfair business practices under California law. The court certified a class for the breach of contract claim, but denied class treatment for the California business practices claims. On Rodmans motion for partial summary judgment, the court held that Rodman had established a prima facie claim for breach of contract, and that Safeway had not effectively cured the breach by revising the language on its website in November 2011. The court noted that its ruling did not address Safeways affirmative defenses or the calculation of damages. On June 19, 2015, the parties filed cross-motions for summary judgment on various liability and damages issues, which motions were heard on July 30, 2015, and decisions are pending. The matter is set for trial on October 5, 2015. Based on proceedings to date, the company is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
F-22 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
Other Commitments
In the ordinary course of business, the Company enters into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.
NOTE 10OTHER COMPREHENSIVE INCOME OR LOSS
Total comprehensive earnings are defined as all changes in members equity during a period, other than those from investments by or distributions to members. Generally, for the Company, total comprehensive income or loss equals net income plus or minus adjustments for pension and other post-retirement liabilities and interest rate swaps. Total comprehensive earnings represent the activity for a period net of tax.
While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period, accumulated other comprehensive income or loss (AOCI) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and interest rate swaps. Changes in the AOCI balance by component are shown below (in millions):
16 weeks ended June 20, 2015 | ||||||||||||||||
Pension and Post-
retirement benefit plan items |
Interest
rate swaps |
Other |
Total Comprehensive
income (loss) |
|||||||||||||
Beginning balance |
$ | 77.1 | $ | (20.6 | ) | $ | 3.1 | $ | 59.6 | |||||||
Other comprehensive (loss) income before reclassifications |
| (16.7 | ) | 0.7 | (16.0 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income |
| 6.1 | | 6.1 | ||||||||||||
Tax benefit (expense) |
| 3.3 | (0.1 | ) | 3.2 | |||||||||||
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Net current-period other comprehensive (loss) income |
| (7.3 | ) | 0.6 | (6.7 | ) | ||||||||||
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Ending balance |
$ | 77.1 | $ | (27.9 | ) | $ | 3.7 | $ | 52.9 | |||||||
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16 weeks ended June 12, 2014 | ||||||||||||||||
Pension and Post-
retirement benefit plan items |
Interest
rate swaps |
Other |
Total
Comprehensive income (loss) |
|||||||||||||
Beginning balance |
$ | 17.8 | $ | | $ | 0.2 | $ | 18.0 | ||||||||
Other comprehensive (loss) income |
| (10.9 | ) | 0.6 | (10.3 | ) | ||||||||||
Tax benefit (expense) |
| 0.7 | (0.3 | ) | 0.4 | |||||||||||
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Net current-period other comprehensive (loss) income |
| (10.2 | ) | 0.3 | (9.9 | ) | ||||||||||
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Ending balance |
$ | 17.8 | $ | (10.2 | ) | $ | 0.5 | $ | 8.1 | |||||||
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F-23 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 11SUBSEQUENT EVENTS
On July 20, 2015, the Company announced that it entered into an agreement to acquire 76 A&P stores in Connecticut, Delaware, Maryland, New Jersey, New York and Pennsylvania under the A&P, Superfresh and Pathmark banners. The offer is subject to customary legal and bankruptcy court approvals, following A&Ps Chapter 11 filing on July 19, 2015. The court has entered a bidding procedures order that requires other bidders to submit their bids by September 11, 2015, with a hearing for court approval of the sale to be held on September 21, 2015 if there are no other qualifying bids or an auction to be held on September 24-25, 2015 if there are other qualifying bids, with a sale hearing to be held on October 7, 2015. The Company expects to fund this acquisition with proceeds from the issuance of long-term debt.
The Company has evaluated subsequent events through August 25, 2015, which is the date of these Condensed Consolidated Financial Statements.
F-24 |
AB ACQUISITION LLC AND SUBSIDIARIES
Page | ||||
Financial Information |
||||
F-26 | ||||
Consolidated Financial Statements: |
||||
Consolidated Balance Sheets as of February 28, 2015 and February 20, 2014 |
F-27 | |||
F-28 | ||||
F-29 | ||||
F-31 | ||||
F-32 |
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management Board of
AB Acquisition LLC:
We have audited the accompanying consolidated balance sheets of AB Acquisition LLC and its subsidiaries (the Company) as of February 28, 2015 and February 20, 2014, and the related consolidated statements of operations and comprehensive (loss) income, cash flows, and members (deficit) equity for the 53 weeks ended February 28, 2015 and the 52 weeks ended February 20, 2014 and February 21, 2013. The financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion . An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 AB Acquisition LLC and subsidiaries as of February 28, 2015 and February 20, 2014, and the results of their operations and their cash flows for the 53 weeks ended February 28, 2015 and the 52 weeks ended February 20, 2014 and February 21, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boise, Idaho
July 7, 2015 | (August 25, 2015 as to the change in the Companys method of accounting for the presentation of debt issuance costs described in Note 1 and as to the effects of the restatement described in Note 2) |
F-26
AB ACQUISITION LLC AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions, except unit amounts)
February 28,
2015 |
February 20,
2014 |
|||||||
ASSETS | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 1,125.8 | $ | 307.0 | ||||
Receivables, net |
631.9 | 296.2 | ||||||
Inventories, net |
4,156.6 | 1,839.9 | ||||||
Prepaid assets |
392.9 | 81.5 | ||||||
Other current assets |
797.5 | 46.0 | ||||||
|
|
|
|
|||||
Total current assets |
7,104.7 | 2,570.6 | ||||||
Property and equipment, net |
12,024.2 | 4,546.7 | ||||||
Intangible assets, net |
4,235.0 | 1,432.8 | ||||||
Goodwill |
1,028.6 | 71.4 | ||||||
Other assets |
1,369.3 | 737.5 | ||||||
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TOTAL ASSETS |
$ | 25,761.8 | $ | 9,359.0 | ||||
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LIABILITIES AND MEMBERS EQUITY | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 2,763.5 | $ | 1,063.9 | ||||
Accrued salaries and wages |
1,136.4 | 383.3 | ||||||
Current maturities of long-term debt and capitalized lease obligations |
624.0 | 56.2 | ||||||
Current portion of self-insurance liability |
311.6 | 200.4 | ||||||
Deferred tax liabilities |
145.4 | 85.4 | ||||||
Taxes other than income taxes |
287.5 | 149.5 | ||||||
Other current liabilities |
933.0 | 92.8 | ||||||
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Total current liabilities |
6,201.4 | 2,031.5 | ||||||
Long-term debt and capitalized lease obligations |
11,945.0 | 3,638.0 | ||||||
Deferred income taxes |
1,790.8 | 45.2 | ||||||
Long-term self-insurance liability |
1,133.7 | 809.3 | ||||||
Other long-term liabilities |
2,522.4 | 1,075.4 | ||||||
Commitments and contingencies |
||||||||
Members equity: |
||||||||
Tracking units, 300,000,000 units issued and 297,188,332 outstanding each of ABS, NAI and Safeway units as of February 28, 2015 and 127,799,410 units issued and outstanding each of ABS and NAI units as of February 20, 2014 |
| | ||||||
Residual units, 14,907,871 units issued and outstanding of convertible Investor incentive units as of February 28, 2015 and 2,641,428 units issued and no units outstanding of Class C units as of February 20, 2014 |
| | ||||||
Members investment |
1,848.7 | 256.2 | ||||||
Accumulated other comprehensive income |
59.6 | 18.0 | ||||||
Retained earnings |
260.2 | 1,485.4 | ||||||
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Total members equity |
2,168.5 | 1,759.6 | ||||||
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TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 25,761.8 | $ | 9,359.0 | ||||
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The accompanying notes are an integral part of these Consolidated Financial Statements.
F-27
AB ACQUISITION LLC AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive (Loss) Income
($ in millions, except per unit amounts)
53 weeks ended
February 28, 2015 |
52 weeks ended
February 20, 2014 |
52 weeks ended
February 21, 2013 |
||||||||||
Net sales and other revenue |
$ | 27,198.6 | $ | 20,054.7 | $ | 3,712.0 | ||||||
Cost of sales |
19,695.8 | 14,655.7 | 2,774.3 | |||||||||
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Gross profit |
7,502.8 | 5,399.0 | 937.7 | |||||||||
Selling and administrative expenses |
8,152.2 | 5,874.1 | 899.0 | |||||||||
Bargain purchase gain |
| (2,005.7 | ) | | ||||||||
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Operating (loss) income |
(649.4 | ) | 1,530.6 | 38.7 | ||||||||
Interest expense |
633.2 | 390.1 | 7.2 | |||||||||
Other expense, net |
96.0 | | | |||||||||
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(Loss) income from continuing operations before income taxes |
(1,378.6 | ) | 1,140.5 | 31.5 | ||||||||
Income tax (benefit) expense |
(153.4 | ) | (572.6 | ) | 1.7 | |||||||
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(Loss) income from continuing operations |
(1,225.2 | ) | 1,713.1 | 29.8 | ||||||||
Income from discontinued operations, net of tax |
| 19.5 | 49.2 | |||||||||
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Net (loss) income |
$ | (1,225.2 | ) | $ | 1,732.6 | $ | 79.0 | |||||
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Other comprehensive (loss) income: |
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Loss on interest rate swaps, net of tax |
(20.6 | ) | | | ||||||||
Recognition of pension income, net of tax |
59.3 | 17.8 | | |||||||||
Other |
2.9 | 0.2 | | |||||||||
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Comprehensive (loss) income |
$ | (1,183.6 | ) | $ | 1,750.6 | $ | 79.0 | |||||
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The accompanying notes are an integral part of these Consolidated Financial Statements.
F-28
AB ACQUISITION LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in millions)
53 weeks ended
February 28, 2015 |
52 weeks ended
February 20, 2014 |
52 weeks ended
February 21, 2013 |
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Cash flows from operating activities: |
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Net (loss) income |
$ | (1,225.2 | ) | $ | 1,732.6 | $ | 79.0 | |||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||||||
Net loss (gain) on property dispositions, asset impairment and lease exit costs |
227.7 | (2.4 | ) | (45.6 | ) | |||||||
Depreciation and amortization |
718.1 | 676.4 | 16.9 | |||||||||
LIFO expense |
43.1 | 11.6 | 2.1 | |||||||||
Deferred income tax |
(170.1 | ) | (657.6 | ) | | |||||||
Pension and post-retirement benefits expense |
8.8 | 8.1 | | |||||||||
Contributions to pension and post-retirement benefit plans |
(272.3 | ) | (15.7 | ) | | |||||||
Loss on interest rate swaps and commodity hedges, net |
98.2 | | | |||||||||
Amortization and write-off of debt issuance costs |
65.3 | 25.1 | 1.2 | |||||||||
Bargain purchase gain |
| (2,005.7 | ) | | ||||||||
Loss on debt extinguishment |
| 49.1 | | |||||||||
Non-cash equity-based compensation expense |
344.1 | 6.2 | | |||||||||
Other |
36.5 | 19.7 | | |||||||||
Changes in operating assets and liabilities, net of effects of acquisition of businesses: |
||||||||||||
Receivables, net |
(8.5 | ) | 11.0 | (11.4 | ) | |||||||
Inventories, net |
(52.4 | ) | (39.6 | ) | 15.3 | |||||||
Accounts payable, accrued salaries and wages and other accrued liabilities |
184.0 | 304.9 | (19.5 | ) | ||||||||
Self-insurance liabilities |
(195.0 | ) | (127.9 | ) | (2.5 | ) | ||||||
Other operating assets and liabilities |
32.6 | 53.7 | (3.0 | ) | ||||||||
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Net cash (used in) provided by operating activities |
(165.1 | ) | 49.5 | 32.5 | ||||||||
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Cash flows from investing activities: |
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Business acquisitions, net of cash acquired |
(5,673.4 | ) | (463.9 | ) | | |||||||
Purchases of property and equipment |
(328.2 | ) | (128.2 | ) | (28.7 | ) | ||||||
Proceeds from sale of assets |
23.4 | 58.9 | 45.2 | |||||||||
Changes in restricted cash |
39.3 | (246.0 | ) | | ||||||||
Other |
(6.1 | ) | (2.3 | ) | 4.3 | |||||||
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Net cash (used in) provided by investing activities |
(5,945.0 | ) | (781.5 | ) | 20.8 | |||||||
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F-29 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in millions)
53 weeks ended
February 28, 2015 |
52 weeks ended
February 20, 2014 |
52 weeks ended
February 21, 2013 |
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Cash flows from financing activities: |
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Proceeds from issuance of long-term debt |
$ | 8,097.0 | $ | 2,485.0 | $ | 55.0 | ||||||
Payments on short-term borrowings related to business acquisition |
| (44.3 | ) | | ||||||||
Payments on long-term borrowings |
(2,123.6 | ) | (923.3 | ) | (75.0 | ) | ||||||
Repurchase of debt under tender offer |
| (619.9 | ) | | ||||||||
Payments of obligations under capital leases |
(64.1 | ) | (24.5 | ) | (0.7 | ) | ||||||
Payments for debt financing costs |
(229.1 | ) | (121.0 | ) | (6.9 | ) | ||||||
Proceeds from member contributions |
1,283.2 | 250.0 | | |||||||||
Members distribution |
(34.5 | ) | | (50.0 | ) | |||||||
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Net cash provided by (used in) financing activities |
6,928.9 | 1,002.0 | (77.6 | ) | ||||||||
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Net increase (decrease) in cash and cash equivalents |
818.8 | 270.0 | (24.3 | ) | ||||||||
Cash and cash equivalents at beginning of period |
307.0 | 37.0 | 61.3 | |||||||||
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Cash and cash equivalents at end of period |
$ | 1,125.8 | $ | 307.0 | $ | 37.0 | ||||||
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Supplemental cash flow information: |
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Non-cash investing and financing activities were as follows: |
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Capital lease obligations |
$ | 23.7 | $ | 6.0 | $ | | ||||||
Purchases of property and equipment included in accounts payable |
109.1 | 11.7 | 3.0 | |||||||||
Interest and income taxes paid: |
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Interest paid (net of amount capitalized) |
581.4 | 283.0 | 5.0 | |||||||||
Income taxes (refunded) paid |
(21.5 | ) | 40.8 | 2.0 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-30
AB ACQUISITION LLC AND SUBSIDIARIES
Consolidated Statements of Members (Deficit) Equity
(in millions, except units)
Tracking group | Residual group | |||||||||||||||||||||||||||||||||||
ABS units | NAI units |
Safeway
units |
Class C
units |
Investor
incentive units |
Members
investment |
Accumulated
other comprehensive income |
Accumulated
(deficit)/ Retained earnings |
Total
members (deficit) equity |
||||||||||||||||||||||||||||
Balance at February 23, 2012 |
69,708,763 | | | | | $ | | $ | | $ | (276.2 | ) | $ | (276.2 | ) | |||||||||||||||||||||
Net income |
| | 79.0 | 79.0 | ||||||||||||||||||||||||||||||||
Members distributions |
| | (50.0 | ) | (50.0 | ) | ||||||||||||||||||||||||||||||
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Balance at February 21, 2013 |
69,708,763 | | | | | | | (247.2 | ) | (247.2 | ) | |||||||||||||||||||||||||
Issuance of tracking units to existing members |
69,708,763 | | | | | |||||||||||||||||||||||||||||||
Proceeds from issuance of tracking units |
58,090,647 | 58,090,647 | 250.0 | | | 250.0 | ||||||||||||||||||||||||||||||
Equity-based compensation |
6.2 | | 6.2 | |||||||||||||||||||||||||||||||||
Net income |
| | 1,732.6 | 1,732.6 | ||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
| 18.0 | | 18.0 | ||||||||||||||||||||||||||||||||
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|||||||||||||||||||
Balance at February 20, 2014 |
127,799,410 | 127,799,410 | | | | 256.2 | 18.0 | 1,485.4 | 1,759.6 | |||||||||||||||||||||||||||
Vesting of Class C units |
2,641,428 | | | | | |||||||||||||||||||||||||||||||
Exchange of Class C units for tracking units |
2,641,428 | 2,641,428 | (2,641,428 | ) | | | | | ||||||||||||||||||||||||||||
Equity-based compensation |
78.4 | | | 78.4 | ||||||||||||||||||||||||||||||||
Issuance of investor incentive units for services |
14,907,871 | 265.7 | | | 265.7 | |||||||||||||||||||||||||||||||
Proceeds from issuance of tracking units to management |
4,309,128 | 4,309,128 | 33.2 | | | 33.2 | ||||||||||||||||||||||||||||||
Proceeds from issuance of tracking units |
162,438,366 | 162,438,366 | 1,250.0 | | | 1,250.0 | ||||||||||||||||||||||||||||||
Issuance of Safeway tracking units to existing members |
297,188,332 | | | | | |||||||||||||||||||||||||||||||
Net loss |
| | (1,225.2 | ) | (1,225.2 | ) | ||||||||||||||||||||||||||||||
Members distribution |
(34.5 | ) | | | (34.5 | ) | ||||||||||||||||||||||||||||||
Other member activity |
(0.3 | ) | | | (0.3 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
| 41.6 | | 41.6 | ||||||||||||||||||||||||||||||||
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Balance at February 28, 2015 |
297,188,332 | 297,188,332 | 297,188,332 | | 14,907,871 | $ | 1,848.7 | $ | 59.6 | $ | 260.2 | $ | 2,168.5 | |||||||||||||||||||||||
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|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-31
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
AB Acquisition LLC and its subsidiaries (the Company) is a food and drug retailer that, as of February 28, 2015, operated 2,382 retail food and drug stores together with 390 associated fuel centers, 30 dedicated distribution centers and 21 manufacturing facilities. The Company is composed of retail food businesses and in-store pharmacies with operations primarily located throughout the United States under the banners Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs Quality Centers, United Supermarkets, Market Street, Amigos, United Express, Sav-On, Jewel-Osco, ACME, Shaws and Star Market. The Company also owns and operates GroceryWorks.com Operating Company, LLC, an online grocery channel, doing business under the names Safeway.com and Vons.com. The Company also has a 49% ownership in Casa Ley, S.A. de C.V. (Casa Ley), which operates 206 food and general merchandise stores in Western Mexico. AB Acquisition LLC has no separate assets or liabilities other than the investments in its subsidiaries and all its business operations are conducted through its operating subsidiaries. The Company is owned by a consortium of investors led by Cerberus Capital Management, L.P. (Cerberus).
On January 30, 2015, the Company, through a subsidiary, Albertsons Holdings LLC (Albertsons), acquired Safeway Inc. (Safeway) pursuant to an Agreement and Plan of Merger dated as of March 6, 2014, as amended April 7, 2014 and June 13, 2014 (the Merger Agreement), under which Albertsons acquired all of the outstanding shares of Safeway (the Safeway acquisition). Safeway operated 1,325 supermarkets under the banners Safeway, Vons, Pavilions, Randalls, Tom Thumb and Carrs Quality Centers.
On December 29, 2013, the Company acquired United Supermarkets, LLC (United). United operated 51 supermarkets under the banners United Supermarkets, Market Street, Amigos and United Express. On March 21, 2013, the Company acquired from SUPERVALU INC. (SuperValu) all of the issued and outstanding shares of New Albertsons, Inc. (NAI) through a newly formed subsidiary of the Company, NAI Holdings LLC (the NAI acquisition). NAI operated 871 supermarkets under the banners Jewel-Osco, ACME, Shaws, Star Market and Albertsons. Prior to the NAI acquisition, the Company owned 192 supermarkets under the Albertsons banner and two distribution centers operating within certain geographical markets.
Basis of Presentation
The Companys Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Intercompany transactions and accounts have been eliminated in consolidation for all periods presented. The Companys investment in Casa Ley is reported using the equity method.
Significant Accounting Policies
Fiscal year: In connection with the Safeway acquisition, the Company elected to change its fiscal year from the Thursday before the last Saturday in February to the last Saturday in February. Unless the context otherwise indicates, reference to a fiscal year of the Company refers to the calendar year in which such fiscal year commences. The Companys first quarter consists of 16 weeks, and the second, third and fourth quarters generally each consist of 12 weeks. For the fiscal year ended February 28, 2015, the fourth quarter consisted of 13 weeks, and the fiscal year consisted of 53 weeks. For each of the prior years presented, the fiscal year consisted of 52 weeks.
F-32 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Use of estimates: The preparation of the Companys Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that 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 for the reporting periods presented. Certain estimates require difficult, subjective or complex judgments about matters that are inherently uncertain. Actual results could differ from those estimates.
Cash and cash equivalents: Cash equivalents include all highly liquid investments with original maturities of three months or less at the time of purchase and outstanding deposits related to credit and debit card sales transactions that settle within a few days. Amounts classified as Cash and cash equivalents for credit and debit card transactions were $299.2 million and $53.4 million as of February 28, 2015 and February 20, 2014, respectively.
Restricted cash: Restricted cash primarily relates to collateralized surety bonds and letters of credit. The Company had $270.2 million and $246.0 million of restricted cash included in Other assets within the Consolidated Balance Sheets as of February 28, 2015 and February 20, 2014, respectively.
Receivables, net: Receivables consist primarily of trade accounts receivable, pharmacy accounts receivable and vendor receivables. Management makes estimates of the uncollectibility of its accounts receivable. In determining the adequacy of the allowances for doubtful accounts, management analyzes the value of collateral, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments, estimations and assumptions based on the information considered and could result in a further adjustment of receivables. The allowance for doubtful accounts and bad debt expenses were not material for any of the periods presented.
Inventories, net: Substantially all of the Companys inventories consist of finished goods valued at the lower of cost or market and net of vendor allowances.
As of February 28, 2015 and February 20, 2014, approximately 84.5% and 91.7%, respectively, of the Companys inventories were valued under the last-in, first-out (LIFO) method. The Company primarily uses the item-cost or the retail inventory method to determine inventory cost before application of any LIFO adjustment. Under the item-cost method, the most recent purchase cost is used to determine the cost of inventory before the application of any LIFO adjustment. Under the retail inventory method, inventory cost is determined, before the application of any LIFO adjustment, by applying a cost-to-retail ratio to various categories of similar items to the retail value of those items. Replacement or current cost was higher than the carrying amount of inventories valued using LIFO by $92.3 million and $49.2 million at February 28, 2015 and February 20, 2014, respectively.
Cost for the remaining inventories, which represents perishable, pharmacy and fuel inventories, was determined using the most recent purchase cost, which approximates the first-in, first-out (FIFO) method. Perishables are counted every four weeks and are carried at the last purchased cost which approximates FIFO cost. Pharmacy and fuel inventories are carried at the last purchased cost, which approximates FIFO cost. The Company records inventory shortages based on actual physical counts at its facilities and also provides allowances for inventory shortages for the period between the last physical count and the balance sheet date.
F-33 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property and equipment, net: Property and equipment is recorded at cost or fair value for assets acquired as part of a business combination, and depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally as follows: buildingsseven to 40 years; leasehold improvementsthe shorter of the remaining lease term or ten to 20 years; fixtures and equipmentthree to 15 years; specialized supply chain equipmentsix to 25 years.
Assets under capital leases are recorded at the lower of the present value of the future minimum lease payments or the fair value of the asset and are amortized on the straight-line method over the lesser of the lease term or the estimated useful life. Interest capitalized on property under construction was immaterial for all periods presented.
Impairment of long-lived assets: The Company regularly reviews its individual stores operating performance, together with current market conditions, for indicators of impairment. When events or changes in circumstances indicate that the carrying value of the individual stores assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, the Company recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Losses on long-lived asset impairments are recorded as a component of Selling and administrative expenses.
Lease exit costs: The Company records a liability for costs associated with closures of retail stores, distribution centers and other properties that are no longer utilized in current operations. For properties that have closed and are under long-term lease agreements, the present value of any remaining liability under the lease, net of estimated sublease recovery and discounted using credit adjusted risk-free rates, is recognized as a liability and charged to Selling and administrative expenses. These lease liabilities are usually paid over the lease terms associated with the property. Adjustments to lease exit reserves primarily relate to changes in subtenant income or actual exit costs that differ from original estimates. Lease exit reserves for closed properties are included as a component of Other current liabilities and Other long-term liabilities.
Intangible assets, net: The Company reviews intangible assets with indefinite useful lives and tests for impairment annually on the first day of the fourth quarter and also if events or changes in circumstances indicate the occurrence of a triggering event. The review consists of comparing the estimated fair value of the cash flows generated by the asset to the carrying value of the asset. The Company reviews finite-lived intangible assets for impairment in accordance with its policy for long-lived assets. Intangible assets with indefinite useful lives consist of restricted covenants and liquor licenses. Intangible assets with finite lives consist primarily of trade names, naming rights, customer prescription files, internally developed software and beneficial lease rights. Intangible assets with finite lives are amortized on a straight-line basis over an estimated economic life ranging from three to 40 years. Customer prescription files are being amortized on a straight-line basis over a five-year useful life, which management believes is reflective of the economic life of the related assets. Beneficial lease rights and unfavorable lease obligations are recorded on acquired leases based on the differences between the contractual rents for the remaining lease terms under the respective lease agreement and prevailing market rents for the related geography as of the lease acquisition date. Beneficial lease rights and unfavorable lease obligations are amortized over the lease term using the straight-line method.
F-34 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Goodwill: Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired as of the acquisition date. The Company reviews goodwill for impairment annually on the first day of the fourth quarter and also if events or changes in circumstances indicate the occurrence of a triggering event. The impairment test is a two-step process. In the first step, the Company determines if the fair value of the reporting unit is less than the book value. If the Company concludes that the fair value of a reporting unit is less than its book value, the Company must perform step two in which it calculates the implied fair value of goodwill and compares it to carrying value. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment. If the Company concludes that the fair value of a reporting unit is greater than its book value, step two is not performed, and the Company concludes that there is no goodwill impairment. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Generally, fair value is determined by a multiple of earnings based on the guideline publicly traded business method or discounting projected future cash flows based on managements expectations of the current and future operating environment. There were no goodwill impairment charges recorded for any periods presented.
Company-Owned life insurance policies (COLI): The Company has COLI policies that have a cash surrender value. The Company has loans against these policies. The Company has no intention of repaying the loans prior to maturity or cancellation of the policies. Therefore, the Company offsets the cash surrender value by the related loans. As of February 28, 2015 and February 20, 2014, the cash surrender values of the policies were $194.7 million and $134.7 million, and the balance of the policy loans were $120.0 million and $77.7 million, respectively. The net balance of the COLI is included in Other assets.
Interest rate risk management: The Company has entered into several interest rate swap contracts (Swaps) to hedge against the variability in cash flows relating to interest payments on its outstanding variable rate term debt. Swaps are recognized in the Consolidated Balance Sheets at fair value. Changes in the fair value of Swaps designated as cash flow hedges, to the extent the hedges are highly effective, are recorded in Other comprehensive income (loss), net of income taxes. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income (loss) is reclassified into current period earnings when the hedged transaction affects earnings. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.
Energy contracts: The Company has entered into contracts to purchase electricity and natural gas at fixed prices for a portion of its energy needs. The Company expects to take delivery of the electricity and natural gas in the normal course of business. Contracts that qualify for the normal purchase exception under derivatives and hedging accounting guidance are not recorded at fair value. Energy purchased under these contracts is expensed as delivered. The Company also manages its exposure to changes in energy prices utilized in the shipping process through the use of short-term heating oil derivative contracts used to hedge diesel fuel. These contracts are economic hedges of price risk and are not designated or accounted for as hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in earnings.
Self-Insurance liabilities : The Company is primarily self-insured for workers compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The
F-35 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company has established stop-loss amounts that limit the Companys further exposure after a claim reaches the designated stop-loss threshold. In determining its self-insurance liabilities, the Company performs a continuing review of its overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.
As a part of the Safeway acquisition and NAI acquisition, the Company assumed outstanding self-insurance liabilities. Under the acquisition method of accounting, these assumed liabilities were recorded on the acquisition dates of Safeway and NAI at fair values of $613.5 million and $1,082.9 million, respectively. Subsequent to the acquisitions, the Company measures and accounts for the assumed self-insurance liabilities using a systematic and rational approach, which considers actual claims experience in each period compared to total expected claims over the estimated remaining life of the claims.
The Company has deposits with its insurers to fund workers compensation and automobile and general liability claims payments. The Company had $12.9 million and $14.9 million of deposits for its workers compensation and automobile liability claims as of February 28, 2015, and February 20, 2014, respectively, included in Other assets. The Company has reinsurance receivables of $30.4 million and $24.3 million recorded within Receivables, net and $70.8 million and $76.5 million recorded within Other assets as of February 28, 2015 and February 20, 2014, respectively. The self-insurance liabilities and related reinsurance receivables are recorded gross.
Changes in self-insurance liabilities consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Beginning balance |
$ | 1,009.7 | $ | 52.5 | $ | 55.0 | ||||||
Assumed liabilities from acquisitions |
613.5 | 1,082.9 | | |||||||||
Expense |
157.7 | 128.6 | 14.2 | |||||||||
Claim payments |
(205.3 | ) | (192.3 | ) | (16.7 | ) | ||||||
Other reductions(1) |
(130.3 | ) | (62.0 | ) | | |||||||
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|||||||
Ending balance |
1,445.3 | 1,009.7 | 52.5 | |||||||||
Less current portion |
(311.6 | ) | (200.4 | ) | (16.8 | ) | ||||||
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Long-term portion |
$ | 1,133.7 | $ | 809.3 | $ | 35.7 | ||||||
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|
(1) | Primarily reflects the systematic adjustments to the fair value of the assumed self-insurance liabilities from acquisitions and actuarial adjustments for claims experience. |
Deferred rents: The Company recognizes rent holidays, from the period of time the Company has possession of the property, as well as tenant allowances and escalating rent provisions, on a straight-line basis over the expected term of the operating lease. The expected term may also include the exercise of renewal options if such exercise is determined to be reasonably assured and is used to determine whether the lease is capital or operating. Certain leases call for payment of executory costs, such as property taxes, utilities, insurance and maintenance costs. Deferred rents are included in Other current liabilities and Other long-term liabilities.
Deferred gains on leases: The Company may receive up-front funds upon sublease or assignment of existing leases. Deferred gains related to subleases and assignments as of February 28, 2015 and February 20, 2014 were $12.9 million and $12.5 million, respectively, recorded
F-36 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in Other current liabilities, and $72.7 million and $82.8 million, respectively, recorded in Other long-term liabilities. These proceeds are amortized on a straight-line basis over an estimated sublease term as rent income and were $12.6 million for fiscal 2014, and $12.5 million for both fiscal 2013 and 2012.
In addition, deferred gains have been recorded in connection with several sale-leaseback transactions and are recognized over the lives of the leases. The current portion of deferred gains related to sale-leaseback transactions at February 28, 2015 and February 20, 2014 were $12.5 million and $13.4 million, respectively, recorded in Other current liabilities, with the long-term portion of $183.3 million and $209.6 million at February 28, 2015 and February 20, 2014, respectively, recorded in Other long-term liabilities. Amortization of deferred gains related to sale-leaseback transactions were $13.4 million for fiscal 2014, 2013 and 2012, respectively, and is recorded as a reduction in rent expense.
Benefit plans: Substantially all of the Companys employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to dedicated defined benefit plans for Safeway, Shaws and United employees. Certain employees participate in a long-term retention incentive bonus plan. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by the Company. The Company also provides certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement.
The Company recognizes a liability for the under-funded status of the defined benefit plans as a component of Other long-term liabilities. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive income (loss). The determination of the Companys obligation and related expense for its sponsored pensions and other post-retirement benefits is dependent, in part, on managements selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets. Pension expense for the multiemployer plans is recognized as contributions are funded.
Revenue recognition : Revenues from the sale of products are recognized at the point of sale to the customer, net of returns and sales tax. Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Discounts provided to customers by vendors, usually in the form of coupons, are not recognized as a reduction in sales, provided the coupons are redeemable at any retailer that accepts coupons. The Company recognizes revenue and records a corresponding receivable from the vendor for the difference between the sales prices and the cash received from the customer. The Company records a deferred revenue liability when it sells its own proprietary gift cards. The Company records a sale when the customer redeems the gift card. The gift cards do not expire. The Company reduces the liability and records revenue for the unused portion of gift cards (breakage) after two to five years, the period at which redemption is considered remote. Breakage amounts were immaterial for fiscal 2014, 2013 and 2012, respectively.
Cost of sales and vendor allowances: Cost of sales includes, among other things, purchasing, inbound freight costs, product quality testing costs, warehousing costs, internal transfer costs, advertising costs, private label program costs and strategic sourcing program costs.
The Company receives vendor allowances or rebates (Vendor Allowances) for a variety of merchandising initiatives and buying activities. The terms of the Companys Vendor Allowances arrangements vary in length but are primarily expected to be completed within a quarter. The Company records Vendor Allowances as a reduction of Cost of sales when the associated products are sold.
F-37 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Vendor Allowances that have been earned as a result of completing the required performance under terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The reduction of inventory for these Vendor Allowances was $92.0 million and $45.3 million as of February 28, 2015 and February 20, 2014, respectively.
Advertising costs are included in Cost of sales and are expensed in the period the advertising occurs. Cooperative advertising funds are recorded as a reduction of Cost of sales when the advertising occurs. Advertising costs were $239.9 million, $192.4 million, and $45.5 million, net of cooperative advertising allowances of $16.9 million, $11.5 million, and $2.1 million for fiscal 2014, 2013, and 2012 respectively.
Selling and administrative expenses: Selling and administrative expenses consist primarily of store and corporate employee-related costs such as salaries and wages, health and welfare, workers compensation and pension benefits, as well as marketing and merchandising, rent, occupancy and operating costs, amortization of intangibles and other administrative costs.
Equity-Based employee compensation: The Company has granted membership interests to employees and non-employees and accounts for these awards in accordance with the applicable accounting guidance for equity awards issued to employees and non-employees.
Employee awards are recorded under the provisions of ASC 718, CompensationStock Compensation with equity-based compensation expense measured at the grant date, based on the fair value of the award. As required under this guidance, the Company estimates forfeitures for equity-based grants which are not expected to vest. The Company recognizes compensation expense over the requisite vesting period of the award. The Company recognizes compensation expense for equity-based awards subject to a performance vesting condition when achieving the performance condition becomes probable. Changes in inputs and assumptions used to calculate the fair value of equity-based payments can materially affect the measurement of the estimated fair value of the Companys equity-based compensation expense.
The Company measures equity-based compensation to non-employees in accordance with ASC 505-50 Equity-Based Payments to Non-Employees (ASC 505) and recognizes the fair value of the award over the period the services are rendered or goods are provided.
Net (Loss) Income Per Unit (EPU) : The Company has two classes of common units: tracking units and residual units. The tracking units include ABS, NAI and Safeway Units (collectively referred to as the Tracking Group) and residual units including Class C Units, Investor Incentive Units and Series-1 Incentive Units (collectively referred to as the Residual Group). EPU is calculated separately for the Tracking Group and for the Residual Group using the two-class method.
Basic (loss) income per unit (Basic EPU) is computed by dividing net (loss) income attributable to the Tracking Group unit-holders and Residual Group unitholders by the weighted average number of Tracking Group and Residual Group units outstanding, respectively, for the period. Diluted (loss) income per unit (Diluted EPU) gives effect to all dilutive potential tracking units and residual units outstanding during the period using the treasury stock method. Diluted EPU excludes all potentially dilutive units if the effect of their inclusion is anti-dilutive. Diluted EPU is computed by dividing net income (loss) attributable to the Tracking Group unitholders and Residual Group unitholders by the weighted average number of units outstanding, respectively, plus, where applicable, units that would have been outstanding related to dilutive units secured by member loans for the Tracking Group and Class C Units, Investor Incentive Units and Series-1 Incentive Units for the Residual Group.
F-38 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income taxes: The Company is organized as a limited liability company, taxed as a partnership which generally is not subject to entity-level tax. The income taxes in respect to these operations are payable by the equity members in accordance with their respective ownership percentages. The Company conducts the operations of its Safeway, NAI and United operations through Subchapter C Corporations. The Company provides for federal and state income taxes on its Subchapter C Corporations, which are subject to entity-level tax, and state income taxes on its limited liability companies where applicable.
Deferred taxes are provided for the net tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred income taxes are reported as a current or noncurrent asset or liability based on the classification of the related asset or liability according to the expected date of reversal. Valuation allowances are established where management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company reviews tax positions taken or expected to be taken on tax returns to determine whether and to what extent a tax benefit can be recognized. The Company evaluates its positions taken and establishes liabilities in accordance with the applicable accounting guidance for uncertain tax positions. The Company reviews these liabilities as facts and circumstances change and adjusts accordingly. The Company recognizes any interest and penalties associated with uncertain tax positions as a component of Income tax expense.
The Company is contractually indemnified by SuperValu for any tax liability of NAI arising from tax years prior to the NAI acquisition. The Company is also contractually obligated to pay SuperValu any tax benefit it receives in a tax year after the NAI acquisition as a result of an indemnification payment made by SuperValu. An indemnification asset and liability, where necessary, has been recorded to reflect this arrangement.
Segments : The Company and its subsidiaries operate food and drug retail stores that offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services. The Companys retail operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance and are reported in one reportable segment. The Companys operating segments and reporting units are its 14 divisions, which have been aggregated into one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Across all operating segments, the Company operates primarily one store format. Each store offers the same general mix of products with similar pricing to similar categories of customers, have similar distribution methods, operate in similar regulatory environments and purchase merchandise from similar or the same vendors. Except for an equity method investment in Casa Ley, all of the Companys retail operations are domestic.
F-39 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table represents sales revenue by type of similar product (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | |||||||||||||||||||
Non-perishables(1) |
$ | 12,906.1 | 47.5 | % | $ | 9,956.4 | 49.7 | % | $ | 1,836.0 | 49.5 | % | ||||||||||||
Perishables(2) |
11,043.8 | 40.6 | % | 7,842.3 | 39.1 | % | 1,441.3 | 38.8 | % | |||||||||||||||
Pharmacy |
2,602.9 | 9.6 | % | 2,019.4 | 10.1 | % | 393.1 | 10.6 | % | |||||||||||||||
Fuel |
387.4 | 1.4 | % | 46.9 | 0.2 | % | | | % | |||||||||||||||
Other(3) |
258.4 | 0.9 | % | 189.7 | 0.9 | % | 41.6 | 1.1 | % | |||||||||||||||
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Total |
$ | 27,198.6 | 100.0 | % | $ | 20,054.7 | 100.0 | % | $ | 3,712.0 | 100.0 | % | ||||||||||||
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(1) | Consists primarily of general merchandise, grocery and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, deli, floral and seafood. |
(3) | Consists primarily of lottery and various other commissions and other miscellaneous income. |
Recently Adopted Accounting Standards: In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The Company adopted ASU 2013-11 in the first quarter of fiscal 2014, which resulted in a decrease of $132.5 million to the unrecognized tax benefit and an offsetting decrease to the long-term deferred tax asset.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This pronouncement changes the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results when any of certain criteria are met. Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group is eligible for discontinued operations. Certain disclosure requirements relating to discontinued operations are also updated in this pronouncement. ASU 2014-08 is effective for fiscal years beginning after December 15, 2014. Early adoption is allowed for discontinued operations that have not been previously reported. The Company early adopted this standard, effective February 21, 2014. The adoption of this standard did not have a material impact on the Companys financial position, results of operations and related disclosures for the fiscal year 2014.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The objective of this ASU is to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented
F-40 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 for publicly traded companies and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company early adopted ASU 2015-03 as of March 1, 2015. As a result of the adoption, the Company retrospectively reclassified $187.8 million and $47.7 million of unamortized debt issuance costs as of February 28, 2015 and February 20, 2014, respectively, from Other assets to a reduction in long-term debt. The adoption did not have an impact on the Companys Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows.
Recently Issued Accounting Standards: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1) identify the contract(s) with a customer, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, this pronouncement is effective for annual reporting periods beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the impact of this pronouncement.
In April 2015, the FASB issued ASU 2015-04, CompensationRetirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employers Defined Benefit Obligation and Plan Assets . This ASU gives an employer whose fiscal year-end does not coincide with a calendar month-end (e.g., an entity that has a 52- or 53-week fiscal year) the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. This amendment is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The Company is currently evaluating the impact of this ASU.
Note 2Acquisitions
Safeway acquisition
On January 30, 2015, the Company completed its acquisition of Safeway by acquiring all of the outstanding shares of Safeway for cash consideration of $34.92 per share, or $8,263.5 million, and issuing contingent value rights of $1.0266 and $0.0488 per share relating to Safeways 49% interest in Casa Ley and deferred consideration related to Safeways previous sale of the Property Development Centers, LLC (PDC) assets, respectively, for an aggregate fair value of $270.9 million. The Casa Ley contingent value right will entitle the holder to a pro rata share of the net proceeds from the sale of Casa Ley. In the event that Casa Ley is not sold prior to January 30, 2018, holders of the Casa Ley contingent value rights will be entitled to receive their pro rata portion of the fair market value of such remaining interest minus certain fees, expenses and assumed taxes that would have been deducted from the proceeds of a sale of Casa Ley. The PDC contingent value right will entitle the holder to a pro rata share of the net proceeds from any deferred consideration relating to the previous sale of the PDC assets. At the time of the acquisition, Safeway operated 1,325 supermarkets under the banners Safeway, Vons, Pavilions, Randalls, Tom Thumb and Carrs Quality Centers, with an extensive network of distribution, manufacturing and food processing facilities. Safeway also owned and operated GroceryWorks.com Operating Company, LLC an online grocery channel. The acquisition was financed through a combination of debt financing and equity contributions from existing members.
F-41 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Safeway acquisition allows the Company to expand into various new and existing markets and provides the Company access to a broad range of brands and own brand products. The acquisition was accounted for under the acquisition method of accounting. In a business combination, the purchase price is allocated to the fair values of the identifiable assets and liabilities, with any excess of purchase price over the fair value recognized as goodwill. The fair values of the identifiable assets and liabilities assumed were based on the Companys estimates and assumptions using various market, income and cost valuation approaches. The following table summarizes the assets acquired and liabilities assumed at the date of the Safeway acquisition (in millions):
The above amounts represent the Companys allocation of purchase price. The goodwill recorded of $957.2 million is primarily attributable to the operational and administrative synergies expected to arise from the acquisition. The acquisition is treated as a stock purchase for income tax purposes, and the assets acquired and liabilities assumed as part of the acquisition did not result in a step up of tax basis, and goodwill is not deductible for tax purposes. Third-party acquisition-related costs of $110.5 million in fiscal 2014 and $5.9 million in fiscal 2013 were expensed as incurred as a component of Selling and administrative expenses.
F-42 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As part of the Safeway acquisition, the Company assumed long-term debt and long-term capital lease obligations with fair values of $2,470.3 million and $514.2 million, respectively. Immediately following the acquisition, the Company redeemed $864.6 million of assumed debt and paid accrued interest and breakage fees of $8.6 million.
Safeway contributed revenues of $2,696.0 million and an operating loss of $184.2 million for the period from January 31, 2015 to February 28, 2015.
Unaudited Supplemental Pro Forma Information
The pro forma financial information as presented below is for informational purposes only and is not indicative of operations that would have been achieved from the Safeway acquisition had they occurred at the beginning of fiscal 2013. The pro forma results exclude the results of operations for the divested stores and PDC. Supplemental information on an unaudited pro forma basis is as follows (in millions):
Fiscal 2014 | Fiscal 2013 | |||||||
Net sales and other revenue |
$ | 57,496.9 | $ | 52,145.4 | ||||
(Loss) income from continuing operations, net of tax |
$ | (281.5 | ) | $ | 739.3 |
The unaudited pro forma supplemental amounts have been calculated to reflect interest expense and additional depreciation and amortization that would have been charged assuming the fair value adjustments to the acquired assets and assumed liabilities and related financing events had been applied from the beginning of fiscal 2013 with the related tax effects.
United acquisition
On December 29, 2013, the Company, through its wholly owned subsidiary, Albertsons LLC, acquired United for $362.1 million in cash (United acquisition). At the time of the acquisition, United operated 51 traditional, specialty and Hispanic retail food stores under its United Supermarkets, Market Street and Amigos banners, seven convenience stores and 26 fuel centers under its United Express banner and three distribution centers. United is located in 30 markets across north and west Texas.
The acquisition of United, with its focus on selection, quality and customer service, allowed the Company to add a complementary base of stores in Texas. To fund the United acquisition, the Company amended its Term Loan and Asset-Based Revolving Credit Agreement on December 27, 2013.
F-43 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes the final allocation of the fair value of the assets acquired and liabilities assumed (in millions):
December 29, 2013 | ||||
Cash and cash equivalents |
$ | 19.6 | ||
Receivables |
28.6 | |||
Inventories |
117.8 | |||
Other current assets |
3.5 | |||
Property and equipment |
241.8 | |||
Intangible assets |
74.2 | |||
Other assets |
4.5 | |||
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|
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Total assets acquired |
490.0 | |||
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|
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Current liabilities |
118.9 | |||
Long-term capital lease obligations |
5.9 | |||
Other long-term liabilities |
71.0 | |||
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|
|||
Total liabilities assumed |
195.8 | |||
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|
|||
Total identifiable net assets |
294.2 | |||
Goodwill |
67.9 | |||
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|
|||
Total purchase consideration |
$ | 362.1 | ||
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|
The identifiable intangible assets acquired consisted of the following as of the acquisition date (in millions):
Trade names |
$ | 32.9 | ||
Beneficial lease rights |
13.5 | |||
Customer prescription files |
27.8 | |||
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Total identifiable intangible assets |
$ | 74.2 | ||
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The goodwill recorded as part of the acquisition was attributable to the United workforce and the operational synergies expected from the acquisition, and is not tax deductible. Acquisition-related costs for the United acquisition of $10.3 million in fiscal 2013 were expensed as incurred as a component of Selling and administrative expenses.
Vons REIT, Inc. acquisition
On October 10, 2013, the Company purchased all of the stock of Vons REIT, Inc. (Vons) for $30.0 million in cash. Vons owned and operated four Dominicks-bannered stores in the Chicago metropolitan area at the time of the acquisition. The Vons acquisition was accounted for under the acquisition method of accounting. The identifiable tangible and intangible assets acquired and liabilities assumed were at fair value based on managements estimates and assumptions using a combination of market, income and cost valuation approaches. No goodwill was recorded as a result of the Vons acquisition.
F-44 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NAI acquisition
On March 21, 2013, the Company acquired from SuperValu all of the issued and outstanding shares of NAI pursuant to a Stock Purchase Agreement for a total purchase consideration of $253.6 million, including $69.9 million of working capital adjustments, and assumed debt and capital lease obligations with a carrying value prior to the acquisition date of $3.2 billion. The purchase consideration was primarily cash and a short-term payable that was fully paid as of February 20, 2014. The estimated fair value of debt and capital leases assumed was $2.6 billion on the acquisition date of March 21, 2013. Subsequent to the original issuance of its fiscal 2013 consolidated financial statements, the Company determined there was $102.9 million of cash paid for the NAI acquisition that was classified as a cash outflow from operating activities that should have been classified as a cash outflow from investing activities. As a result, the Company corrected the presentation of the fiscal 2013 Consolidated Statement of Cash Flows to classify the $102.9 million as a cash flow from investing activities. This correction had no impact on the Companys Consolidated Balance Sheets or Consolidated Statements of Operation and Comprehensive (Loss) Income for any periods presented. The Company has evaluated the correction and concluded that it is not material.
The NAI acquisition was accounted for under the acquisition method of accounting. The fair values of the identifiable tangible and intangible assets acquired and liabilities assumed were based on managements estimates and assumptions using various market, income and cost valuation approaches.
The following table summarizes the final allocation of the fair value of assets acquired and liabilities assumed in the NAI acquisition (in millions):
March 21, 2013 | ||||
Cash |
$ | 111.2 | ||
Receivables |
215.2 | |||
Inventories |
1,408.6 | |||
Other current assets |
69.2 | |||
Property and equipment |
4,615.0 | |||
Intangible assets |
1,502.9 | |||
Other assets |
389.6 | |||
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Total assets acquired |
8,311.7 | |||
Current liabilities |
1,498.3 | |||
Long-term capital lease obligations |
430.0 | |||
Long-term debt |
2,036.4 | |||
Long-term deferred taxes |
313.6 | |||
Other long-term liabilities |
1,774.1 | |||
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Total liabilities assumed |
6,052.4 | |||
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Net assets acquired |
2,259.3 | |||
Excess of net assets acquired over purchase consideration |
2,005.7 | |||
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Total purchase consideration |
$ | 253.6 | ||
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F-45 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The identifiable intangible assets acquired consisted of the following as of the acquisition date (in millions):
March 21, 2013 | ||||
Trade names |
$ | 407.0 | ||
Beneficial lease rights |
519.3 | |||
Customer lists, including prescription files, covenants not to compete and naming rights |
552.5 | |||
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Total of finite life intangible assets |
1,478.8 | |||
Restricted covenants and liquor licenses |
24.1 | |||
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Total identifiable intangible assets |
$ | 1,502.9 | ||
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The Company recognized a bargain purchase gain of $2,005.7 million as the amount by which the fair value of the net assets acquired exceeded the purchase consideration paid. The bargain purchase was recognized as a gain within the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company believes it was able to acquire the net assets for lower than fair value due to the sellers financial condition, together with the Companys historical experience and position with the acquired banners. These factors resulted in NAI being marketed in a limited manner without exposure to the usual and customary marketing conditions. The Company incurred $34.0 million of acquisition-related costs to complete the NAI acquisition, and these costs were expensed as incurred in the Companys results of operations.
Unaudited Supplemental Pro Forma Information
The pro forma financial information as presented below is for informational purposes only and is not indicative of operations that would have been achieved from the NAI, Vons and United acquisitions had they all occurred at the beginning of fiscal 2012. Supplemental information on an unaudited pro forma basis is as follows (in millions):
Fiscal 2013 | Fiscal 2012 | |||||||
Net sales and other revenue |
$ | 22,653.3 | $ | 22,412.0 | ||||
Loss from continuing operations, net of tax |
$ | 571.2 | $ | 177.3 |
The unaudited pro forma supplemental amounts have been calculated to reflect interest expense and additional depreciation and amortization that would have been charged assuming the fair value adjustments to the acquired assets and assumed liabilities and related financing events had been applied from the beginning of fiscal 2012 with the related tax effects.
Note 3Lease Exit Costs and Properties Held for Sale
Lease Exit Costs
Changes to the Companys lease exit cost reserves for closed properties consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Beginning balance |
$ | 55.1 | $ | 11.4 | ||||
Additions |
22.9 | 46.9 | ||||||
Payments |
(21.4 | ) | (1.1 | ) | ||||
Disposals, transferred to held for sale |
(13.1 | ) | (2.1 | ) | ||||
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Ending balance |
$ | 43.5 | $ | 55.1 | ||||
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F-46 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company closed 12 non-strategic stores in fiscal 2014, 45 in fiscal 2013 and 13 in fiscal 2012. Lease exit costs related to closed properties were recorded at the time of closing. Additions to the lease exit cost reserves for closed properties were recorded as a component of Selling and administrative expenses.
Properties Held for Sale
On December 19, 2014, in connection with the pending Safeway acquisition, the Company, together with Safeway, announced that they entered into agreements to sell 111 Albertsons and 57 Safeway stores across eight states to four separate buyers. Divestiture of these stores was required by the Federal Trade Commission as a condition of closing the Safeway acquisition and was contingent upon the completion of the Safeway acquisition. The aggregate sales price of these stores is $327.5 million plus the book value of inventory. The proceeds from the sale will be used to pay outstanding borrowings under Albertsons Term Loans and Albertsons Asset-Based Loan Facility per the respective terms of the credit facilities. As a result, the Company recorded an impairment loss on the Albertsons stores of $233.4 million during the fourth quarter of fiscal 2014. The related assets and liabilities have been classified as held for sale, net of the impairment loss. No gain or loss was recorded for the Safeway stores, as the related assets and liabilities were recorded for purchase accounting at fair value less the cost to sell. The divestiture of these stores commenced upon completion of the Safeway acquisition and closed in the first fiscal quarter of 2015 in accordance with the asset purchase agreements. Revenue and income before taxes associated with the divested Albertsons stores included in the Companys fiscal 2014 results were $2,070.1 million and $25.9 million, respectively. Revenue and income before taxes associated with the divested Safeway stores for the four weeks ended February 28, 2015 were $89.1 million and $2.8 million, respectively.
Assets held for sale and liabilities held for sale are recorded in Other current assets and Other current liabilities, respectively, and consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Assets held for sale: |
||||||||
Beginning balance |
$ | 9.3 | $ | 26.3 | ||||
Transfers in |
558.1 | 35.4 | ||||||
Disposals |
(46.2 | ) | (52.4 | ) | ||||
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Ending balance |
$ | 521.2 | $ | 9.3 | ||||
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Liabilities held for sale: |
||||||||
Beginning balance |
$ | 2.1 | $ | | ||||
Transfers in |
103.2 | 2.1 | ||||||
Disposals |
(14.9 | ) | | |||||
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Ending balance |
$ | 90.4 | $ | 2.1 | ||||
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Discontinued Operations
The Company adopted ASU 2014-8, Subtopic 205-20 on February 21, 2014, which changed the requirements for reporting discontinued operations. Based on the guidelines set forth in ASU 2014-8, the Company did not have any discontinued operations in fiscal 2014. For fiscal 2013 and 2012, the results of operations and related costs of stores or groups of stores that were held for sale or closed
F-47 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
were reported as Income from discontinued operations, net of tax. The notes to the consolidated financial statements exclude discontinued operations for all prior periods, unless otherwise noted.
The results of discontinued operations are summarized as follows (in millions):
Fiscal 2013 | Fiscal 2012 | |||||||
Net sales |
$ | 52.7 | $ | 55.0 | ||||
Income from discontinued operations, net of tax |
$ | 19.5 | $ | 49.2 |
Note 4Property and Equipment
Property and equipment consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Land |
$ | 2,951.1 | $ | 1,134.5 | ||||
Buildings |
5,464.8 | 2,464.2 | ||||||
Property under construction |
233.6 | 50.7 | ||||||
Leasehold improvements |
1,023.7 | 155.0 | ||||||
Fixtures and equipment |
2,551.3 | 920.3 | ||||||
Buildings under capital leases |
872.0 | 440.4 | ||||||
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Total property and equipment |
13,096.5 | 5,165.1 | ||||||
Accumulated depreciation and accumulated amortization of capitalized lease assets |
(1,072.3 | ) | (618.4 | ) | ||||
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Total property and equipment, net |
$ | 12,024.2 | $ | 4,546.7 | ||||
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Depreciation expense was $523.1 million, $526.1 million and $15.5 million for fiscal 2014, 2013 and 2012, respectively. Amortization expense related to capitalized lease assets was $45.5 million and $35.8 million in fiscal 2014 and 2013, respectively. Amortization expense related to capitalized lease assets in fiscal 2012 was not material. Fixed asset impairment charges of $227.7 million, $2.0 million and $1.8 million were recorded as a component of Selling and administrative expenses in fiscal 2014, 2013 and 2012, respectively. Fiscal 2014 impairment losses related primarily to the divestiture of the Albertsons stores.
Note 5Goodwill and Intangible Assets
The following table summarizes the changes in the Companys goodwill balances (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Balance at beginning of year |
$ | 71.4 | $ | 3.5 | ||||
Activity during the year |
957.2 | 67.9 | ||||||
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Balance at end of year |
$ | 1,028.6 | $ | 71.4 | ||||
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F-48 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Companys Intangible assets consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||||||||||||||||||||||
Estimated
useful lives (Years) |
Gross
carrying amount |
Accumulated
amortization |
Net |
Gross
carrying amount |
Accumulated
amortization |
Net | ||||||||||||||||||||||
Trade names |
40 | $ | 1,900.8 | $ | (24.4 | ) | $ | 1,876.4 | $ | 441.7 | $ | (10.8 | ) | $ | 430.9 | |||||||||||||
Beneficial lease rights |
12 | 868.8 | (124.7 | ) | 744.1 | 587.8 | (89.1 | ) | 498.7 | |||||||||||||||||||
Customer prescription files |
5 | 1,395.2 | (212.9 | ) | 1,182.3 | 577.2 | (103.1 | ) | 474.1 | |||||||||||||||||||
Covenants not to compete |
5 | 1.3 | (0.7 | ) | 0.6 | 1.0 | (0.2 | ) | 0.8 | |||||||||||||||||||
Internally developed software |
5 | 375.3 | (5.8 | ) | 369.5 | | | | ||||||||||||||||||||
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Total finite-lived intangible assets |
4,541.4 | (368.5 | ) | 4,172.9 | 1,607.7 | (203.2 | ) | 1,404.5 | ||||||||||||||||||||
Liquor licenses and restricted covenants |
Indefinite | 62.1 | | 62.1 | 28.3 | | 28.3 | |||||||||||||||||||||
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Total intangible assets, net |
$ | 4,603.5 | $ | (368.5 | ) | $ | 4,235.0 | $ | 1,636.0 | $ | (203.2 | ) | $ | 1,432.8 | ||||||||||||||
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In connection with the acquisitions, total Intangible assets acquired of $4,679.3 million were valued at fair value at the respective acquisition dates.
Amortization expense for intangible assets with finite useful lives was $201.2 million, $157.1 million and $0.7 million for fiscal 2014, 2013 and 2012, respectively. Estimated future amortization expense associated with the net carrying amount of intangibles with finite lives is as follows (in millions):
Fiscal Year |
Amortization
Expected |
|||
2015 |
$ | 494.7 | ||
2016 |
480.4 | |||
2017 |
473.9 | |||
2018 |
375.3 | |||
2019 |
333.9 | |||
Thereafter |
2,014.7 | |||
|
|
|||
Total |
$ | 4,172.9 | ||
|
|
During fiscal 2014, the Company had intangible asset impairment charges of $39.2 million, the majority of which related to the Albertsons divested stores. There were no intangible asset impairment charges for fiscal 2013 or 2012.
The Company had long-term liabilities for unfavorable operating lease intangibles related to above-market leases of $775.4 million and $369.2 million at February 28, 2015 and February 20, 2014, respectively. Amortization of unfavorable operating leases recorded as a reduction of expense was $51.8 million, $40.9 million and $1.3 million for fiscal 2014, 2013 and 2012, respectively.
F-49 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6Fair Value Measurements
The accounting guidance for fair value established a framework for measuring fair value and established a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability at the measurement date. The three levels are defined as follows:
Level 1 | Quoted prices in active markets for identical assets or liabilities; | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 | Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability. |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table presents assets and liabilities which are measured at fair value on a recurring basis at February 28, 2015 (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices
in active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market |
$ | 565.0 | $ | 565.0 | $ | | $ | | ||||||||
Short-term investments (1) |
24.1 | 17.1 | 7.0 | | ||||||||||||
Non-current investments (2) |
55.3 | 8.4 | 46.9 | | ||||||||||||
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|
|
|
|
|
|||||||||
Total |
$ | 644.4 | $ | 590.5 | $ | 53.9 | $ | | ||||||||
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|
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|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative contracts (3) |
$ | 121.7 | $ | | $ | 121.7 | $ | | ||||||||
Contingent consideration (4) |
270.9 | | | 270.9 | ||||||||||||
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Total |
$ | 392.6 | $ | | $ | 121.7 | $ | 270.9 | ||||||||
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|
(1) | Classified as available-for-sale securities and included in Other current assets on the Consolidated Balance Sheet. |
(2) | Classified as available-for-sale securities and included in Other assets on the Consolidated Balance Sheet. |
(3) | Included in Other current liabilities on the Consolidated Balance Sheet. |
(4) | Included in Other long-term liabilities on the Consolidated Balance Sheet. |
In fiscal 2013, the Company classified available-for-sale securities within Level 1 of the fair value hierarchy, as the estimated fair value was determined using quoted market prices from the underlying over-the-counter publicly traded securities. As of February 20, 2014, the fair value of the Companys available-for-sale securities was $5.3 million.
F-50 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company records its CVR obligations at fair value using a combined income and market approach. The CVR obligation is estimated using the income approach of a discounted cash flow model with a weighted average cost of capital of 10.0%, and a guideline company method resulting in adjusted total invested capital. As of February 28, 2015, the estimated fair value of the CVR obligations were $270.9 million. The above inputs used for determining the fair value of the CVR obligations are Level 3 fair value measurements. Changes in the fair value of the CVR obligations can result from changes to the discount rates, as well as the Mexican currency value relative to the US Dollar.
A reconciliation of the beginning and ending balances for Level 3 liabilities for the fiscal year ended February 28, 2015 follows (in millions):
Contingent
consideration |
||||
Balance, beginning of year |
$ | | ||
Additions |
270.9 | |||
|
|
|||
Balance, end of year |
$ | 270.9 | ||
|
|
For fiscal 2013, for certain of the Companys financial instruments, including cash and cash equivalents, receivables, accounts payable, accrued salaries and wages and other current assets and liabilities, the fair values approximate carrying values due to their short-term maturities.
The estimated fair value of the Companys debt, including current maturities, was based on Level 2 inputs, being market quotes or values for similar instruments, and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. At February 28, 2015, the fair value of total debt was $12,095.2 million compared to a carrying value of $11,782.1 million. At February 20, 2014, the fair value of total debt was $3,267.4 million compared to the carrying value of $3,279.8 million.
Assets Measured at Fair Value on a Nonrecurring Basis
Except in relation to assets classified as held-for-sale and held-and-used, no assets have been adjusted to fair value on a nonrecurring basis. The Companys held-for-sale assets are classified as Level 3 of the fair value hierarchy and are valued primarily based on estimated selling prices less costs of disposal.
Note 7Derivative Financial Instruments
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of interest rate swaps (Cash Flow Hedges). The Companys risk management objective and strategy with respect to interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in the LIBOR rate, the designated benchmark interest rate being hedged (the hedged risk), on an amount of the Companys debt principal equal to the then-outstanding swap notional.
F-51 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deal-Contingent Swap
On April 16, 2014, the Company entered into a deal-contingent interest rate swap (Deal- Contingent Swap) used to hedge against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on anticipated variable rate debt issuances in connection with the Safeway acquisition. In accordance with the swap agreement, the Company receives a floating rate of interest and pays a fixed rate of interest for the life of the contract. The aggregate notional amount of the Deal-Contingent Swap is $2,960.2 million. At the close of the Safeway acquisition, the Company designated it as a cash flow hedge. The fair value of the swap on the designation date was $96.1 million with changes in fair value recorded through earnings for the period prior to the designation date. This charge is included in Other expense, net in the fiscal 2014 Consolidated Statement of Operations and Comprehensive (Loss) Income.
Cash Flow Interest Rate Swaps
On April 3, 2014 and July 2, 2014, the Company entered into several additional swaps with notional amounts of $446.0 million, $993.0 million and $841.5 million, maturing in March 2016, March 2019 and June 2021, respectively, to hedge against variability in cash flows relating to interest payments on a portion of the Companys outstanding variable rate term debt. The aggregate notional amount of the Swaps, including the Deal-Contingent Swap, is $5,240.7 million, of which $5,182.7 million are designated as Cash Flow Hedges as defined by GAAP. The undesignated portion of the Companys interest rate swaps is attributable to principal payments expected to be made through the loans maturity.
As of February 28, 2015, the fair value of the cash flow interest rate swaps of $116.5 million is recorded in Other current liabilities. The Company did not have interest rate swaps as of or prior to February 20, 2014.
Activity related to the Companys derivative instruments designated as Cash Flow Hedges during the fiscal year ended February 28, 2015 consisted of the following (in millions):
Derivatives Designated as Hedging Instruments |
Amount of Loss
Recognized from Derivatives Fiscal 2014 |
Location of Loss
Recognized from Derivatives |
||||||
Designated interest rate swaps |
$ | (20.6 | ) |
|
Other comprehensive
(loss) income, net of tax |
|
Activity related to the Companys derivative instruments not designated as hedging instruments during the fiscal year ended February 28, 2015 consisted of the following (in millions):
Derivatives Not Designated as Hedging Instruments |
Amount of Loss
Recognized from Derivatives Fiscal 2014 |
Location of Loss
Recognized from Derivatives |
||||||
Deal-Contingent Swap (through date of designation) |
$ | (96.1 | ) | Other expense, net | ||||
Undesignated and ineffective portion of interest rate swaps |
(0.9 | ) | Other expense, net |
F-52 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8Long-Term Debt
The Companys long-term debt as of February 28, 2015 and February 20, 2014, net of debt discounts of $376.4 million and $322.9 million, respectively, and deferred financing costs of $187.8 million and $47.7 million, respectively, consisted of the following (in millions):
February 28,
2015 |
February 20,
2014 |
|||||||
Albertsons Term Loans, Due 2019 to 2021, interest range of 4.25% to 5.5% |
$ | 6,077.0 | $ | 1,390.6 | ||||
Albertsons Asset-Based Loan Facility, average interest rate of 1.94% and 2.29%, respectively |
980.0 | 210.0 | ||||||
NAI Asset-Based Loan Facility, average interest rate of 3.1875% |
| 150.0 | ||||||
NAI 4.75% Senior Secured Term Loan Due 2021 |
822.9 | | ||||||
NAI 7.45% Debentures due 2029 |
530.3 | 516.5 | ||||||
Albertsons 7.75% Senior Secured Notes Due 2022 |
583.6 | | ||||||
Safeway 7.25% Debentures Due 2031 |
573.8 | | ||||||
NAI 8.00% Debentures Due 2031 |
346.5 | 340.4 | ||||||
NAI 6.34% to 7.15% Medium-Term Notes due 20172028 |
244.1 | 236.8 | ||||||
Safeway 5.0% Senior Notes Due 2019 |
271.2 | | ||||||
NAI 8.70% Debentures Due 2030 |
204.6 | 202.1 | ||||||
NAI 7.75% Debentures Due 2026 |
166.1 | 161.6 | ||||||
Safeway 7.45% Senior Debentures Due 2027 |
153.0 | | ||||||
Safeway 3.95% Senior Notes Due 2020 |
138.2 | | ||||||
Safeway 4.75% Senior Notes Due 2021 |
131.3 | | ||||||
Safeway 6.35% Notes Due 2017 |
106.8 | | ||||||
Safeway 3.4% Senior Notes Due 2016 |
79.9 | | ||||||
American Stores 8.00% Debentures Due 2026 |
3.6 | 3.7 | ||||||
American Stores 7.90% Debentures Due 2017 |
1.9 | 2.0 | ||||||
Other Notes Payable, Unsecured |
155.1 | | ||||||
Mortgage Notes Payable, Secured |
24.4 | 18.4 | ||||||
|
|
|
|
|||||
Total debt |
11,594.3 | 3,232.1 | ||||||
Less current maturities |
(502.9 | ) | (32.3 | ) | ||||
|
|
|
|
|||||
Long-term portion |
$ | 11,091.4 | $ | 3,199.8 | ||||
|
|
|
|
The Albertsons and NAI Term Loans, Albertsons and NAI Asset-Based Loan Facilities and certain of the outstanding notes and debentures have restrictive covenants, subject to the right to cure in certain circumstances, calling for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain debt arrangements. The Company was in compliance with all such covenants and provisions as of and for the fiscal years ended February 28, 2015 and February 20, 2014.
Each of the credit agreements for the Albertsons and NAI Asset-Based Loan Facilities and Albertsons and NAI Term Loans restrict the ability of Albertsons or NAI, as the case may be, and the indenture for the 2022 Notes restricts the ability of Albertsons Holdings, to pay dividends and distribute property to their respective equity holders. Each of the agreements contains customary exceptions for such dividends and distributions, including up to specified maximum dollar amounts or if certain financial ratios are satisfied. As a result, all of the Companys consolidated net assets are effectively restricted with respect to their ability to be transferred to the parent company, AB Acquisition LLC. AB Acquisition LLC has no separate assets other than its investments in its subsidiaries, and all of its business operations are conducted through its operating subsidiaries.
F-53 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Albertsons Term Loans
On March 21, 2013, in conjunction with the NAI acquisition, Albertsons entered into a Term Loan Agreement in the amount of $1,150.0 million, consisting of Term B Loans with an interest rate of LIBOR plus 4.50% and an expiration date of March 21, 2016. On May 9, 2013, Albertsons amended the original Term Loan (Amendment 1), dividing the Term B Loan into Term B-1 and Term B-2 Loans. A Term B-1 Loan of $450.0 million was re-priced with an interest rate of LIBOR plus 3.25% and an expiration date of March 21, 2016. A Term B-2 Loan of $700.0 million was re-priced with an interest rate of LIBOR plus 3.75% and an expiration date of March 21, 2019. The Term Loans include a floor on LIBOR set at 1.0%. On September 19, 2013, Albertsons entered into a second amendment to update certain restrictive covenants in Amendment 1, and on December 27, 2013, Albertsons entered into a third amendment to increase the outstanding borrowings on the Term B-2 Loans to $996.5 million, with all other terms remaining the same. The Term Loans require annual principal payments of 1.0% of the original amended loan balance, paid quarterly.
On May 5, 2014, Albertsons entered into a fourth amendment converting the B-1 Loan into the B-2 Loan for a total principal amount of $1,440.6 million. The terms on the Term B-2 Loan remain consistent with Amendment 1.
On August 25, 2014, Albertsons amended and restated the Term Loan facility (fifth amendment), which provided funds for the Safeway acquisition to be held in escrow, consisting of a $950.0 million Term B-3 Loan and a $3,609.0 million Term B-4 Loan, with an original debt discount of $68.4 million. Prior to the release from escrow upon consummation of the Safeway acquisition, the Term B-3 and B-4 Loans accrued fees at rates of 4.0% and 4.5% per annum, respectively. Following the release from escrow, borrowings under the Term B-3 Loan now bear interest at the current LIBOR rate, subject to a 1.0% floor, plus 4.0%. Following the release from escrow, borrowings under the Term B-4 Loan now bear interest at the current LIBOR rate, subject to a 1.0% floor, plus 4.5%. The Term B-3 Loan has a maturity date of August 25, 2019, and the Term B-4 Loan has a maturity date of August 25, 2021. The Term B-3 Loan requires annual principal payments starting on June 30, 2015 based on rates ranging from 5.0% to 15.0% of the outstanding balance, paid quarterly. The Term B-4 Loan requires annual principal payments starting on June 30, 2015 of 1.0% of the original amended balance, paid quarterly.
On October 23, 2014, Albertsons executed an incremental amendment to the Term Loan facility, which created a Term B-4-1 Loan of $300.0 million. The terms are identical to the Term B-4 Loan except for the closing fee on the Term B-4-1 Loan was 0.5%. The $300.0 million Term B-4-1 Loan was funded on October 23, 2014. The proceeds of the Term B-4-1 Loan were released from escrow upon closing of the Safeway acquisition, and all applicable closing fees are netted from any amount repaid. The proceeds from the Term B-4-1 Loan were $298.5 million, net of $1.5 million original issue discount. The Term B-4-1 Loan requires annual principal payments starting June 30, 2015 of 1.0% of the original amended balance, paid quarterly.
Pursuant to the fifth amendment, no principal payments were made on the Term B-2 Loan during the third or fourth quarter of fiscal 2014, and future principal payments are not required until June 2015. On the date of the Safeway acquisition, the Term B-2 Loan was repriced with an interest rate of LIBOR plus 4.375% with a maturity date of March 21, 2019.
The Albertsons Term Loan facilities are guaranteed by Albertsons existing and future direct and indirect wholly owned domestic subsidiaries that are not borrowers, subject to certain exceptions. The
F-54 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Albertsons Term Loan facilities are secured by (i) a first-priority lien on substantially all of the assets of the borrowers and guarantors (other than accounts receivable, inventory and related assets of the proceeds thereof (the Albertsons ABL priority collateral)) and (ii) a second-priority lien on substantially all of the Albertsons ABL priority collateral.
NAI Term Loans
On June 27, 2014, in anticipation of the Safeway acquisition, NAI entered into a Senior Secured Term Loan Agreement in the amount of $850.0 million, with an interest rate of LIBOR, subject to a 1.0% floor, plus 3.75% and an expiration date of June 27, 2021. The borrowings are guaranteed by NAIs existing and future direct and indirect wholly owned domestic subsidiaries that are not borrowers, subject to certain exceptions. The borrowings are secured by (i) a first-priority lien on (a) all of the borrowers and guarantors real property, equipment, fixtures and intellectual property, certain other property relating solely to or constituting proceeds of such assets and all proceeds of the foregoing and (b) equity interests in NAI and its subsidiaries and intercompany notes, certain dividends and distributions with respect thereto and proceeds thereof and (ii) a second-priority lien on all of the borrowers and guarantors accounts, inventory, documents, letters of credit and letters of credit rights, investment property (excluding equity interests in the Company and its subsidiaries), general intangibles (excluding intellectual property), deposit accounts, scripts and prescription files, and certain related assets, and all proceeds of the foregoing (the NAI ABL priority collateral). The agreement requires annual principal payments of 1.0% of the original loan balance, paid quarterly.
In conjunction with the new Senior Secured Term Loan Agreement, the Company capitalized an additional $23.0 million of deferred financing costs and $4.3 million of original issue discount.
Asset-Based Loan Facilities
On March 21, 2013, and in conjunction with the NAI acquisition, Albertsons repaid and replaced an existing ABL Facility of $350.0 million with a new asset-based loan facility in the amount of $850.0 million (the Albertsons ABL), and NAI entered into an asset-based loan facility of $400.0 million (the NAI ABL), in each case providing for borrowings collateralized by accounts receivable, customer pharmacy files, inventory and certain other assets.
Albertsons ABL: The Albertsons ABL had an interest rate of LIBOR (subject to a 1.0% floor) plus a margin ranging from 1.75% to 2.25% and also provided a letter-of-credit (LOC) sub-facility of $400.0 million. On September 19, 2013, Albertsons amended the Albertsons ABL and on December 27, 2013, Albertsons entered into a second amendment to the Albertsons ABL facility (the Amended Albertsons ABL), increasing the commitment to $950.0 million, with a maturity date of March 21, 2018. The Amended Albertsons ABL continued to provide for a LOC sub-facility of $400.0 million. The Amended Albertsons ABL has a loan interest rate of LIBOR plus a margin ranging from 1.75% to 2.25%. The margin is determined by the average daily excess availability percentage for the most recent quarterly period. In addition, a facility fee ranging from 0.25% to 0.375% is charged for any unused portion of the Amended Albertsons ABL, which is based on the average daily unused amount as a percentage of the aggregate commitments during the most recent fiscal quarter ended. The fees for the Amended Albertsons ABL LOC sub-facility are based upon the Amended Albertsons ABL interest rate margin plus a fronting fee of 0.125%. Concurrently with the Safeway acquisition, the Amended Albertsons ABL was amended and restated to provide for borrowing capacity of up to $3.0 billion and to extend the maturity date to the earlier of January 30, 2020 and the date that is 91 days
F-55 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
prior to the final maturity of certain material indebtedness (if not prepaid or extended prior to such 91 st day). As amended and restated, the Amended Albertsons ABL has a loan interest rate of LIBOR plus a margin ranging from 1.50% to 2.00% and also provides for a LOC sub-facility of $1.25 billion. Facility and fronting fees remain unchanged. The Amended Albertsons ABL contains no financial covenants unless and until (i) an event of default under the Amended Albertsons ABL has occurred and is continuing or (ii) the failure of Albertsons to maintain excess availability of at least 10.0% of the aggregate commitments at any time or (iii) excess availability is less than $200.0 million. If any such events occur, then Albertsons is required to maintain a fixed charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30 th day after the other trigger event ceases to exist.
Borrowings outstanding under the Amended Albertsons ABL as of February 28, 2015 consisted of loans of $980.0 million and letters of credit issued under the LOC sub-facilities of $272.1 million. Borrowings outstanding under the Amended Albertsons ABL as of February 20, 2014 consisted of loans of $210.0 million and letters of credit issued under the LOC sub-facilities of $54.3 million.
The Amended Albertsons ABL is guaranteed by Albertsons existing and future direct and indirect wholly owned domestic subsidiaries that are not borrowers, subject to certain exceptions. The Amended Albertsons ABL is secured by (i) a first-priority lien on substantially all of the Albertsons ABL priority collateral and (ii) a third-priority lien on substantially all other assets (other than real property).
NAI ABL: The NAI ABL has an interest rate ranging from LIBOR plus 1.75% to 2.25% and a facility fee on the unused portion ranging from 0.25% to 0.375%. NAI also entered into a separate LOC facility in the amount of $125.0 million. The NAI LOC facility had an interest rate of 1.75% and a facility fee on the unused portion of 0.25%.
On January 24, 2014, NAI replaced the NAI ABL with an amended ABL facility (the Amended NAI ABL) in the amount of $1,200.0 million, which expires on the earlier of January 24, 2019 and the date that is 91 days prior to final maturity of certain material indebtedness (if not prepaid or extended prior to such 91 st day). Included in the Amended NAI ABL is a $600.0 million sub-facility for LOCs. In connection with entering into the NAI Term Loan facility, the amount of the Amended NAI ABL was reduced to $1,000.0 million, and $5.0 million of the NAI ABL capitalized deferred financing costs were written off. All other terms of the NAI ABL remained unchanged. Borrowings under the Amended NAI ABL are secured by (i) a first priority lien on the NAI ABL priority collateral and (ii) a second-priority lien on the other collateral securing the NAI Term Loan facility (excluding any real estate that NAI has not elected to include in the borrowing base under the Amended NAI ABL). The Amended NAI ABL interest rate is based upon LIBOR plus a margin of 2.5% to 3.0%. The margin is determined by the average daily excess availability percentage for the most recent quarterly period. In addition, a facility fee ranging from 0.375% to 0.50% is charged for any unused portion of the Amended NAI ABL, which is based on the average daily unused amount as a percentage of the aggregate commitments during the most recent fiscal quarter ended. The fees for the Amended NAI ABL LOC sub-facility are based upon the Amended NAI ABL interest rate margin plus a fronting fee of 0.125%. The Amended NAI ABL had $418.7 million and $431.3 million of outstanding issued LOC as of February 28, 2015 and February 20, 2014, respectively.
In conjunction with the Amended NAI ABL, the Company also entered into a separate amended and restated LOC facility agreement (Amended NAI LOC facility) with available credit of $125.0 million and an expiration date of January 24, 2019. The Amended NAI LOC facility has a fee of 1.75%, and a facility fee on the unused portion of 0.25%. The Amended NAI LOC facility had $104.6 million and $120.5 million of outstanding issued LOCs as of February 28, 2015 and February 20, 2014, respectively.
F-56 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Amended NAI ABL contains no covenants unless and until (i) an event of default under the Amended NAI ABL has occurred and is continuing or (ii) the failure of NAI to maintain excess availability of at least 10.0% of the aggregate commitments at any time. If any of such events occur, NAI is required to maintain a fixed charge coverage ratio of 1.0 to 1.0 until such event of default is cured or waived or the 30 th day after the other trigger event ceases to exist.
2022 Notes
On October 23, 2014, Albertsons completed the sale of $1,145.0 million of principal amount of 7.75% Senior Secured Notes (2022 Notes) which will mature on October 15, 2022. The net proceeds from the sale of the 2022 Notes were $1,128.4 million, net of $16.6 million of original issue discount. Safeway is a co-issuer of the 2022 Notes. Albertsons also capitalized an additional $6.3 million of deferred financing costs. Pursuant to the Safeway acquisition, Safeway became a co-obligor on the 2022 Notes. The 2022 Notes are guaranteed by Albertsons current and future direct and indirect domestic subsidiaries (other than Safeway), subject to certain exceptions. Interest on the 2022 Notes is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2015. On February 9, 2015, following the Safeway acquisition, Albertsons redeemed $535.4 million of the 2022 Notes. As of February 28, 2015, the outstanding balance was $609.6 million, before debt discount.
The 2022 Notes are secured by (i) a second-priority lien on substantially all of the assets of Albertsons, Safeway and the guarantors (other than the Albertsons ABL priority collateral), and (ii) a third-priority lien on the Albertsons ABL priority collateral.
Safeway Debt
Safeway has outstanding notes and debentures with a fair value of $2,470.3 million (the Safeway Debt). Immediately following the Safeway acquisition, Safeway redeemed $864.6 million of the Safeway Debt.
The Safeway Debt maturing in 2016, 2017 and 2019 is guaranteed by Albertsons and its subsidiaries that guarantee the 2022 Notes. The Safeway Debt maturing in 2020, 2021, 2027 and 2031 is not guaranteed. The Safeway Debt maturing in 2016, 2017 and 2019 is secured on a pari passu basis with the 2022 Notes by all of the collateral that secures the 2022 Notes. The Safeway Debt maturing in 2020, 2021, 2027 and 2031 is equally and ratably secured on a pari passu basis with the 2022 Notes to the extent of certain of the collateral owned by Safeway and its subsidiaries.
NAIs Unsecured Debentures and Medium-Term Notes
NAI has outstanding various series of debentures and medium-term notes in the aggregate principal amount of $1,780.6 million, before debt discounts, that were issued by a predecessor entity prior to the NAI acquisition. Such debentures and medium-term notes are unsecured and are not guaranteed. Interest is payable semi-annually in accordance with their respective underlying terms.
American Stores Company, LLC Debentures and Medium Term Notes
At the time of the NAI acquisition, a wholly owned subsidiary of NAI, American Stores Company, LLC (American Stores), had outstanding 7.90% Debentures due 2017 (the 2017 Debentures), 8.00% Debentures due 2026 (the 2026 Debentures) and 7.10% Medium Term Notes, Series B due 2028 (the 2028 Notes) totaling $467.4 million.
F-57 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 13, 2013, American Stores commenced a tender offer to purchase for cash all of its outstanding 2017 Debentures and 2026 Debentures, and 2028 Notes, culminating in the repurchase and retirement of substantially all the related debt for $619.9 million. As a result of the debt repurchase, the Company recorded a loss on extinguishment of debt of $49.1 million. As of February 28, 2015, the non-repurchased balance of $5.0 million continues to be guaranteed by SuperValu and continues to be cash collateralized.
The Companys debentures and medium-term notes are unsecured and interest is payable semi-annually in accordance with their respective underlying terms.
As of February 28, 2015 the future maturities of long-term debt, excluding deferred financing costs, consisted of the following (in millions):
2015 |
$ | 503.4 | ||
2016 |
217.1 | |||
2017 |
324.3 | |||
2018 |
219.1 | |||
2019 |
2,286.5 | |||
Thereafter |
8,608.1 | |||
|
|
|||
Total |
$ | 12,158.5 | ||
|
|
Deferred Financing Costs and Interest Expense
Financing costs incurred to obtain all financing other than ABL financing are recognized as a direct reduction from the carrying amount of the debt liability. Deferred financing costs recorded as a reduction of debt were $187.8 million and $47.7 million as of February 28, 2015 and February 20, 2014, respectively.
Financing costs incurred to obtain ABL financing are capitalized and amortized over the term of the related debt facilities, using the effective interest method. Deferred financing costs associated with ABL financing are included in Other assets and were $75.0 million and $51.0 million as of February 28, 2015 and February 20, 2014, respectively. For fiscal 2014, total amortization expense of $65.3 million included $36.8 million of deferred financing costs written off in connection with Term Loan amendments and reductions. For fiscal 2013, total amortization expense of $25.1 million included $9.0 million of deferred financing costs written off in connection with Term Loan amendments. For fiscal 2012, amortization expense of deferred financing costs was $1.3 million.
Interest expense, net consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
ABL facility, senior secured notes, term loans, notes and debentures |
$ | 454.1 | $ | 246.0 | $ | 2.8 | ||||||
Capital lease obligations |
77.5 | 63.3 | 1.4 | |||||||||
Amortization and write off of deferred financing costs |
65.3 | 25.1 | 1.2 | |||||||||
Amortization and write off of debt discount |
6.8 | 1.3 | | |||||||||
Loss on extinguishment of debt |
| 49.1 | | |||||||||
Other |
29.5 | 5.3 | 1.8 | |||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
$ | 633.2 | $ | 390.1 | $ | 7.2 | ||||||
|
|
|
|
|
|
F-58 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9Members Equity
Interests in the Company held by its members are presented as units. The Company effected a unit split in fiscal 2014, discussed below. All share and per share information set forth in the accompanying Consolidated Financial Statements and the related footnotes thereto, with the exception of this footnote, has been retroactively adjusted to reflect the January 30, 2015 stock split described below.
As of February 23, 2012, the Company had 880 Class A units and 106 Class B units issued and outstanding.
Class A Units
The Class A units represented percentage ownership interests in the Company. The original 880 Class A units were granted on June 1, 2006 to the members of the Company in connection with their initial investments. The holders of the Class A units were entitled to participate first in cash distributions of the Company in connection with their respective ownership percentages: (i) up to an amount equal to the aggregate of the original invested capital not already returned, (ii) accrued distributions based on a rate of 10.0% per annum on the capital not already paid through previous distributions and the aggregate amounts accrued but not yet distributed and (iii) once the minimum amounts were distributed, then pro rata in accordance with their ownership percentage with respect to Class A and Class B units. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms applied after payment to creditors. The Class A unitholders were also entitled to allocations of profits and losses of the Company for each fiscal period in accordance with the liquidation distribution terms. Class A members held voting rights equal to their percentage ownership of Class A units.
Class B Units
The Class B units represented percentage ownership interests in the Company. One hundred eighteen Class B units were granted to management on June 1, 2006 and vested over four years. At the end of the vesting period, 12 Class B units were forfeited, resulting in 106 outstanding Class B units. The holders of the fully vested units were entitled to participate in cash distributions of the Company based on their respective ownership percentages on a subordinate basis to the Class A members. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms applied after payment to creditors. The Class B unitholders were also entitled to allocations of profits and losses derived from the Company for each fiscal period in accordance with the liquidation distribution terms. Class B units held no voting rights.
March 2013 Tracking Unit Issuance and Member Contributions
In connection with the NAI acquisition on March 21, 2013, the Class A and Class B units then outstanding were exchanged into Class A and Class B Albertsons (ABS) units, and a new class of Class A and Class B NAI units were issued. Additional Class A ABS units and NAI units were also issued with the investment of $250.0 million from the institutional investors. The Company also granted Class C units to certain executives with participation rights that allow participation in profits subordinate to the Class A ABS and NAI units and the Class B ABS and NAI units.
F-59 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Class A and Class B ABS Units
The Class A and Class B ABS units represented percentage ownership interests in the Company. The holders of the Class A and Class B ABS units were entitled to participate in cash distributions of Albertsons in connection with their respective ownership percentages of Class A and Class B ABS units up to an amount equal to, in aggregate with Class A and Class B ABS distributions and Class A and Class B NAI distributions, $550.0 million plus an annual return of 8.0%. Upon achieving the distribution target, the holders of Class A and Class B ABS units and Class C units shared pro rata in the distributions of ABS. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms applied after payment to creditors. The Class A and Class B ABS unitholders are entitled to allocations of profits and losses derived from ABS for each fiscal period in accordance with the liquidation distribution terms. The Class A ABS units maintained voting interests that were commensurate with their ownership percentage of Class A ABS units. Class B ABS units held no voting rights.
Class A and Class B NAI Units
The Class A and Class B NAI units represented percentage ownership interests in the Company. The holders of the units were entitled to participate in cash distributions of NAI in connection with their respective ownership percentages of NAI up to an amount equal to, in aggregate with Class A and Class B NAI distributions and Class A and Class B ABS distributions of $550.0 million plus an annual return of 8.0%. Upon achieving the distribution target, the holders of Class A and Class B NAI units and Class C units shared pro rata in the distributions of NAI. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms applied after payment to creditors. The Class A and Class B NAI unitholders were entitled to allocations of profits and losses derived from NAI for each fiscal period in accordance with the liquidation distribution terms. Class A and Class B NAI units held no voting rights.
Class C Units
The Class C units represented percentage ownership interests in the Company that were issued to management. Holders of the vested Class C units were entitled to participate in cash distributions of ABS and NAI based on their respective ownership percentages on a subordinate basis to the distribution target of $550.0 million and 8.0% annual interest distributed to ABS and NAI unitholders. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms applied after payment to creditors. The Class C units vested over three years with one-third of the units vesting on each of the subsequent three anniversaries of the grant date. The Class C unitholders were entitled to allocations of profits and losses derived from ABS and NAI for each fiscal period in accordance with the liquidation distribution terms. Class C units held no voting rights.
January 2015 Member Unit Split and Member Contributions
On January 30, 2015, the Company effected a 70,699 for 1 unit split of the Companys then outstanding Class A and Class B ABS units and Class A and Class B NAI units and effected a 25,598 for 1 unit split of the Companys then outstanding Class C units (collectively, the Fiscal 2014 Unit Splits). In connection with the Safeway acquisition, these units were exchanged into a single class of ABS units and a single class of NAI units. Concurrent with the Safeway acquisition, the Company also established a class of Safeway units and issued equity-based compensation in the form of the Series-1 incentive units and the Investor incentive units.
F-60 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately following the Fiscal 2014 Unit Splits, certain investors and management contributed $1,250.0 million and $54.8 million, respectively, in the Company in exchange for additional ABS and NAI units. Managements contribution of $33.2 million was in connection with the termination of the Companys long-term incentive plans (LTIPs). The remaining contribution of $21.6 million was funded in the form of a loan from the Company to its executive officers for the purchase of 2.8 million units each of ABS units, NAI units and Safeway units and is accounted for as an equity-based compensation award.
The equityholders agreement, as amended, with the existing holders of the ABS, NAI, and Safeway units, provides, among other things, for preemptive or anti-dilution rights that entitle the unitholder the right to purchase additional units to give them the same pro rata percentage ownership in the event additional units are issued. Restrictions on the transfer of units require that a member transfer its ABS units, NAI units and Safeway units on a pari passu percentage basis to the total number of ABS units, NAI units and Safeway units to the same holder. Furthermore, if the Company enters into a recapitalization, reorganization, merger, conversion, contribution, exchange and/or other restructuring in connection with an initial public offering (IPO), each investor member will receive a proportionate number of shares such that the fair value of the units exchanged will equal the fair value of units received.
The members agreement, as amended, established a management board comprised of 10 voting members, representing the institutional and individual investors. In addition, each member will maintain certain voting rights commensurate with the ownership in the Company. No specific voting rights are associated with the share classes described below. The Company has issued an identical number of ABS units, NAI units and Safeway units to its members, each of which holds a similar ownership percentage in each class of unit and has similar features. Each class of unit participates in the profits and losses of the respective subsidiary. The Company characterizes a single unit each of ABS, NAI and Safeway units as a Common unit.
Albertsons Units (ABS Units)
The ABS Units represent percentage ownership interests in the Company. The holders of the units are entitled to participate in cash distributions of Albertsons in connection with their respective ownership percentages of ABS units up to an amount, in aggregate with the NAI and Safeway distributions, of $2,308.6 million. Upon achieving aggregate distributions of $2,308.6 million, cash distributions of Albertsons will be made to unitholders pro rata in proportion to the number of ABS units, vested Series-1 incentive units and Investor incentive units outstanding. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms will apply after payment to creditors. The ABS unitholders are entitled to allocations of profits and losses derived from Albertsons for each fiscal period in accordance with the liquidation distribution terms.
New Albertsons Units (NAI Units)
The NAI units represent percentage ownership interests in the Company. The holders of the units are entitled to participate in cash distributions of NAI in connection with their respective ownership percentages of NAI units up to an amount, in aggregate with the Albertsons and Safeway distributions, of $2,308.6 million. Upon achieving aggregate distributions of $2,308.6 million, cash distributions of NAI will be made to unitholders pro rata in proportion to the number of NAI units, vested Series-1 incentive units and Investor incentive units outstanding. In the event of a dissolution of the Company
F-61 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and liquidation of its assets, the same distribution terms will apply after payment to creditors. The NAI unitholders are entitled to allocations of profits and losses derived from NAI for each fiscal period in accordance with the liquidation distribution terms.
Safeway Units
The Safeway units represent percentage ownership interests in the Company. The holders of the units are entitled to participate in cash distributions of Safeway in connection with their respective ownership percentages of Safeway units up to an amount, in aggregate with the Albertsons and NAI distributions, of $2,308.6 million. Upon achieving aggregate distributions of $2,308.6 million, cash distributions of Safeway will be made to unitholders pro rata in proportion to the number of Safeway units, vested Series-1 incentive units and Investor incentive units outstanding. In the event of a dissolution of the Company and liquidation of its assets, the same distribution terms will apply after payment to creditors. The Safeway unitholders are entitled to allocations of profits and losses derived from Safeway for each fiscal period in accordance with the liquidation distribution terms.
Series-1 Incentive Units
The Company granted 3.3 million Series-1 incentive units to a member of management, with 16.8 million Series-1 incentive units reserved for future issuance. The holders of the units are entitled to participate in cash distributions of Albertsons, NAI and Safeway based on their respective ownership percentages of the aggregate of ABS units, NAI units, Safeway units, vested Series-1 incentive units and Investor incentive units outstanding. All distributions are on a subordinate basis to the $2,308.6 million aggregate distributions to Albertsons, NAI and Safeway unitholders; after which they participate on a pro rata basis. The Series-1 incentive units are accounted for as employee equity-based compensation.
Investor Incentive Units
The Company also granted 14.9 million Investor incentive units to five institutional investors and a member of management. The holders of the Investor Incentive units are entitled to participate in cash distributions of Albertsons, NAI and Safeway based on their respective ownership percentages of aggregate ABS, NAI and Safeway units, vested Series-1 incentive units and Investor incentive units outstanding. All distributions are on a subordinate basis to the $2,308.6 million aggregate distributions to Albertsons, NAI and Safeway unitholders, after which they participate on a pro rata basis. The units are convertible to an equal number of ABS units, NAI units and Safeway units reflecting the fair market value of such units as of the conversion date, which is the earlier of (i) January 30, 2020 and (ii) the effective date of consummation of an IPO of the Company (or any conversion entity) or a sale of all or substantially all of the equity of the Company or of the consolidated assets of the Company and its subsidiaries. The Investor incentive units vested immediately and contain no voting rights.
The Investor incentive units issued to the five institutional investors were accounted for under the guidance for equity-based payments to non-employees. The Investor incentive units issued to the member of management were accounted for as employee equity-based compensation.
Members Equity Presentation and Disclosure
As discussed above, the Company effected the Fiscal 2014 Unit Splits, which has been applied retroactively in the accompanying Consolidated Financial Statements and the related footnotes thereto, with the exception of this footnote.
F-62 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of February 28, 2015, the Company has authorized 300.0 million Common units, with each Common unit consisting of a single ABS Unit, a NAI Unit and a Safeway Unit, of which 297.2 million Common units are issued and outstanding, with 2.8 million units representing the units associated with member loans described above. The Company has also issued 14.9 million units of Investor incentive units, of which 11.6 million were issued to certain institutional investors and 3.3 million to a member of management. The Company has also authorized 20.1 million units of Series-1 incentive units, of which 3.3 million units have been granted as of February 28, 2015 and are subject to vesting terms.
The following table depicts how the historical equity capitalization is presented in the Consolidated Statements of Members (Deficit) Equity. This presentation is based on the underlying subsidiaries profits and losses that these units participate in, which are also described in the preceding paragraphs.
Consolidated Statements of
Members (Deficit) Equity |
ABS units | NAI units | Safeway units | |||
Fiscal 2012 |
Class A units
Class B units |
|||||
Fiscal 2013 |
Class A ABS units
Class B ABS units |
Class A NAI units
Class B NAI units |
||||
Fiscal 2014 | ABS units | NAI units | Safeway units |
Note 10Equity-Based Compensation
The Company has issued incentive units and other units to management and key investors who provided consulting services to the Company under the equityholders agreement, as amended. Compensation costs for employees are recognized, net of any estimated forfeitures, on a straight-line basis over the requisite service periods. For equity awards issued as of February 28, 2015, no forfeiture rate was assumed due to the limited number of executive employees who were granted the awards and the remote likelihood of their termination of employment prior to the end of any requisite service period associated with the vesting of the award. Equity-based compensation expense recognized in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income was $344.1 million and $6.2 million in fiscal 2014 and fiscal 2013, respectively. No tax benefit was recognized for equity-based compensation for fiscal 2014 and fiscal 2013.
The equity-based compensation expense consisted of the following:
Fiscal 2014 | Fiscal 2013 | |||||||
Equity-based compensation expense related to employees: |
||||||||
Class C units |
$ | 14.1 | $ | 6.2 | ||||
Investor incentive units and Series-1 incentive units |
76.2 | | ||||||
Loans to members |
62.2 | | ||||||
|
|
|
|
|||||
Equity-based compensation expense to employees |
$ | 152.5 | $ | 6.2 | ||||
|
|
|
|
|||||
Equity-based compensation expense to non-employees |
||||||||
Investor incentive units |
191.6 | | ||||||
|
|
|
|
|||||
Equity-based compensation expense to non-employees |
191.6 | | ||||||
|
|
|
|
|||||
Total equity-based compensation expense |
$ | 344.1 | $ | 6.2 | ||||
|
|
|
|
F-63 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Class C Units
On March 21, 2013, the Company granted 103 Class C units (2.6 million Class C units following a 25,598 for 1 split on January 30, 2015) to certain key executives under the Companys Class C Interest Plan. These grants are accounted for as a grant of equity awards to employees in accordance with GAAP. The fair value of these grants is based on the grant date fair value, which was based on the enterprise valuation of the Company at the date of grant, the Class C units ownership percentage and residual cash flows distributed to C unit holders after the tracking units hurdles were met. The estimated total fair value is charged to compensation expense on a straight-line basis over the vesting term of three years, with one-third of the units vesting on each of the subsequent three anniversaries of the grant date. During fiscal 2014, concurrently with the termination of the Companys LTIPs, the vesting of unvested Class C units was accelerated resulting in compensation expense of $9.8 million. The fully vested units were then subsequently exchanged for ABS and NAI units in conjunction with the Safeway acquisition.
Class C Unit activity for each period was as follows:
Number of Class C
units |
Weighted average
grant date fair value per unit |
|||||||
Units outstanding at February 21, 2013 |
| $ | | |||||
Granted |
2,641,428 | 7.70 | ||||||
|
|
|||||||
Units outstanding at February 20, 2014 |
2,641,428 | 7.70 | ||||||
Vested |
(2,641,428 | ) | 7.70 | |||||
|
|
|||||||
Units outstanding at February 28, 2015 |
| $ | | |||||
|
|
Investor Incentive Units
The Company also granted 14.9 million fully vested, non-forfeitable Investor incentive units to five investors and a member of management. The 11.6 million units granted and issued to the Companys investors were treated as non-employee compensation for merger and acquisition services related to the Safeway acquisition and direct equity issuance services. The value of the units was $22.11 per unit, or $255.5 million, of which $191.6 million was recorded in the Consolidated Statements of Operations as compensation expense for services. The remaining $63.9 million was equity issuance costs and recorded as a reduction in proceeds from member contributions. The 3.3 million Investor incentive units granted to a member of management were recorded as employee compensation cost. The fair value of the units was $22.11 per unit, or $74.1 million, and was recorded as compensation cost in the Consolidated Statements of Operations and also reflected in the Consolidated Statements of Members (Deficit) Equity.
Series-1 Incentive Units
On January 30, 2015, the Company granted 3.3 million Series-1 incentive units to a member of management, with an additional 16.8 million authorized and reserved for future issuance. 50% of the Incentive units have a service vesting period of four years from the date awarded and vest 25% on each of the subsequent four anniversaries of such date. These time-based units are subject to accelerated vesting in certain limited circumstances, such as upon an initial public offering or change in control of the Company, or prorated vesting due to termination without cause, termination by the employee for good reason or due to the employees death or disability.
F-64 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The remaining 50% of the incentive units have performance-based vesting terms, which vest 25% on the last day of Safeways fiscal year for each of the following four fiscal years, subject to specific performance targets. For the units subject to a service period, the estimated total fair value is charged to compensation expense on a straight-line basis over the vesting of four years and vest 25% on each of the subsequent four anniversaries of such date. For the units subject to a performance condition, compensation cost will be recognized on a graded vesting basis when probable and based on the estimated quantity of awards for which it is probable that the performance conditions will be achieved. All performance-based units that have not vested as of the fiscal year commencing in 2018 shall terminate. Upon the consummation of an IPO, the unvested units subject to performance conditions are converted into units subject to a continuation of service condition.
Incentive unit activity for each period was as follows:
Investor
incentive units |
Series 1
incentive units |
Weighted average
grant date fair value per unit |
||||||||||
Units unvested at February 20, 2014 |
| | $ | | ||||||||
Granted |
14,907,871 | 3,350,083 | 22.11 | |||||||||
Vested |
(14,907,871 | ) | | 22.11 | ||||||||
Forfeited |
| | | |||||||||
|
|
|
|
|||||||||
Units unvested at February 28, 2015 |
| 3,350,083 | $ | 22.11 | ||||||||
|
|
|
|
The aggregate fair value and grant date of Investor incentive units that vested in fiscal 2014 was $330.0 million.
As of February 28, 2015, the Company had yet to recognize $71.9 million in unrecognized compensation cost related to unvested equity-based compensation arrangements granted under the Companys Series-1 Incentive Unit Plan.
Member Loans to Employees
Upon termination of the Companys LTIPs, certain executives were entitled to the right to receive a loan from the Company to purchase additional ABS and NAI units. Employees took loans of $21.6 million to purchase an additional 2.8 million units. At February 28, 2015, the principal amounts due to the Company under outstanding notes receivable were $21.6 million. Each loan is collateralized by the additional units purchased with the loan, but in the event the loan amount exceeds the fair value of the units when repaid, the employee must repay the loan with other assets owned by the employee. Any distributions received with respect to any equity held by the individual in the Company must first be used to pay the loan. The loans are treated as non-recourse for accounting purposes and accounted for as equity-based compensation. Upon issuance the units issued to employees were fully vested, and as such we recognized compensation expense with an offsetting entry to Members Investment. The units associated with the loan are not transferable, and the loans are payable on the earliest of: five years from January 30, 2015 or six months following the employees termination, the date of the consummation of an IPO or the consummation of a corporate transaction constituting a change in control. The estimated fair value of equity granted under the loans during 2014 was $62.2 million.
The Company determined fair value of unvested and issued awards on the grant date using an option pricing model adjusted for a lack of marketability and using an expected term or time to liquidity based on judgments made by management. Expected volatility is calculated based upon historical
F-65 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
volatility data from a group of comparable companies over a time frame consistent with the expected life of the awards. The expected risk-free rate is based on the U.S. Treasury yield curve rates in effect at the time of the grant using the term most consistent with the expected life of the award. Dividend yield was estimated at zero, as the Company does not anticipate making regular future distributions to unitholders. As part of calculating fair value for its equity-based awards, the Company estimates the enterprise value underlying the equity-based awards. The most recent valuation was performed as of January 2015 using a Market and Income approach weighted at 50% each. The Market Approach uses the Guideline Public Company Method, which focuses on comparing the subject entity to selected reasonably similar (or guideline) publicly traded companies, while the Income approach uses discounted cash flows to measure the value of the enterprise by estimating the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the life of the Company.
The valuations used to determine the fair values of the Class C units, Investor incentive units, Series-1 incentive units and Member loans to employees were retrospective. The following weighted-average assumptions used, by year, to value the Companys equity-based awards are as follows:
February 28, 2015 | ||||
Dividend yield |
% | |||
Expected volatility |
42.4% | |||
Risk-free interest rate |
0.47% | |||
Time to liquidity |
2 years | |||
Discount for lack of marketability |
16.0% |
Note 11Net (loss) Income Per Unit
The Company calculates EPU separately for the Tracking group and for the Residual group using the two-class method, which are both presented on the Consolidated Statements of Operations. Under the two-class method, EPU is determined for the Tracking group and the Residual group based on the separate earnings attributed to actual distributions to the respective classes of units and undistributed earnings available for distribution to the respective classes of units.
The Company treats ABS, NAI and Safeway units as tracking units due to their participation (or tracking) of the earnings of the individual subsidiaries. ABS, NAI and Safeway units have been presented as one Tracking group, as each member holds a pro rata share of each of the units, the units are contractually inseparable from one another and the individual unit distributions are co-dependent on the distributions of the other units due to an aggregate distribution target, as defined. Tracking units issued to members through employee loans (as described in Note 10Equity-based compensation) participate in distributions of the Tracking group but are not outstanding and were excluded from the Tracking group diluted EPU in Fiscal 2014 because their inclusion would be anti-dilutive.
The Residual Group consists of the Class C units, Series-1 incentive units and Investor incentive Units, of which the Investor Incentive Units participate in earnings and distributions on a pro rata basis at the AB Acquisition LLC level with the Tracking Group once the distribution hurdles of the Tracking Group have been met. Unvested Class C units and Series-1 incentive units do not participate in earnings and distributions until fully vested, and were included in the Residual group diluted EPU in Fiscal 2013.
In fiscal 2014, units of 0.2 million and 1.4 million for the Tracking group and Residual group, respectively, have been excluded from diluted weighted-average units outstanding because their inclusion would be anti-dilutive.
F-66 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted net income (loss) per Tracking group unit and diluted net (loss) income per Residual group unit (in millions, per unit amounts):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Net (loss) income |
$ | (1,225.2 | ) | $ | 1,732.6 | $ | 79.0 | |||||
Less: income from discontinued operations |
| 19.5 | 49.2 | |||||||||
|
|
|
|
|
|
|||||||
Net (loss) income from continuing operations |
(1,225.2 | ) | 1,713.1 | 29.8 | ||||||||
Less: distributions to Tracking group |
34.5 | | 50.0 | |||||||||
Less: undistributed (loss) income available to Tracking group up to Distribution Targets |
(1,259.7 | ) | 594.0 | | ||||||||
|
|
|
|
|
|
|||||||
Net income (loss) from continuing operations available to Tracking group and Residual group |
$ | | $ | 1,119.1 | $ | (20.2 | ) | |||||
|
|
|
|
|
|
|||||||
Net (loss) income from continuing operations and distributions attributable to: |
||||||||||||
Tracking groupbasic |
$ | (1,225.2 | ) | $ | 1,713.1 | $ | 29.8 | |||||
Residual groupbasic |
| | | |||||||||
Tracking groupdiluted |
(1,225.2 | ) | 1,690.4 | 29.8 | ||||||||
Residual groupdiluted |
| 22.7 | | |||||||||
Net income from discontinued operations and distributions attributable to: |
||||||||||||
Tracking groupbasic |
$ | | $ | 19.5 | $ | 49.2 | ||||||
Residual groupbasic |
| | | |||||||||
Tracking groupdiluted |
| 19.1 | 49.2 | |||||||||
Residual groupdiluted |
| 0.4 | | |||||||||
Weighted average Tracking group units outstanding used in computing net income attributable to Tracking groupbasic and diluted |
141.42 | 123.49 | 69.71 | |||||||||
Weighted average Residual group units outstanding used in computing net income attributable to Residual groupbasic |
2.68 | | | |||||||||
Dilutive effect of Class C units |
| 2.45 | | |||||||||
|
|
|
|
|
|
|||||||
Weighted average units for calculating diluted earnings per unitResidual group |
2.68 | 2.45 | | |||||||||
(Loss) income from continuing operations per unit attributable to: |
||||||||||||
Tracking groupbasic |
$ | (8.66 | ) | $ | 13.87 | $ | 0.43 | |||||
Residual groupbasic |
| | | |||||||||
Tracking groupdiluted |
(8.66 | ) | 13.69 | 0.43 | ||||||||
Residual groupdiluted |
| 9.27 | | |||||||||
Income from discontinued operations per unit attributable to: |
||||||||||||
Tracking groupbasic |
$ | | $ | 0.16 | $ | 0.71 | ||||||
Residual groupbasic |
| | | |||||||||
Tracking groupdiluted |
| 0.15 | 0.71 | |||||||||
Residual groupdiluted |
| 0.16 | |
F-67 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12Leases
The Company leases certain retail stores, distribution centers, office facilities and equipment from third parties. The typical lease period is 15 to 20 years with renewal options for varying terms and, to a limited extent, options to purchase. Certain leases contain percent rent based on sales, escalation clauses or payment of executory costs, such as property taxes, utilities, insurance and maintenance.
Future minimum lease payments to be made by the Company for non-cancelable operating lease and capital lease obligations as of February 28, 2015 consisted of the following (in millions):
Lease Obligations | ||||||||
Fiscal year |
Operating Leases | Capital Leases | ||||||
2015 |
$ | 735.7 | $ | 202.2 | ||||
2016 |
688.7 | 192.4 | ||||||
2017 |
620.1 | 171.2 | ||||||
2018 |
538.9 | 142.8 | ||||||
2019 |
455.1 | 130.2 | ||||||
Thereafter |
2,858.2 | 669.5 | ||||||
|
|
|
|
|||||
Total future minimum obligations |
$ | 5,896.7 | 1,508.3 | |||||
|
|
|||||||
Less interest |
(533.6 | ) | ||||||
|
|
|||||||
Present value of net future minimum lease obligations |
974.7 | |||||||
Less current portion |
(121.1 | ) | ||||||
|
|
|||||||
Long-term obligations |
$ | 853.6 | ||||||
|
|
The Company subleases certain property to third parties. Future minimum tenant rental income under these non-cancelable operating leases as of February 28, 2015 was $358.8 million.
Rent expense and tenant rental income under operating leases consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Minimum rent |
$ | 371.3 | $ | 300.8 | $ | 53.4 | ||||||
Contingent rent |
4.7 | 3.3 | 0.5 | |||||||||
|
|
|
|
|
|
|||||||
Total rent expense |
376.0 | 304.1 | 53.9 | |||||||||
Tenant rental income |
(51.9 | ) | (45.3 | ) | (19.2 | ) | ||||||
|
|
|
|
|
|
|||||||
Total rent expense, net of tenant rental income |
$ | 324.1 | $ | 258.8 | $ | 34.7 | ||||||
|
|
|
|
|
|
Note 13Income Taxes
The components of (loss) income before income taxes consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Domestic |
$ | (1,379.1 | ) | $ | 1,140.5 | $ | 31.5 | |||||
Foreign |
0.5 | | | |||||||||
|
|
|
|
|
|
|||||||
$ | (1,378.6 | ) | $ | 1,140.5 | $ | 31.5 | ||||||
|
|
|
|
|
|
F-68 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of income tax (benefit) expense consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Current |
||||||||||||
Federal |
$ | 8.5 | $ | 67.8 | $ | | ||||||
State |
8.2 | 17.2 | 1.7 | |||||||||
Foreign |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total Current |
16.7 | 85.0 | 1.7 | |||||||||
Deferred |
||||||||||||
Federal |
(110.9 | ) | (561.1 | ) | | |||||||
State |
(59.2 | ) | (96.5 | ) | | |||||||
Foreign |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total Deferred |
(170.1 | ) | (657.6 | ) | | |||||||
|
|
|
|
|
|
|||||||
Income Tax (Benefit) Expense, Continuing Operations |
$ | (153.4 | ) | $ | (572.6 | ) | $ | 1.7 | ||||
|
|
|
|
|
|
The difference between the actual tax provision and the tax provision computed by applying the statutory federal income tax rate to losses from continuing operations before income taxes was attributable to the following (in millions):
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Income tax (benefit) expense at federal statutory rate |
$ | (482.5 | ) | $ | 399.1 | $ | 11.0 | |||||
State income taxes, net of federal benefit |
(38.4 | ) | (30.5 | ) | 1.7 | |||||||
Change in valuation allowance |
6.4 | 2.0 | | |||||||||
Unrecognized tax benefits |
11.3 | (15.5 | ) | | ||||||||
Members loss (income) |
251.0 | (581.4 | ) | (11.0 | ) | |||||||
Common control transaction |
13.3 | (357.7 | ) | | ||||||||
Effect of tax rate change |
(3.7 | ) | | | ||||||||
Indemnification liability |
(26.3 | ) | | | ||||||||
Transaction costs |
62.1 | | | |||||||||
Nondeductible equity compensation |
51.0 | | | |||||||||
Other |
2.4 | 11.4 | | |||||||||
|
|
|
|
|
|
|||||||
Income tax (benefit) expense, continuing operations |
$ | (153.4 | ) | $ | (572.6 | ) | $ | 1.7 | ||||
|
|
|
|
|
|
Taxes on income from limited liability companies held in partnership are payable by the members in accordance with their respective ownership percentages. Accordingly, the Company recorded an adjustment to income tax expense (benefit) of $251.0 million, $(581.4) million and $(11.0) million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. Immediately subsequent to the March 21, 2013 acquisition of NAI, the Company sold and transferred the Albertsons-bannered stores and six distribution centers from NAI to Albertsons LLC and recorded an adjustment to income tax expense (benefit) of $13.3 million and $(357.7) million for fiscal 2014 and fiscal 2013, respectively. The adjustment primarily represents a net reduction of deferred tax liabilities related to the sale and transfer.
F-69 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. The Companys deferred tax assets and liabilities consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Deferred tax assets: |
||||||||
Compensation and benefits |
$ | 231.6 | $ | 16.2 | ||||
Net operating loss |
65.1 | 153.5 | ||||||
Pension & postretirement benefits |
329.5 | 18.6 | ||||||
Reserves |
38.4 | 8.3 | ||||||
Self-Insurance |
385.1 | 164.5 | ||||||
Tax credits |
32.6 | 10.7 | ||||||
Other |
161.3 | 49.0 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
1,243.6 | 420.8 | ||||||
Less: valuation allowance |
(90.4 | ) | (51.7 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
1,153.2 | 369.1 | ||||||
Deferred tax liabilities: |
||||||||
Debt discount |
111.9 | 123.6 | ||||||
Depreciation and amortization |
2,168.3 | 79.5 | ||||||
Inventories |
491.3 | 138.7 | ||||||
Investment in foreign operations |
163.9 | | ||||||
Other |
61.0 | 13.1 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
2,996.4 | 354.9 | ||||||
|
|
|
|
|||||
Net deferred tax (liability) asset |
$ | (1,843.2 | ) | $ | 14.2 | |||
|
|
|
|
|||||
Current deferred tax asset |
$ | | $ | | ||||
Current deferred tax liability |
(145.4 | ) | (85.4 | ) | ||||
Noncurrent deferred tax asset |
93.0 | 144.8 | ||||||
Noncurrent deferred tax liability |
(1,790.8 | ) | (45.2 | ) | ||||
|
|
|
|
|||||
Total |
$ | (1,843.2 | ) | $ | 14.2 | |||
|
|
|
|
In connection with the Safeway acquisition, the Company recorded a $1,807.7 million net deferred tax liability as of January 30, 2015.
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. On the basis of this evaluation, as of February 28, 2015, a valuation allowance of $90.4 million has been recorded for the portion of the deferred tax asset that is not more likely than not to be realized. The Company will continue to evaluate the need to adjust the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted if the Company continues to incur losses in the future.
The Company currently has federal and state net operating loss (NOL) carryforwards of $247.5 million and $771.5 million, respectively, which will begin to expire in 2015 and continue through the fiscal year ending February 2035. As of February 28, 2015, the Company had federal and state credit carryforwards of $2.7 million and $47.4 million, respectively, the majority of which will expire in 2023.
F-70 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Changes in the Companys unrecognized tax benefits consisted of the following (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Beginning balance |
$ | 180.4 | $ | | ||||
Increase from acquisitions |
262.7 | 147.0 | ||||||
Increase related to tax positions taken in the current year |
10.6 | 152.3 | ||||||
Increase related to tax positions taken in prior years |
19.9 | 8.8 | ||||||
Decrease related to tax position taken in prior years |
(15.5 | ) | (10.8 | ) | ||||
Foreign currency translation |
(0.1 | ) | | |||||
Decrease related to settlements with taxing authorities |
(4.9 | ) | (115.5 | ) | ||||
Decrease related to lapse of statute of limitations |
(1.6 | ) | (1.4 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 451.5 | $ | 180.4 | ||||
|
|
|
|
Included in the balance of unrecognized tax benefits as of February 28, 2015, February 20, 2014 and February 21, 2013 are tax positions of $221.6 million, $103.0 million and $32.4 million, respectively, which would reduce the Companys effective tax rate if recognized in future periods. Of the $221.6 million that could impact tax expense, the Company has recorded $12.8 million of indemnification assets that would offset any future recognition. As of February 28, 2015, the Company is no longer subject to federal income tax examinations for the fiscal years prior to 2007, and in most states, is no longer subject to state income tax examinations for fiscal years before 2007. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recognized expense (benefit) related to interest and penalties, net of settlement adjustments, of $(1.2) million, $(5.9) million and $7.0 million for fiscal 2014, 2013 and 2012, respectively. The Company does not expect any material amount of unrecognized tax benefits to reverse in the next 12 months.
Note 14Employee Benefit Plans and Collective Bargaining Agreements
Pension Plans
The Company sponsors a defined benefit pension plan (the Shaws Plan) covering union employees under the Shaws banner. The Company also sponsors a defined benefit pension plan (the Safeway Plan) for substantially all of its employees under the Safeway banners not participating in multiemployer pension plans. The Company also sponsors a frozen plan covering certain employees under the United banners and a Retirement Restoration Plan that provides death benefits and supplemental income payments for certain senior executives after retirement. The Retirement Restoration Plan is unfunded.
The Safeway Plan and the Retirement Restoration Plan were acquired as part of the Safeway acquisition in fiscal 2014. The United Plan was acquired as part of the United acquisition in fiscal 2013.
Other Post-Retirement Benefits
In addition to the Companys pension plans, the Company acquired plans as part of the Safeway acquisition that provide post-retirement medical and life insurance benefits to certain employees. Retirees share a portion of the cost of the post-retirement medical plans. The Company pays all the cost of the life insurance plans. The plans are unfunded.
F-71 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the changes in the retirement plans benefit obligation and fair value of assets over the two-year period ended February 28, 2015 and a statement of funded status as of fiscal year-end 2014 and fiscal year-end 2013 (in millions):
Pension |
Other
Post- Retirement Benefits |
|||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2014 | ||||||||||
Change in projected benefit obligation: |
||||||||||||
Beginning balance |
$ | 357.4 | $ | | $ | | ||||||
NAI acquisition |
| 307.0 | | |||||||||
United acquisition |
| 53.9 | | |||||||||
Safeway acquisition |
2,452.9 | | 19.4 | |||||||||
Service cost |
13.5 | 9.4 | | |||||||||
Interest cost |
24.5 | 13.1 | 0.1 | |||||||||
Actuarial gain |
(61.9 | ) | (19.7 | ) | (0.3 | ) | ||||||
Benefit payments |
(61.6 | ) | (6.3 | ) | (0.2 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,724.8 | $ | 357.4 | $ | 19.0 | ||||||
|
|
|
|
|
|
|||||||
Change in fair value of plan assets: |
||||||||||||
Beginning balance |
$ | 298.1 | $ | | $ | | ||||||
NAI acquisition |
| 214.7 | | |||||||||
United acquisition |
| 49.7 | | |||||||||
Safeway acquisition |
1,547.3 | | | |||||||||
Actual return on plan assets |
88.2 | 24.3 | | |||||||||
Employer contributions |
272.1 | 15.7 | 0.2 | |||||||||
Benefit payments |
(61.6 | ) | (6.3 | ) | (0.2 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,144.1 | $ | 298.1 | $ | | ||||||
|
|
|
|
|
|
|||||||
Components of net amount recognized in financial position: |
||||||||||||
Other current liabilities |
$ | (5.5 | ) | $ | | $ | (1.9 | ) | ||||
Other long-term liabilities |
(575.2 | ) | (59.3 | ) | (17.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Funded status |
$ | (580.7 | ) | $ | (59.3 | ) | $ | (19.0 | ) | |||
|
|
|
|
|
|
Amounts recognized in Accumulated other comprehensive (loss) income consisted of the following (in millions):
Pension |
Other Post-
Retirement Benefits |
|||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2014 | ||||||||||
Net actuarial gain |
$ | (150.1 | ) | $ | (29.4 | ) | $ | (0.3 | ) |
F-72 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information for the Companys pension plans, all of which have an accumulated benefit obligation in excess of plan assets as of fiscal year-end 2014 and 2013, is shown below (in millions):
February 28, 2015 | February 20, 2014 | |||||||
Projected benefit obligation |
$ | 2,724.8 | $ | 357.4 | ||||
Accumulated benefit obligation |
2,659.5 | 357.4 | ||||||
Fair value of plan assets |
2,144.1 | 298.1 |
The following tables provide the components of net expense for the retirement plans and other changes in plan assets and benefit obligations recognized in other comprehensive income (in millions):
Pension |
Other Post-
Retirement Benefits |
|||||||||||
Fiscal 2014 | Fiscal 2013 | Fiscal 2014 | ||||||||||
Components of net expense: |
||||||||||||
Estimated return on plan assets |
$ | (29.9 | ) | $ | (14.5 | ) | $ | | ||||
Service cost |
13.5 | 9.4 | | |||||||||
Interest cost |
24.5 | 13.1 | 0.1 | |||||||||
Settlement loss |
0.5 | | | |||||||||
|
|
|
|
|
|
|||||||
Net expense |
$ | 8.6 | $ | 8.0 | $ | 0.1 | ||||||
Changes in plan assets and benefit obligations recognized in Other comprehensive income (loss): |
||||||||||||
Net actuarial gain |
$ | (120.7 | ) | $ | (29.5 | ) | $ | (0.3 | ) | |||
|
|
|
|
|
|
|||||||
Total net expense and changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) |
$ | (112.1 | ) | $ | (21.5 | ) | $ | (0.2 | ) | |||
|
|
|
|
|
|
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. When the accumulation of actuarial gains and losses exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets, the excess is amortized over the average remaining service period of active participants. No prior service costs or estimated net actuarial gain or loss is expected to be amortized from other comprehensive income into periodic benefit cost during fiscal 2015.
Assumptions
The actuarial assumptions used to determine year-end projected benefit obligations for pension plans were as follows:
February 28, 2015 | February 20, 2014 | |||||||
Discount rate |
3.92 | % | 4.96 | % | ||||
Rate of compensation increase |
3.32 | % | 2.00 | % |
F-73 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actuarial assumptions used to determine net periodic benefit costs for pension plans were as follows:
February 28, 2015 | February 20, 2014 | |||||||
Discount rate |
3.75 | % | 4.62 | % | ||||
Expected return on plan assets: |
6.97 | % | 7.17 | % |
The Company has adopted and implemented an investment policy for the defined benefit pension plans that incorporates a strategic long-term asset allocation mix designed to meet the Companys long-term pension requirements. This asset allocation policy is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. The following table summarizes actual allocations for the Safeway Plan which had $1.9 billion in plan assets at February 28, 2015:
Plan assets | ||||||||
Asset category |
Target | February 28, 2015 | ||||||
Equity |
65 | % | 64.9 | % | ||||
Fixed income |
35 | % | 34.1 | % | ||||
Cash and other |
| 1.0 | % | |||||
|
|
|
|
|||||
Total |
100 | % | 100.0 | % | ||||
|
|
|
|
Shaws Plan assets are held in an individual trust and invested in commingled investment vehicles holding domestic and international equity securities, domestic fixed income securities and other investment classes. The Company employs a total-return approach whereby a diversified mix of asset class investments is used to maximize the long-term return of plan assets for an acceptable level of risk. Risk is managed through careful consideration of the plan liabilities, plan funded status and the Companys financial condition. The asset allocation policy is reviewed annually, and allocations are monitored regularly and rebalanced on an as-needed basis. Plan assets are invested using active and passive investment strategies. Passive or indexed strategies attempt to replicate the performance of a market benchmark. Monitoring activities to evaluate performance against targets and measure investment risk take place on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. The following table summarizes the actual allocations for the Shaws Plan which had $240.0 million in plan assets as of February 28, 2015:
Plan assets | ||||||||||||
Asset Category |
Target | February 28, 2015 | February 20, 2014 | |||||||||
Domestic equity |
35 | % | 34.9 | % | 35.3 | % | ||||||
International equity |
20 | % | 20.2 | % | 15.0 | % | ||||||
Fixed income |
45 | % | 44.9 | % | 49.7 | % | ||||||
|
|
|
|
|
|
|||||||
Total |
100 | % | 100.0 | % | 100.0 | % | ||||||
|
|
|
|
|
|
F-74 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The target market value of equity securities for the United Plan is 50% of plan assets. If the equity percentage exceeds 60% or drops below 40%, the asset allocation is adjusted to target. The following table summarizes the actual allocations for the United Plan, which had $52 million in plan assets as of February 28, 2015:
Plan assets | ||||||||||||
Asset category |
Target | February 28, 2015 | February 20, 2014 | |||||||||
Equity |
50 | % | 55.0 | % | 50.9 | % | ||||||
Fixed income(1) |
| 32.9 | % | 36.8 | % | |||||||
Cash and other(1) |
| 12.1 | % | 12.3 | % | |||||||
|
|
|
|
|||||||||
Total |
100.0 | % | 100.0 | % | ||||||||
|
|
|
|
(1) | No formal allocation percentages have been established for these asset categories. Allocations are evaluated monthly and adjusted to meet the cash needs of the plan. |
The investment policy also emphasizes the following key objectives: (i) maintaining a diversified portfolio among asset classes and investment styles; (ii) maintaining an acceptable level of risk in pursuit of long-term economic benefit; (iii) maximizing the opportunity for value-added returns from active investment management while establishing investment guidelines and monitoring procedures for each investment manager to ensure that the characteristics of the portfolio are consistent with the original investment mandate; and (iv) maintaining adequate controls over administrative costs.
Expected return on pension plan assets is based on historical experience of the Companys portfolios and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation. The Companys target asset allocation mix is designed to meet the Companys long-term pension requirements.
Pension Plan Assets
The fair value of the Companys pension plan assets at February 28, 2015, excluding pending transactions of $45.1 million, by asset category are as follows (in millions):
Fair Value Measurements | ||||||||||||||||
Asset category: |
Total |
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
||||||||||||
Cash and cash equivalents(1) |
$ | 20.4 | $ | 9.6 | $ | 10.8 | $ | | ||||||||
Short-term investment collective trust(2) |
47.4 | | 47.4 | | ||||||||||||
Common and preferred stock:(3) |
||||||||||||||||
Domestic common and preferred stock |
306.1 | 306.1 | | | ||||||||||||
International common stock |
67.2 | 67.2 | | | ||||||||||||
Common collective trust funds(2) |
914.3 | | 914.3 | | ||||||||||||
Corporate bonds(4) |
153.7 | | 153.7 | | ||||||||||||
Mortgage- and other asset-backed securities(5) |
71.0 | | 71.0 | | ||||||||||||
Mutual funds(6) |
219.2 | 63.9 | 155.3 | | ||||||||||||
U.S. government securities(7) |
324.4 | | 324.3 | 0.1 | ||||||||||||
Other securities(8) |
65.5 | 0.1 | 41.2 | 24.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,189.2 | $ | 446.9 | $ | 1,718.0 | $ | 24.3 | ||||||||
|
|
|
|
|
|
|
|
F-75 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) | The carrying value of these items approximates fair value. |
(2) | These investments are valued based on the Net Asset Value (NAV) of the underlying investments and are provided by the fund issuers. |
(3) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for preferred stock, an industry standard valuation model is used which maximizes observable inputs. |
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs. |
(5) | The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for comparable securities, the fair value is based upon an industry model which maximizes observable inputs. |
(6) | These investments are publicly traded investments, which are valued using the NAV. The NAV of the mutual funds is a quoted price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the funds liabilities, expressed on a per share basis. |
(7) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model that maximizes observable inputs. |
(8) | Level 2 Other Securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Also included in Other Securities are exchange-traded derivatives that are valued based on quoted prices in an active market for identical derivative assets and liabilities. Non-exchange-traded derivatives are valued using industry valuation models, which maximize observable inputs, such as interest-rate yield curve data, foreign exchange rates and applicable spot and forward rates. |
Level 3 Other Securities consist primarily of a commingled fund valued based on the NAV of the underlying investments and is provided by the fund issuer.
A reconciliation of the beginning and ending balances for Level 3 assets for the fiscal year ended February 28, 2015 follows (in millions):
Fair Value Measured Using Significant
Unobservable Inputs (Level 3) |
||||||||||||||||||||
Total |
Corporate
Bonds |
Mortgage-
and other Asset- Backed Securities |
U.S.
Government Securities |
Other
Securities |
||||||||||||||||
Balance, beginning of year |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Safeway acquisition |
26.2 | 0.7 | 0.3 | 0.1 | 25.1 | |||||||||||||||
Purchases, sales, settlements, net |
(2.6 | ) | (0.7 | ) | | | (1.9 | ) | ||||||||||||
Transfer out of Level 3 |
(0.3 | ) | | (0.3 | ) | | | |||||||||||||
Unrealized gains |
1.0 | | | | 1.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, end of year |
$ | 24.3 | $ | | $ | | $ | 0.1 | $ | 24.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-76 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of assets of the Companys pension plan assets as of February 20, 2014, by asset category, consisted of the following (in millions):
Fair Value Measurements | ||||||||||||||||
Asset category: |
Total |
Quoted prices
in active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
||||||||||||
Cash and cash equivalents(1) |
$ | 6.8 | $ | 6.8 | $ | | $ | | ||||||||
Domestic common stock(2) |
25.2 | 25.2 | | | ||||||||||||
Common collective trust funds(3) |
248.0 | | 248.0 | | ||||||||||||
Corporate bonds(4) |
8.4 | | 8.4 | | ||||||||||||
U.S. government securities(5) |
9.7 | | 9.7 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 298.1 | $ | 32.0 | $ | 266.1 | $ | | ||||||||
|
|
|
|
|
|
|
|
(1) | The carrying value of these items approximates fair value. |
(2) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for preferred stock, an industry standard valuation model is used which maximizes observable inputs. |
(3) | These investments are valued based on the NAV of the underlying investments and are provided by the fund issuers. |
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model that maximizes observable inputs. |
(5) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model that maximizes observable inputs. |
Contributions
In the fourth quarter of fiscal 2014, the Company contributed $260.0 million to the Safeway Plan under a settlement with the Pension Benefit Guaranty Corporation in connection with the Safeway acquisition closing. The Company expects to contribute approximately $7.9 million to its pension and post-retirement plans in fiscal 2015. The Companys funding policy for the defined benefit pension plan is to contribute the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, and other applicable laws as determined by the Companys external actuarial consultant. At the Companys discretion, additional funds may be contributed to the defined benefit pension plans. The Company will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
F-77 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (in millions):
Pension
benefits |
Other
benefits |
|||||||
2015 |
$ | 155.9 | $ | 2.2 | ||||
2016 |
156.9 | 2.1 | ||||||
2017 |
158.9 | 2.0 | ||||||
2018 |
160.2 | 1.9 | ||||||
2019 |
161.7 | 1.9 | ||||||
2020 2024 |
821.7 | 7.7 |
Multiemployer Pension Plans
The Company contributes to various multiemployer pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded.
The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
| Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
| If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
| If the Company chooses to stop participating in some multiemployer plans, or makes market exits or store closures or otherwise has participation in the plan fall below certain levels, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The Companys participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employee Identification Number (EIN) and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act zone status (PPA) available for fiscal 2014 and 2013 is for the plans year ending at December 31, 2014 and December 31, 2013, respectively. The zone status is based on information received from the plans and is certified by each plans actuary. The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented by the plan trustees.
Certain plans have been aggregated in the Other funds line in the following table, as the contributions to each of these plans are not individually material. None of the Companys collective bargaining agreements require that a minimum contribution be made to these plans.
F-78 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a part of the Safeway acquisition, the Company recorded a $221.8 million estimated multiemployer pension withdrawal liability related to Safeways previous closure of its Dominicks division. The respective pension plans have assessed a maximum withdrawal liability of approximately $510 million. The maximum withdrawal liability would potentially be payable if the UFCW & Employers Midwest Pension Fund (the UFCW Midwest Plan) were to experience a mass withdrawal, requiring monthly installment payments to be made by the Company in perpetuity. The Companys annual installment payments would be limited to 20 years if a mass withdrawal is not experienced by the UFCW Midwest Plan. The Companys current estimate of the withdrawal liability is based on the fact that a mass withdrawal has not occurred. If the UFCW Midwest Plan was to experience a mass withdrawal, the plan may take the position that the 20-year limit for installment payments no longer applies and the installment payments are required in perpetuity. In addition, the Company is also currently disputing in arbitration the amount of the demand and, based on the current facts and circumstances, believes payment of the maximum liability is remote.
The number of employees covered by the Companys multiemployer plans increased significantly from February 21, 2013 to February 20, 2014, and again from February 20, 2014 to February 28, 2015, affecting the year-to-year comparability of the contributions. The increase in employees covered is a direct result of the NAI acquisition and Safeway acquisition.
F-79 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following tables contain information about the Companys multiemployer plans:
EINPN |
Pension Protection
Act zone status(1) |
Companys 5% of total
plan contributions |
FIP/RP status
pending/ implemented |
|||||||||||
Pension fund |
2014 | 2013 | 2013 | 2012 | ||||||||||
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan |
951939092001 |
Red
3/31/2015 |
Red
3/31/2014 |
Yes
3/31/2014 |
Yes
3/31/2013 |
Implemented | ||||||||
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund |
236396097001 | Red | Red | Yes | Yes | Implemented | ||||||||
Western Conference of Teamsters Pension Plan |
916145047001 | Green | Green | No | No | No | ||||||||
UFCW Local 152 Retail Meat Pension Fund |
2362096956001 |
Red
6/30/2014 |
Red
6/30/2013 |
Yes
6/30/2013 |
Yes
6/30/2012 |
Implemented | ||||||||
UFCW-Northern California Employers Joint Pension Trust Fund |
946313554001 | Red | Red | Yes | Yes | Implemented | ||||||||
Sound Retirement Trust (formerly Retail Clerks Pension
|
916069306001 |
Red
9/30/2014 |
Red
9/30/2013 |
Yes
9/30/2013 |
Yes
9/30/2012 |
Implemented | ||||||||
UFCW International UnionIndustry Pension Fund |
516055922001 |
Green
6/30/2014 |
Green
6/30/2013 |
No
6/30/2013 |
No
6/30/2012 |
Implemented | ||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
516031512001 | Red | Red | Yes | Yes | Implemented | ||||||||
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund |
526128473001 | Red | Red | No | No | Implemented | ||||||||
Teamsters Pension Trust Fund of Philadelphia and Vicinity |
23-1511735001 | Yellow | Yellow | No | No | Implemented | ||||||||
Rocky Mountain UFCW Unions & Employers Pension Plan |
846045986001 | Green | Green | Yes | Yes | No | ||||||||
Bakery and Confectionery Union and Industry International Pension Fund |
526118572001 | Red | Red | Yes | Yes | Implemented | ||||||||
Intermountain Retail Store Employee Pension Trust |
916187192001 |
Red
8/31/2014 |
Red
8/31/2013 |
Yes
8/31/2013 |
Yes
8/31/2012 |
Implemented | ||||||||
Oregon Retail Employees Pension Trust |
936074377001 | Green | Red | Yes | Yes | No | ||||||||
Desert States Employers & UFCW Unions Pension Plan |
846277982001 | Green | Green | Yes | Yes | No | ||||||||
UFCW Local 1245 Labor Management Pension Plan |
516090661001 | Red | Red | Yes | Yes | Implemented | ||||||||
Washington Meat Industry Pension Trust |
916134141001 |
Red
6/30/2014 |
Red
6/30/2013 |
No
6/30/2013 |
No
6/30/2012 |
No |
F-80 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contributions of Company
(in millions) |
Surcharge
imposed(3) |
Expiration
date of collective bargaining agreements |
Total
collective bargaining agreements |
Most significant collective
bargaining agreement(s) |
||||||||||||||||||||||
Pension fund |
2014 | 2013 | 2012 | Count | Expiration |
% head-
count(4) |
||||||||||||||||||||
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan |
$ | 35.3 | $ | 29.7 | $ | 1.0 | No |
3/6/2016 to
5/8/2016 |
19 | 14 | 3/6/2016 | 99 | % | |||||||||||||
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund |
$ | 14.5 | $ | 14.3 | $ | 14.6 | Yes |
2/2/2013 to
1/31/2018 |
4 | 1 | 1/31/2018 | 39 | % | |||||||||||||
Western Conference of Teamsters Pension Plan |
$ | 14.0 | $ | 0.9 | $ | | No |
9/20/2014 to
10/6/2018 |
57 | 1 | 10/1/2016 | 23 | % | |||||||||||||
UFCW Local 152 Retail Meat Pension Fund |
$ | 7.8 | $ | 7.7 | $ | 7.3 | Yes |
5/3/2016 to
5/4/2016 |
2 | 1 | 5/4/2016 | 97 | % | |||||||||||||
UFCW-Northern California Employers Joint Pension Trust Fund |
$ | 7.2 | $ | | $ | | No |
8/3/2013 to
7/23/2016 |
20 | 14 | 10/11/2014 | 93 | % | |||||||||||||
Sound Retirement Trust (formerly Retail Clerks Pension Trust)(2) |
$ | 6.3 | $ | 3.1 | $ | | No |
1/10/2015 to
9/20/2017 |
72 | 6 | 5/7/2016 | 53 | % | |||||||||||||
UFCW International UnionIndustry Pension Fund |
$ | 5.0 | $ | 4.4 | $ | 4.2 | No |
8/23/2014 to
7/16/2016 |
3 | 1 | 8/23/2014 | 98 | % | |||||||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
$ | 4.1 | $ | 3.4 | $ | | No |
5/19/2013 to
3/1/2015 |
7 | 4 | 3/1/2015 | 99 | % | |||||||||||||
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund |
$ | 3.6 | $ | 2.0 | $ | 2.0 | Yes |
10/29/2016
to 9/30/2017 |
8 | 4 | 10/29/2016 | 89 | % | |||||||||||||
Teamsters Pension Trust Fund of Philadelphia and Vicinity |
$ | 2.3 | $ | 2.0 | $ | 1.8 | No | 7/1/2019 | 1 | 1 | 7/1/2019 | 100 | % | |||||||||||||
Rocky Mountain UFCW Unions & Employers Pension Plan |
$ | 2.1 | $ | 1.1 | $ | 1.0 | No |
9/12/2015 to
8/27/2016 |
52 | 10 | 9/12/2015 | 50 | % | |||||||||||||
Bakery and Confectionery Union and Industry International Pension Fund |
$ | 1.9 | $ | | $ | | Yes |
11/7/2011 to
9/17/2017 |
62 | 5 | 4/8/2017 | 36 | % | |||||||||||||
Intermountain Retail Store Employee Pension Trust |
$ | 1.5 | $ | 1.3 | $ | | Yes |
2/18/2012 to
7/25/2015 |
60 | 16 | 3/31/2014 | 33 | % | |||||||||||||
Oregon Retail Employees Pension Trust |
$ | 1.3 | $ | 1.5 | $ | | No |
7/25/2015 to
1/21/2017 |
48 | 5 | 7/25/2015 | 33 | % | |||||||||||||
Desert States Employers & UFCW Unions Pension Plan |
$ | 1.1 | $ | 0.2 | $ | | No |
10/29/2016
to 11/3/2018 |
8 | 2 | 10/29/2016 | 67 | % | |||||||||||||
UFCW Local 1245 Labor Management Pension Plan |
$ | 1.1 | $ | 1.0 | $ | 0.9 | Yes | 11/21/2015 | 1 | 1 | 11/21/2015 | 100 | % | |||||||||||||
Washington Meat Industry Pension Trust |
$ | 1.1 | $ | | $ | | No |
9/12/2015 to
7/23/2016 |
8 | 3 | 5/7/2016 | 79 | % | |||||||||||||
Other funds |
$ | 3.2 | $ | 1.6 | $ | 0.3 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total Company contributions to U.S. multiemployer pension plans |
$ | 113.4 | $ | 74.2 | $ | 33.1 | ||||||||||||||||||||
|
|
|
|
|
|
F-81 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) | PPA established three categories (or zones) of plans: (1) Green Zone for healthy; (2) Yellow Zone for endangered; and (3) Red Zone for critical. These categories are based upon the funding ratio of the plan assets to plan liabilities. In general, Green Zone plans have a funding ratio greater than 80%, Yellow Zone plans have a funding ratio between 6579%, and Red Zone plans have a funding ratio less than 65%. |
(2) | Sound Retirement Trust information includes former Washington Meat Industry Pension Trust due to merger into Sound Retirement Trust, effective June 30, 2014. |
(3) | PPA surcharges are five percent or ten percent of eligible contributions and may not apply to all collective bargaining agreements or total contributions to each plan. |
(4) | Employees on which the Company may contribute under these most significant collective bargaining agreements as a percent of all employees on which the Company may contribute to the respective fund. |
Collective Bargaining Agreements
As of February 28, 2015, the Company had approximately 265,000 employees, of which approximately 174,000 were covered by collective bargaining agreements. During fiscal 2014, collective bargaining agreements covering approximately 50,000 employees were renegotiated. During fiscal 2015, 233 collective bargaining agreements covering approximately 73,000 employees are scheduled to expire.
Multiemployer Health and Welfare Plans
The Company makes contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. These plans provide medical, dental, pharmacy, vision and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The vast majority of the Companys contributions covers active employees and as such, may not constitute contributions to a postretirement benefit plan. However, the Company is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to active plans. Total contributions to multiemployer health and welfare plans were $316.2 million, $260.4 million and $6.6 million for fiscal 2014, 2013 and 2012, respectively.
Defined Contribution Plans and Supplemental Retirement Plans
Many of the Companys employees are eligible to contribute a percentage of their compensation to defined contribution plans (401(k) Plans). Participants in the 401(k) Plans may become eligible to receive a profit-sharing allocation in the form of a discretionary Company contribution based on employee compensation. In addition, the Company may also provide matching contributions based on the amount of eligible compensation contributed by the employee. The Company provides supplemental retirement benefits through the Albertsons LLC Executive Deferred Compensation Makeup Plan and the United Supplemental Plan, which provide certain key employees with retirement benefits that supplement those provided by the 401(k) Plans. All Company contributions to the 401(k) Plans are made at the discretion of the Companys Board of Managers. Total contributions for these plans were $37.0 million, $28.5 million and $6.3 million for fiscal 2014, 2013 and 2012, respectively.
On October 10, 2014, the Company, with the unanimous consent of the plan participants, terminated its LTIPs. The termination of this plan resulted in a charge totaling $78.0 million, which was recorded as compensation expense during the fiscal year ended February 28, 2015. In connection with
F-82 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the termination, certain plan participants were required to purchase equity of AB acquisition at an amount equal to 50.0% of their LTIPs payouts upon closing of the Safeway acquisition. The total value of units purchased by these plan participants was approximately $33.2 million.
Note 15Related Parties
Symphony Investors LLC Tender Offer
On March 21, 2013, associated with the NAI acquisition, Symphony Investors LLC (Symphony), which is owned by a consortium of investors led by Cerberus, acquired 21.1% of SuperValu shares. Symphony held 20.7% of SuperValu shares at February 28, 2015.
Transition Services Agreement with SuperValu
The Consolidated Financial Statements include expenses for certain support functions provided by SuperValu through Transition Services Agreements (TSA) including, but not limited to, general corporate expenses related to finance, legal, information technology, warehouse and distribution, human resources, communications, processing and handling cardholder data and procurement of goods. Prior to March 21, 2013, the cost structure of the TSA was based mainly on the number of Company stores and distribution centers serviced by SuperValu, as well as a fixed annual fee of $20.0 million. On March 21, 2013, the Company entered into a new TSA with SuperValu for a total annual fee of $200.0 million, paid monthly over the first 12 months of the new TSA. In December 2013, the fee of $200.0 million was renegotiated with SuperValu and reduced to $193.0 million. Beginning in month 13, fees are calculated on a per-store and distribution center basis of fixed and variable costs for services. The Company also paid a transition fee of $60.0 million amortized on a straight line basis over the 30-month life of the agreement.
On September 12, 2014, the Company exercised its right to renew the term of the TSA with SuperValu for an additional year. The original TSA had an initial term expiring on September 21, 2015 and included 10 options for additional one-year renewals with notice given to SuperValu at least 12 months prior to the expiration of the then current term. The renewal extends the TSA through September 21, 2016.
On April 16, 2015, the Company entered into a letter agreement regarding the TSA with SuperValu (the TSA Letter Agreement) pursuant to which SuperValu will provide services to the Company as needed to transition and wind down the TSA and the services SuperValu provides under the TSA. In exchange for these transition and wind down services, the agreement calls for eight payments of $6.3 million every six months for aggregate fees of $50.0 million. These payments are separate from and incremental to the fixed and variable fees the Company pays to SuperValu under the TSA. The parties also agreed to negotiate in good faith if either the costs associated with the transition and wind down services are materially higher (i.e. 5.0% or more) than anticipated, or SuperValu is not performing in all material respects the transition and wind down services as needed to support the Companys transition and wind down activities.
F-83 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summary of SuperValu activity
Related party activities with SuperValu that are included in the Consolidated Statements of Operations and Comprehensive Loss consisted of the following (in millions):
Fiscal 2014 | Fiscal 2013 | |||||||
Supply agreements included in Cost of sales |
$ | 1,359.4 | $ | 1,389.8 | ||||
Selling and administrative expenses |
215.2 | 202.4 | ||||||
|
|
|
|
|||||
Total |
$ | 1,574.6 | $ | 1,592.2 | ||||
|
|
|
|
Trademark Cross-Licensing Agreements
In conjunction with the NAI acquisition, the Company entered into separate trademark cross-licensing agreements with SuperValu. These cross-licensing agreements include a limited royalty-free license to certain proprietary rights (e.g., trademarks, trade names, trade dress, service markets, banners, etc.) among and between the entities, for an initial period of three years.
Cerberus
Immediately after the consummation of the NAI acquisition from SuperValu, the Company paid Cerberus a transaction fee of $15.0 million. As a result of the Safeway acquisition and pursuant to the members agreement, as amended, the management agreement with Cerberus was terminated, and the remaining annual management fees of $9.0 million were paid by the Company. A new agreement with Cerberus and the consortium of investors commenced on January 30, 2015, requiring a management fee of $13.8 million, payable annually beginning January 30, 2015. The agreement term is four years. The Company also paid an affiliate of Cerberus, Cerberus Operations and Advisory Committee, LLC, fees totaling $1.7 million and $0.5 million in fiscal 2014 and fiscal 2013, respectively, for consulting services provided in connection with improving the Companys operations.
Note 16Commitments and Contingencies and Off Balance Sheet Arrangements
Guarantees
California Department of Industrial Relations : On October 24, 2012, the Office of Self-Insurance Plans, a program within the directors office of the California Department of Industrial Relations (the DIR), notified SuperValu that additional security was required to be posted in connection with the Companys, and certain other subsidiaries, California self-insured workers compensation obligations pursuant to applicable regulations. The notice from the DIR stated that the additional security was required as a result of an increase in estimated future liabilities, as determined by the DIR pursuant to a review of the self-insured California workers compensation claims with respect to the applicable businesses, and a decline in SuperValus net worth. A security deposit of $271.0 million was demanded in addition to security of $427.0 million provided through SuperValus participation in Californias Self-Insurers Security Fund (the Fund). SuperValu appealed this demand. The Fund has attempted to create a secured interest in certain assets of the Company for the total amount of the additional security deposit. The dispute with the Fund and the DIR was resolved through a settlement agreement as part of the NAI acquisition on March 21, 2013, and the primary obligation to the Fund and the DIR was retained by the Company following the NAI acquisition. Subsequent to the NAI acquisition, the Company set up a fund of $75.0 million to be used for the payment of future claims. In addition, the Company provided to the DIR a $225.0 million LOC to collateralize any of the self-insurance workers compensation future obligations in excess of the $75.0 million fund. As of February 28, 2015, the balance remaining in the fund for payment of future claims was immaterial. Prior to January 21, 2014, the California Self Insurers Security Fund also held mortgage liens against
F-84 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the Jewel real estate assets as collateral. On January 21, 2014, the Company entered into a Collateral Substitution Agreement with the California Self-Insurers Security Fund to provide an irrevocable LOC to replace the mortgage liens against the Jewel real estate assets and the previously issued $225.0 million LOC. The amount of the LOC is adjusted semi-annually based on annual filings of an actuarial study reflecting liabilities as of December 31 of each year reduced by claim closures and settlements. The related LOC was $338.0 million and $431.0 million as of February 28, 2015 and February 20, 2014, respectively.
The Company is contingently liable for leases that have been assigned to various third parties, including those in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Companys assignments among third parties and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the accompanying Consolidated Balance Sheets for these contingent obligations. The Company expenses legal costs associated with loss contingencies as incurred.
The Company also provides guarantees, indemnifications and assurances to others in the ordinary course of its business.
Legal Contingencies
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain wage and hour or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where the loss contingency can be reasonably estimated and an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for the Companys exposure in excess of amounts accrued is expected to be immaterial to the Company. It remains possible that despite managements current belief, material differences in actual outcomes or changes in managements evaluation or predictions could arise that could have a material effect on the Companys financial condition, results of operations or cash flows.
Appraisal of Safeway Inc. : Certain holders of Safeway common stock, who held approximately 17.7 million shares, sought appraisal rights under Section 262 of the Delaware General Corporation Law, requesting a determination that the per share merger consideration payable in the Safeway acquisition does not represent fair value for their shares. Five petitions for appraisal were filed in Delaware Chancery Court, consolidated under the title In re Appraisal of Safeway Inc. , on behalf of all former holders of Safeway common stock who had demanded appraisal. In May 2015, the Company settled with respect to five of the seven petitioners representing approximately 14.0 million shares for approximately $621 million. The settlement amount includes the merger consideration of $34.92 per share, or $487 million, with the additional $134 million recorded as an operating expense in the fourth quarter of fiscal 2014. Approximately $100 million of the $621 million was paid as of February 28, 2015, with the remaining amount recorded in Other current liabilities as of February 28, 2015. The appraisal action is ongoing with respect to two remaining petitioners, with trial on the merits set to commence in April 2016. These remaining petitioners are holders of approximately 3.74 million shares
F-85 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and have previously accepted a tender offer of the merger consideration of $34.92 per share acquisition consideration, which stops statutory interest from accruing on the amount of any recovery. If the remaining petitioners are successful in the appraisal proceeding, they could be entitled to more for their stock than the per share acquisition consideration payable in the acquisition, plus statutory interest on that additional amount. As of February 28, 2015, the Company has recorded a liability for these remaining petitioners.
Security Breach : On August 14, 2014, AB Acquisition announced that it had experienced a criminal intrusion by installation of malware on a portion of its computer network that processes payment card transactions for retail store locations for its Shaws , Star Market , Acme , Jewel - Osco and Albertsons retail banners. On September 29, 2014, the Company announced that it had experienced a second and separate criminal intrusion. The Company believes these were attempts to collect payment card data. The Company, relying on its IT service provider, SuperValu, took immediate steps to secure the affected part of its network. The Company believes that it has eradicated the malware used in each intrusion. The Company has notified federal law enforcement authorities, the major payment card networks, and its insurance carriers and is cooperating in their efforts to investigate these intrusions. As required by the payment card networks, the Company retained a firm to conduct a forensic investigation into the intrusions. Recently, the firm issued a report for the first intrusion (a copy of which has been provided to the card networks), finding that, although the Companys network had previously been found to be compliant with payment card industry data security standards (PCI DSS), not all of these standards had been met, and this non-compliance may have contributed to or caused at least some portion of the compromise that occurred during the first intrusion. A report for the second intrusion is still pending. The Company believes it is probable that the payment card networks will make claims against the Company following the conclusion of the ongoing forensic investigation and associated analysis. These claims will likely include amounts for incremental counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment card networks assert they or their issuing banks have incurred. If the payment card networks assert claims against it, the Company currently intends to dispute those claims and assert available defenses. At the present time, the Company cannot reasonably estimate a range of losses because to date no claims have been asserted and because significant factual and legal issues remain unresolved. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. As a result of the criminal intrusions, two class action complaints were filed against the Company by consumers and are currently pending, Mertz v. SuperValu Inc. et a l. filed in federal court in the state of Minnesota and Rocke v. SuperValu Inc. et al. filed in federal court in the state of Idaho, alleging deceptive trade practices, negligence and invasion of privacy. Plaintiffs seek unspecified damages. The Judicial Panel on Multidistrict Litigation has consolidated the class actions and transferred the cases to the District of Minnesota. Based on proceedings to date, the Company is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
Cicairos, et al / Bluford : On August 18, 2001, a group of truck drivers from Safeways Tracy, California distribution center filed an action in California Superior Court, San Joaquin County entitled Cicairos, et al. v. Summit Logistics , alleging that Summit Logistics, the entity with whom Safeway contracted to operate the distribution center until August 2003, failed to provide meal periods, rest periods and itemized wage statements to the drivers in violation of California state law. Under its contract with Summit, Safeway is obligated to defend and indemnify Summit Logistics in this lawsuit. On February 6, 2007, another group of truck drivers from the Tracy distribution center filed a similar action in the same court, entitled Bluford, et al. v. Safeway Inc., alleging essentially the same claims
F-86 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
against Safeway. After lengthy litigation in the trial and appellate courts, both cases were certified as class actions and assigned to a single judge for all purposes in October 2013. On February 18, 2015, the parties signed a preliminary agreement of settlement that calls for Safeway to pay approximately $31.0 million in total. This amount consists of a settlement fund of $30.2 million, out of which will be paid relief to the class, and attorneys fees and costs as awarded by the court. Safeway will also pay third-party settlement administrator costs, and its employer share of FICA/Medicare taxes. The motion
for preliminary approval of the settlement has been granted. A hearing on the motion for final approval of the settlement is set for August 14, 2015. At this time, the Company does not believe that financial exposure to loss in excess of the amount accrued is probable.
Drug Enforcement Agency : The Company has received two subpoenas from the Drug Enforcement Administration (DEA) concerning Safeways record keeping, reporting and related practices associated with the loss or theft of controlled substances. We are not a party to any pending DEA administrative or judicial proceeding arising from or related to these subpoenas. The Company is cooperating with the DEA in all investigative matters.
Newman Development Group of Pottstown : On March 20, 2002, Safeways Genuardi subsidiary was sued by a real estate developer for breach of a lease in the Court of Common Pleas, Chester County (Pa.), in a case entitled Newman Development Group of Pottstown, LLC v. Genuardis Family Markets, Inc. and Safeway Inc. On December 19, 2006, the trial court entered a judgment in favor of Newman in the amount of $0.3 million. On April 25, 2008, the appellate court remanded the case to the trial court for recalculation of damages. On February 25, 2010, the trial court entered a judgment in favor of Newman in the amount of $18.5 million. Safeway appealed, and on March 18, 2011, the appellate court held that Safeway had waived its right to appeal. The Pennsylvania Supreme Court vacated this order on November 1, 2012. On July 29, 2013, an appellate court panel reversed three key elements of the trial courts damages calculation in Safeways favor. On August 19, 2014, a rehearing by the appellate court en banc rejected the panels July 29, 2013 ruling, effectively reinstating the $18.5 million judgment. The Pennsylvania Supreme Court declined to hear Safeways appeal on June 24, 2015, and the case will return to the trial court for calculation of interest and attorneys fees and entry of judgment. At this time, the Company does not believe that financial exposure to loss in excess of the amount accrued is probable.
Rodman : On June 17, 2011, a customer of Safeways home delivery business (safeway.com) filed a class action complaint in the United States District Court for the Northern District of California entitled Rodman v. Safeway Inc. , alleging that Safeway had inaccurately represented on its home delivery website that the prices paid there were the same as the prices in the brick-and-mortar retail store. Rodman asserted claims for breach of contract and unfair business practices under California law. The court certified a class for the breach of contract claim, but denied class treatment for the California business practices claims. On Rodmans motion for partial summary judgment, the court held that Rodman had established a prima facie claim for breach of contract, and that Safeway had not effectively cured the breach by revising the language on its website in November 2011. The court noted that its ruling did not address Safeways affirmative defenses or the calculation of damages. The matter is set for trial on October 5, 2015. Based on proceedings to date, the Company is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
F-87 | (Continued) |
AB ACQUISITION LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other Commitments
In the ordinary course of business, the Company enters into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.
Note 17Other Comprehensive Income or Loss
Total comprehensive earnings are defined as all changes in members equity during a period, other than those from investments by or distributions to members. Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for pension and other post-retirement liabilities and interest rate swaps.
While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period, accumulated other comprehensive income or loss (AOCI) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. AOCI is primarily the cumulative balance related to pension adjustments and interest rate swaps. Changes in the AOCI balance by component are shown below (in millions):
Fiscal 2014 | ||||||||||||||||
Pension plan
items |
Interest
rate swaps |
Other |
Total Comprehensive
income (loss) including noncontrolling interests |
|||||||||||||
Beginning balance |
$ | 17.8 | $ | | $ | 0.2 | $ | 18.0 | ||||||||
Other comprehensive income (loss) before reclassifications |
120.7 | (30.5 | ) | 2.5 | 92.7 | |||||||||||
Amounts reclassified from Accumulated other comprehensive income (loss) |
| 11.3 | | 11.3 | ||||||||||||
Tax (expense) benefit |
(61.4 | ) | (1.4 | ) | 0.4 | (62.4 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net current-period other comprehensive income (loss) |
59.3 | (20.6 | ) | 2.9 | 41.6 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 77.1 | $ | (20.6 | ) | $ | 3.1 | $ | 59.6 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Fiscal 2013 | ||||||||||||||||
Pension plan
items |
Interest
rate swaps |
Other |
Total Comprehensive
income (loss) including noncontrolling interests |
|||||||||||||
Beginning balance |
$ | | $ | | $ | | $ | | ||||||||
Other comprehensive income before reclassifications |
29.5 | | 0.2 | 29.7 | ||||||||||||
Tax (expense) |
(11.7 | ) | | | (11.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net current-period other comprehensive income (loss) |
17.8 | | 0.2 | 18.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 17.8 | $ | | $ | 0.2 | $ | 18.0 | ||||||||
|
|
|
|
|
|
|
|
Note 18Subsequent Events
The Company has evaluated all subsequent events as of July 7, 2015, which represents the date of issuance of these Consolidated Financial Statements.
F-88 | (Continued) |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries (the Company) as of January 3, 2015 and December 28, 2013, and the related consolidated statements of income, comprehensive (loss) income, stockholders equity, and cash flows for each of the three years in the period ended January 3, 2015. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Safeway Inc. and subsidiaries as of January 3, 2015 and December 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, CA
March 3, 2015
F-89
Consolidated Statements of Income
(In millions, except per-share amounts)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Sales and other revenue |
$ | 36,330.2 | $ | 35,064.9 | $ | 35,161.5 | ||||||
Cost of goods sold |
(26,648.2 | ) | (25,833.4 | ) | (25,932.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Gross profit |
9,682.0 | 9,231.5 | 9,229.1 | |||||||||
Operating and administrative expense |
(9,147.5 | ) | (8,680.0 | ) | (8,593.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Operating profit |
534.5 | 551.5 | 635.4 | |||||||||
Interest expense |
(198.9 | ) | (273.0 | ) | (300.6 | ) | ||||||
Loss on extinguishment of debt |
(84.4 | ) | (10.1 | ) | | |||||||
Loss on foreign currency translation |
(131.2 | ) | (57.4 | ) | | |||||||
Other income, net |
45.0 | 40.6 | 27.4 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
165.0 | 251.6 | 362.2 | |||||||||
Income taxes |
(61.8 | ) | (34.5 | ) | (113.0 | ) | ||||||
|
|
|
|
|
|
|||||||
Income from continuing operations, net of tax |
103.2 | 217.1 | 249.2 | |||||||||
Income from discontinued operations, net of tax |
9.3 | 3,305.1 | 348.9 | |||||||||
|
|
|
|
|
|
|||||||
Net income before allocation to noncontrolling interests |
112.5 | 3,522.2 | 598.1 | |||||||||
Less noncontrolling interests |
0.9 | (14.7 | ) | (1.6 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income attributable to Safeway Inc. |
$ | 113.4 | $ | 3,507.5 | $ | 596.5 | ||||||
|
|
|
|
|
|
|||||||
Basic earnings per share: |
||||||||||||
Continuing operations |
$ | 0.44 | $ | 0.90 | $ | 1.01 | ||||||
Discontinued operations |
$ | 0.04 | $ | 13.63 | $ | 1.40 | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 0.48 | $ | 14.53 | $ | 2.41 | ||||||
|
|
|
|
|
|
|||||||
Diluted earnings per share: |
||||||||||||
Continuing operations |
$ | 0.44 | $ | 0.89 | $ | 1.00 | ||||||
Discontinued operations |
$ | 0.04 | $ | 13.49 | $ | 1.40 | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 0.48 | $ | 14.38 | $ | 2.40 | ||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstandingbasic |
228.8 | 239.1 | 245.6 | |||||||||
Weighted average shares outstandingdiluted |
230.7 | 241.5 | 245.9 |
See accompanying notes to consolidated financial statements.
F-90 |
Consolidated Statements of Comprehensive (Loss) Income
(In millions)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Net income before allocation to noncontrolling interests |
$ | 112.5 | $ | 3,522.2 | $ | 598.1 | ||||||
Other comprehensive income (loss): |
||||||||||||
Translation adjustments, net of tax |
0.2 | (65.0 | ) | (3.1 | ) | |||||||
Pension and post-retirement benefits adjustment to funded status, net of tax |
(185.0 | ) | 179.5 | (79.7 | ) | |||||||
Recognition of pension and post-retirement benefits actuarial loss, net of tax |
31.8 | 66.3 | 69.5 | |||||||||
Other, net of tax |
0.2 | (1.1 | ) | 1.0 | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive (loss) income |
(152.8 | ) | 179.7 | (12.3 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive (loss) income including noncontrolling interests |
(40.3 | ) | 3,701.9 | 585.8 | ||||||||
Comprehensive income (loss) attributable to noncontrolling interests |
0.9 | (14.7 | ) | (1.6 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive (loss) income attributable to Safeway Inc. |
$ | (39.4 | ) | $ | 3,687.2 | $ | 584.2 | |||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-91 |
Consolidated Balance Sheets
(In millions, except per-share amounts)
Year-end
2014 |
Year-end
2013 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 2,255.1 | $ | 4,647.3 | ||||
Receivables |
373.4 | 1,211.4 | ||||||
Merchandise inventories, net of LIFO reserve of $53.1 and $58.1 |
2,187.9 | 2,089.6 | ||||||
Income tax receivable |
476.1 | | ||||||
Prepaid expenses and other current assets |
277.1 | 371.5 | ||||||
Assets held for sale |
39.5 | 143.9 | ||||||
|
|
|
|
|||||
Total current assets |
5,609.1 | 8,463.7 | ||||||
|
|
|
|
|||||
Property: |
||||||||
Land |
1,376.8 | 1,583.2 | ||||||
Buildings |
5,666.7 | 5,774.0 | ||||||
Leasehold improvements |
2,804.1 | 2,836.2 | ||||||
Fixtures and equipment |
6,517.9 | 6,979.1 | ||||||
Property under capital leases |
708.3 | 550.2 | ||||||
|
|
|
|
|||||
17,073.8 | 17,722.7 | |||||||
Less accumulated depreciation and amortization |
(10,297.3 | ) | (10,185.2 | ) | ||||
|
|
|
|
|||||
Total property, net |
6,776.5 | 7,537.5 | ||||||
Goodwill |
330.9 | 464.5 | ||||||
Investment in unconsolidated affiliate |
205.8 | 196.1 | ||||||
Other assets |
454.7 | 557.7 | ||||||
|
|
|
|
|||||
Total assets |
$ | 13,377.0 | $ | 17,219.5 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Current maturities of notes and debentures |
$ | 3.2 | $ | 252.9 | ||||
Current obligations under capital leases |
94.7 | 49.3 | ||||||
Accounts payable |
1,609.6 | 3,376.4 | ||||||
Accrued salaries and wages |
449.8 | 419.4 | ||||||
Deferred income taxes |
29.4 | | ||||||
Income taxes payable |
| 1,135.2 | ||||||
Other accrued liabilities |
566.8 | 623.2 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,753.5 | 5,856.4 | ||||||
|
|
|
|
|||||
Long-term debt: |
||||||||
Notes and debentures |
2,472.9 | 3,515.3 | ||||||
Obligations under capital leases |
429.1 | 375.5 | ||||||
|
|
|
|
|||||
Total long-term debt |
2,902.0 | 3,890.8 | ||||||
Dominicks multiemployer pension plan withdrawal liability |
455.0 | 294.8 | ||||||
Pension and post-retirement benefit obligations |
765.0 | 451.4 | ||||||
Accrued claims and other liabilities |
1,051.1 | 851.0 | ||||||
|
|
|
|
|||||
Total liabilities |
7,926.6 | 11,344.4 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock: par value $0.01 per share; 1,500 shares authorized; 245.8 and 244.2 shares issued |
2.5 | 2.4 | ||||||
Additional paid-in capital |
2,051.3 | 1,981.9 | ||||||
Treasury stock at cost: 14.4 and 14.1 shares |
(491.8 | ) | (480.6 | ) | ||||
Accumulated other comprehensive loss |
(421.7 | ) | (271.1 | ) | ||||
Retained earnings |
4,310.1 | 4,586.9 | ||||||
|
|
|
|
|||||
Total Safeway Inc. equity |
5,450.4 | 5,819.5 | ||||||
Noncontrolling interest |
| 55.6 | ||||||
|
|
|
|
|||||
Total equity |
5,450.4 | 5,875.1 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 13,377.0 | $ | 17,219.5 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-92
Consolidated Statements of Cash Flows
(In millions)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Operating Activities: |
||||||||||||
Net income before allocation to noncontrolling interest |
$ | 112.5 | $ | 3,522.2 | $ | 598.1 | ||||||
Income from discontinued operations, net of tax |
(9.3 | ) | (3,305.1 | ) | (348.9 | ) | ||||||
|
|
|
|
|
|
|||||||
Income from continuing operations, net of tax |
103.2 | 217.1 | 249.2 | |||||||||
Reconciliation to net cash flow from operating activities: |
||||||||||||
Depreciation expense |
921.5 | 922.2 | 952.8 | |||||||||
Loss on foreign currency |
131.2 | 57.4 | | |||||||||
Property impairment charges |
56.1 | 35.6 | 33.6 | |||||||||
Share-based employee compensation |
24.7 | 50.4 | 48.4 | |||||||||
LIFO (income) expense |
(5.0 | ) | (14.3 | ) | 0.7 | |||||||
Equity in earnings of unconsolidated affiliate |
(16.2 | ) | (17.6 | ) | (17.5 | ) | ||||||
Net pension and post-retirement benefits expense |
76.2 | 114.8 | 129.0 | |||||||||
Contributions to pension and post-retirement benefit plans |
(13.3 | ) | (56.3 | ) | (110.3 | ) | ||||||
Gain on sale of PDC |
(22.0 | ) | | | ||||||||
Gain on property dispositions and lease exit costs, net |
(38.8 | ) | (51.2 | ) | (48.3 | ) | ||||||
Loss on extinguishment of debt |
84.4 | 10.1 | | |||||||||
Increase in accrued claims and other liabilities |
26.2 | 9.2 | 60.5 | |||||||||
Deferred income taxes |
89.6 | (276.6 | ) | (36.1 | ) | |||||||
Other |
20.8 | 36.9 | 20.2 | |||||||||
Changes in working capital items: |
||||||||||||
Receivables |
16.5 | (32.0 | ) | 20.3 | ||||||||
Inventories at FIFO cost |
(128.1 | ) | (76.5 | ) | (107.4 | ) | ||||||
Prepaid expenses and other current assets |
63.4 | (49.5 | ) | (20.5 | ) | |||||||
Income taxes |
(90.6 | ) | 71.0 | (54.3 | ) | |||||||
Payables and accruals |
87.9 | 120.7 | 106.2 | |||||||||
|
|
|
|
|
|
|||||||
Net cash flow from operating activitiescontinuing operations |
1,387.7 | 1,071.4 | 1,226.5 | |||||||||
Net cash flow (used by) from operating activitiesdiscontinued operations |
(2,008.9 | ) | 230.1 | 343.2 | ||||||||
|
|
|
|
|
|
|||||||
Net cash flow (used by) from operating activities |
(621.2 | ) | 1,301.5 | 1,569.7 | ||||||||
|
|
|
|
|
|
|||||||
Investing Activities: |
||||||||||||
Cash paid for property additions |
(711.2 | ) | (738.2 | ) | (800.1 | ) | ||||||
Proceeds from sale of PDC |
637.2 | | | |||||||||
Proceeds from sale of property |
99.2 | 220.3 | 263.0 | |||||||||
Proceeds from company-owned life insurance policies |
| 68.7 | | |||||||||
Restricted cash proceeds from the sale of PDC |
(61.9 | ) | | | ||||||||
Increase in restricted cash |
(40.0 | ) | | | ||||||||
Release of restricted cash for payment of mortgage |
40.0 | | | |||||||||
Advances to Blackhawk |
(27.7 | ) | | | ||||||||
Other |
(51.2 | ) | 6.5 | (56.1 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash flow used by investing activitiescontinuing operations |
(115.6 | ) | (442.7 | ) | (593.2 | ) | ||||||
Net cash flow from investing activitiesdiscontinued operations |
226.1 | 5,352.3 | 21.2 | |||||||||
|
|
|
|
|
|
|||||||
Net cash flow from (used by) investing activities |
110.5 | 4,909.6 | (572.0 | ) |
F-93 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Financing Activities: |
||||||||||||
Additions to long-term borrowings |
$ | 239.8 | $ | 785.5 | $ | 3,508.1 | ||||||
Proceeds from PDC sale for development properties recorded (See Note D) |
120.1 | | | |||||||||
Principal payments on long-term borrowings |
(1,731.7 | ) | (2,171.5 | ) | (3,390.6 | ) | ||||||
Payments of debt extinguishment costs |
(82.0 | ) | (11.0 | ) | | |||||||
Purchase of treasury stock |
| (663.7 | ) | (1,274.5 | ) | |||||||
Dividends paid |
(251.8 | ) | (181.4 | ) | (163.9 | ) | ||||||
Net proceeds from exercise of stock options |
29.7 | 240.1 | 3.8 | |||||||||
Excess tax benefit from share-based employee compensation |
15.4 | 6.7 | 1.3 | |||||||||
Other |
(11.6 | ) | (8.6 | ) | (13.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash flow used by financing activitiescontinuing operations |
(1,672.1 | ) | (2,003.9 | ) | (1,329.1 | ) | ||||||
Net cash flow (used by) from financing activitiesdiscontinued operations |
(54.9 | ) | 157.7 | (44.7 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash flow used by financing activities |
(1,727.0 | ) | (1,846.2 | ) | (1,373.8 | ) | ||||||
|
|
|
|
|
|
|||||||
Effect of changes in exchange rates on cash |
(154.5 | ) | (69.8 | ) | (1.1 | ) | ||||||
|
|
|
|
|
|
|||||||
(Decrease) increase in cash and equivalents |
(2,392.2 | ) | 4,295.1 | (377.2 | ) | |||||||
Cash and Equivalents: |
||||||||||||
Beginning of year |
4,647.3 | 352.2 | 729.4 | |||||||||
|
|
|
|
|
|
|||||||
End of year |
$ | 2,255.1 | $ | 4,647.3 | $ | 352.2 | ||||||
|
|
|
|
|
|
|||||||
Other Cash InformationContinuing and Discontinued Operations: |
||||||||||||
Cash payments during the year for: |
||||||||||||
Interest |
$ | 218.5 | $ | 289.2 | $ | 322.3 | ||||||
Income taxes, net of refunds |
1,397.7 | 497.2 | 380.9 | |||||||||
Non-Cash Investing and Financing ActivitiesContinuing and Discontinued Operations: |
||||||||||||
Capital lease obligations entered into |
$ | 180.0 | $ | 78.0 | $ | 48.1 | ||||||
Purchases of property, plant and equipment included in accounts payable |
71.8 | 128.3 | 107.8 | |||||||||
Mortgage notes assumed in property additions |
| | 42.9 |
See accompanying notes to consolidated financial statements.
F-94
Consolidated Statements of Stockholders Equity
(In millions, except per-share amounts)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Common Stock: |
||||||||||||
Balance, beginning of year |
$ | 2.4 | $ | 6.1 | $ | 6.0 | ||||||
Options exercised |
0.1 | | 0.1 | |||||||||
Retirement of treasury stock(1) |
| (3.7 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
2.5 | 2.4 | 6.1 | |||||||||
|
|
|
|
|
|
|||||||
Additional Paid-In Capital: |
||||||||||||
Balance, beginning of year |
1,981.9 | 4,505.6 | 4,463.9 | |||||||||
Share-based employee compensation |
27.7 | 59.1 | 55.1 | |||||||||
Options exercised/cancelled, net |
40.4 | 210.6 | (11.9 | ) | ||||||||
Initial public offering of Blackhawk, net |
| 161.5 | | |||||||||
Retirement of treasury stock(1) |
| (2,989.0 | ) | | ||||||||
Other(2) |
1.3 | 34.1 | (1.5 | ) | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
2,051.3 | 1,981.9 | 4,505.6 | |||||||||
|
|
|
|
|
|
|||||||
Treasury Stock: |
||||||||||||
Balance, beginning of year |
(480.6 | ) | (9,119.8 | ) | (7,874.4 | ) | ||||||
Purchase of treasury stock |
| (663.7 | ) | (1,240.3 | ) | |||||||
Retirement of treasury stock(1) |
| 9,313.4 | | |||||||||
Other |
(11.2 | ) | (10.5 | ) | (5.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
(491.8 | ) | (480.6 | ) | (9,119.8 | ) | ||||||
|
|
|
|
|
|
|||||||
Retained Earnings: |
||||||||||||
Balance, beginning of year |
4,586.9 | 7,585.6 | 7,151.1 | |||||||||
Net income attributable to Safeway Inc. |
113.4 | 3,507.5 | 596.5 | |||||||||
Cash dividends declared ($0.890, $0.775 and $0.670 per share) |
(205.8 | ) | (185.5 | ) | (162.0 | ) | ||||||
Distribution of Blackhawk(3) |
(184.4 | ) | | | ||||||||
Retirement of treasury stock(1) |
| (6,320.7 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
4,310.1 | 4,586.9 | 7,585.6 | |||||||||
|
|
|
|
|
|
|||||||
Accumulated Other Comprehensive Loss: |
||||||||||||
Balance, beginning of year |
(271.1 | ) | (73.8 | ) | (61.5 | ) | ||||||
Translation adjustments |
0.2 | (65.0 | ) | (3.1 | ) | |||||||
Pension and post-retirement benefits adjustment to funded status (net of tax of $118.5, $87.1 and $45.5) |
(185.0 | ) | 179.5 | (79.7 | ) | |||||||
Recognition of pension and post-retirement benefits actuarial loss (net of tax of $20.5, $38.7 and $40.5) |
31.8 | 66.3 | 69.5 | |||||||||
Distribution of Blackhawk(3) |
2.2 | | | |||||||||
Sale of Canada Safeway Limited(4) |
| (377.0 | ) | | ||||||||
Other (net of tax of $0.2, $0.6 and $0.5) |
0.2 | (1.1 | ) | 1.0 | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
(421.7 | ) | (271.1 | ) | (73.8 | ) | ||||||
|
|
|
|
|
|
F-95 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
(In millions, except per-share amounts)
53 Weeks
2014 |
52 Weeks
2013 |
52 Weeks
2012 |
||||||||||
Noncontrolling Interests: |
||||||||||||
Balance, beginning of year |
$ | 55.6 | $ | 5.5 | $ | 6.0 | ||||||
Noncontrolling interests acquired through Blackhawks acquisition of Retailo |
| 6.9 | | |||||||||
Net earnings attributable to noncontrolling interests, net of tax |
(0.9 | ) | 14.7 | 1.6 | ||||||||
Distribution of Blackhawk(3) |
(56.3 | ) | | | ||||||||
Other(2) |
1.6 | 28.5 | (2.1 | ) | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
| 55.6 | 5.5 | |||||||||
|
|
|
|
|
|
|||||||
Total Equity |
$ | 5,450.4 | $ | 5,875.1 | $ | 2,909.2 | ||||||
|
|
|
|
|
|
|||||||
Number of Shares Issued | ||||||||||||
Common Stock: |
||||||||||||
Balance, beginning of year |
244.2 | 605.3 | 604.5 | |||||||||
Options exercised |
1.7 | 9.6 | 0.1 | |||||||||
Restricted stock grants, net of forfeitures |
(0.1 | ) | 0.5 | 0.7 | ||||||||
Performance share awards |
| 0.4 | | |||||||||
Retirement of treasury stock(1) |
| (371.6 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
245.8 | 244.2 | 605.3 | |||||||||
|
|
|
|
|
|
|||||||
Number of Shares | ||||||||||||
Treasury Stock: |
||||||||||||
Balance, beginning of year |
(14.1 | ) | (365.8 | ) | (307.9 | ) | ||||||
Purchase of treasury stock |
| (19.5 | ) | (57.6 | ) | |||||||
Retirement of treasury stock(1) |
| 371.6 | | |||||||||
Other |
(0.3 | ) | (0.4 | ) | (0.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, end of year |
(14.4 | ) | (14.1 | ) | (365.8 | ) | ||||||
|
|
|
|
|
|
(1) | Safeway retired 371.6 million shares in 2013. See Note L under the caption Retirement of Treasury Stock. |
(2) | Fiscal 2013 primarily results from Blackhawk IPO. |
(3) | Safeway distributed its remaining shares of Blackhawk to Safeway stockholders in 2014. See Note B. |
(4) | Safeway completed the sale of CSL in 2013. See Note B. |
See accompanying notes to consolidated financial statements.
F-96
Notes to Consolidated Financial Statements
Note A: The Company and Significant Accounting Policies
The Company Safeway Inc. (Safeway or the Company) is one of the largest food and drug retailers in the United States, with 1,326 stores as of year-end 2014. Safeways U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas, and the Mid-Atlantic region. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities. The Company also owns and operates GroceryWorks.com Operating Company, LLC, an online grocery channel, doing business under the names Safeway.com and Vons.com (collectively Safeway.com).
On January 30, 2015, Safeway was acquired by AB Acquisition LLC (AB Acquisition) pursuant to an Agreement and Plan of Merger (as amended on April 7, 2014 and on June 13, 2014, the Merger Agreement), with AB Acquisition LLC , Albertsons Holdings LLC (Albertsons Holdings), a subsidiary of AB Acquisition, Albertsons LLC (Albertsons LLC), a subsidiary of Albertsons Holdings, and Saturn Acquisition Merger Sub, Inc. (Merger Sub and together with AB Acquisition, Albertsons Holdings and Albertsons LLC, Albertsons), a subsidiary of Albertsons Holdings, in a transaction hereinafter referred to as the Merger. See Note V to the consolidated financial statements for additional information. Unless otherwise noted, these consolidated financial statements and accompanying notes do not give effect to the Merger.
On December 23, 2014, Safeway and its wholly-owned real-estate development subsidiary, Property Development Centers, LLC (PDC), sold substantially all of the net assets of PDC to Terramar Retail Centers, LLC (Terramar). Due to leasing back certain properties, Safeway will have significant continuing involvement with a number of the properties subsequent to the sale of PDC. Therefore, the operating results are not reported in discontinued operations in the consolidated statements of income. See Note D to the consolidated financial statements for additional information.
Blackhawk Network Holdings, Inc. (Blackhawk) was a majority-owned subsidiary of Safeway until Safeway completed the distribution of 37.8 million shares of Blackhawk stock that it owned to its stockholders on April 14, 2014. The operating results of Blackhawk are reported as discontinued operations in the consolidated statements of income for all periods presented. See Note B to the consolidated financial statements for additional information.
During the fourth quarter of 2013, the Company exited the Chicago market, where it operated 72 Dominicks stores. The operating results of Dominicks are reported as discontinued operations in the consolidated statements of income for all periods presented. In addition, certain assets and liabilities associated with Dominicks are reported as assets and liabilities held for sale at December 28, 2013 and some Dominicks properties continued to be classified as held for sale at January 3, 2015. See Note B to the consolidated financial statements for additional information.
On November 3, 2013, Safeway completed the sale of substantially all of the net assets of Canada Safeway Limited (CSL now known as CSL IT Services ULC) to Sobeys Inc. (Sobeys), a wholly-owned subsidiary of Empire Company Limited. As a result, the operating results of CSL are reported as discontinued operations in the consolidated statements of income for all periods presented. See Note B to the consolidated financial statements for additional information.
Unless otherwise indicated, the notes accompanying the consolidated financial statements reflect the Companys continuing operations.
F-97 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company also has a 49% ownership interest in Casa Ley, S.A. de C.V. (Casa Ley), which operates 206 food and general merchandise stores in Western Mexico. See Note V.
Basis of Presentation The consolidated financial statements include Safeway Inc., a Delaware corporation, and all majority-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America. Intercompany transactions and balances have been eliminated in consolidation. The Companys investment in Casa Ley is reported using the equity method. Safeways equity in earnings of Casa Ley is based on financial information prepared in accordance with accounting principles generally accepted in the United States and is recorded on a one-month delay basis because financial information for the latest month is not available from Casa Ley in time to be included in Safeways consolidated results until the following reporting period.
Fiscal Year The Companys fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 53-week period ended January 3, 2015 (fiscal 2014 or 2014), the 52-week period ended December 28, 2013 (fiscal 2013 or 2013) and the 52-week period ended December 29, 2012 (fiscal 2012 or 2012).
Correction to Cash Flow Classification Subsequent to the issuance of the fiscal 2013 consolidated financial statements, the Company determined that the $57.4 million loss on foreign currency translation within the 2013 consolidated statement of cash flows was reflected as a reduction in net cash flow from operating activities, and should not have reduced operating cash flow for U.S. GAAP purposes. As a result, the 2013 presentation has been corrected to increase cash flows from operating activitiescontinuing operations by $57.4 million with an offset to the line item Effect of changes in exchange rates on cash. Safeway assessed the materiality of this adjustment on previously issued financial statements in accordance with the SECs Staff Accounting Bulletin (SAB) No. 99 and concluded that the correction was not material. This correction results in no other changes to the consolidated financial statements and had no effect on the change in cash or ending cash.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ from those estimates.
Translation of Foreign Currencies Assets and liabilities of the Companys foreign subsidiaries and Casa Ley are translated into U.S. dollars at year-end rates of exchange, and income and expenses are translated at average rates during the year. Adjustments resulting from translating financial statements into U.S. dollars, net of applicable income taxes, are included as a separate component in the statement of comprehensive income, within accumulated other comprehensive income in the consolidated balance sheets and within the consolidated statements of stockholders equity.
After the net asset sale of Canadian operations (Sale of Canadian Operations), the adjustments resulting from translation of retained assets and liabilities denominated in Canadian dollars are included in the statement of income as a foreign currency gain or loss. Foreign currency loss was $131.2 million in fiscal 2014 and $57.4 million in fiscal 2013. The Company made a reclassification on the 2013 consolidated statement of cash flows to correct the classification of the loss on foreign currency.
F-98 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition Retail store sales are recognized at the point of sale. Sales tax is excluded from revenue. Internet sales are recognized when the merchandise is delivered to the customer. Discounts provided to customers in connection with loyalty cards are accounted for as a reduction of sales.
Safeway records a deferred revenue liability when it sells Safeway gift cards. Safeway records a sale when a customer redeems the gift card. Safeway gift cards do not expire. The Company reduces the liability and increases other revenue for the unused portion of gift cards (breakage) after two years, the period at which redemption is considered remote. Breakage amounts were $1.8 million, $1.9 million and $1.8 million in 2014, 2013 and 2012, respectively.
Cost of Goods Sold Cost of goods sold includes cost of inventory sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs of Safeways distribution network. All vendor allowances are recorded as a reduction of cost of goods when earned. Advertising and promotional expenses are also included as a component of cost of goods sold. Such costs are expensed in the period the advertisement occurs. Advertising and promotional expenses totaled $325.5 million in 2014, $371.6 million in 2013 and $415.9 million in 2012.
Cash and Equivalents Cash and equivalents include short-term investments with original maturities of less than three months and credit and debit card sales transactions which settle within a few business days of year end.
There were no book overdrafts included in accounts payable at year-end 2014. At year-end 2013, book overdrafts of $84.5 million were included in accounts payable.
Receivables Receivables include pharmacy and miscellaneous trade receivables.
Merchandise Inventories Merchandise inventory of $1,755.3 million at year-end 2014 and $1,643.2 million at year-end 2013 is valued at the lower of cost on a last-in, first-out (LIFO) basis or market value. Such LIFO inventory had a replacement or current cost of $1,808.4 million at year-end 2014 and $1,701.3 million at year-end 2013. Liquidations of LIFO layers during the three years reported did not have a material effect on the results of operations. The remaining inventory consists primarily of perishables, pharmacy and fuel inventory. Perishables are counted every four weeks and are carried at the last purchased cost or the last four-week average cost, which approximates first-in, first-out (FIFO) cost. Pharmacy and fuel inventories are carried at the last purchased cost, which approximates FIFO cost. The Company records an inventory shrink adjustment upon physical counts and also provides for estimated inventory shrink adjustments for the period between the last physical inventory and each balance sheet date.
Property and Depreciation Property is stated at cost. Depreciation expense on buildings and equipment is computed on the straight-line method using the following lives:
Stores and other buildings |
7 to 40 years | |||
Fixtures and equipment |
3 to 15 years |
Safeway capitalizes eligible costs to acquire or develop internal-use software that are incurred during the application development stage as part of fixtures and equipment. Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets.
F-99 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Property under capital leases and leasehold improvements is amortized on a straight-line basis over the shorter of the remaining terms of the leases or the estimated useful lives of the assets.
Company-Owned Life Insurance Policies Safeway has company-owned life insurance policies that have a cash surrender value. During 2013, Safeway borrowed against these policies. The Company has no current intention of repaying the loans prior to maturity or cancellation of the policies. Therefore, we offset the cash surrender value by the related loans. At January 3, 2015, the cash surrender value of the policies was $57.1 million, and the balance of the policy loans was $40.7 million, resulting in a net cash surrender value of $16.4 million. At December 28, 2013, the cash surrender value of the policies was $58.5 million, and the balance of the policy loans was $40.9 million, resulting in a net cash surrender value of $17.6 million.
Employee Benefit Plans The Company recognizes in its consolidated balance sheet an asset for its employee benefit plans overfunded status or a liability for underfunded status. The Company measures plan assets and obligations that determine the funded status as of fiscal year end. See Note N.
Self-Insurance The Company is primarily self-insured for workers compensation, automobile and general liability costs. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported, and is discounted using a risk-free rate of interest. The present value of such claims was calculated using a discount rate of 1.50% in 2014, 1.75% in 2013 and 0.75% in 2012.
A summary of changes in Safeways self-insurance liability is as follows (in millions):
2014 | 2013 | 2012 | ||||||||||
Beginning balance |
$ | 432.7 | $ | 480.1 | $ | 470.9 | ||||||
Expense, including the effect of discount rate |
153.9 | 98.6 | 151.6 | |||||||||
Claim payments |
(151.2 | ) | (137.2 | ) | (142.5 | ) | ||||||
Disposal of discontinued operations |
| (8.8 | ) | | ||||||||
Currency translation |
| | 0.1 | |||||||||
Reclass insurance recoveries to receivable |
25.2 | | | |||||||||
|
|
|
|
|
|
|||||||
Ending balance |
460.6 | 432.7 | 480.1 | |||||||||
|
|
|
|
|
|
|||||||
Less current portion |
(113.3 | ) | (108.6 | ) | (137.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Long-term portion |
$ | 347.3 | $ | 324.1 | $ | 342.7 | ||||||
|
|
|
|
|
|
Beginning in 2014, the Company has recorded estimated insurance recoveries as a receivable, rather than netting the recoveries against the liability.
The current portion of the self-insurance liability is included in other accrued liabilities, and the long-term portion is included in accrued claims and other liabilities in the consolidated balance sheets. The total undiscounted liability, net of insurance receivables, was $477.4 million at year-end 2014 and $477.2 million at year-end 2013.
Deferred Rent
Rent Escalations. The Company recognizes escalating rent provisions on a straight-line basis over the lease term.
F-100 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Rent Holidays. Certain of the Companys operating leases contain rent holidays. For these leases, Safeway recognizes the related rent expense on a straight-line basis starting at the earlier of the first rent payment or the date of possession of the leased property. The difference between the amounts charged to expense and the rent paid is recorded as deferred lease incentives and amortized over the lease term.
Income Taxes Income tax expense or benefit reflects the amount of taxes payable or refundable for the current year, the impact of deferred tax liabilities and deferred tax assets, accrued interest on tax deficiencies and refunds and accrued penalties on tax deficiencies. 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 reverse.
A valuation allowance is established for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on managements assessments of realizable deferred tax assets.
Tax positions are recognized when they are more likely than not to be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is more likely than not of being realized upon settlement. The Company is subject to periodic audits by the Internal Revenue Service and other foreign, state and local taxing authorities. These audits may challenge certain of the Companys tax positions such as the timing and amount of income and deductions and the allocation of taxable income to various tax jurisdictions. The Company evaluates its tax positions and establishes liabilities in accordance with the applicable accounting guidance on uncertainty in income taxes. These tax uncertainties are reviewed as facts and circumstances change and are adjusted accordingly. This requires significant management judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the Companys effective tax rate and cash flows in future years.
Financial Instruments
Interest rate swaps. The Company has, from time to time, entered into interest rate swap agreements to change its portfolio mix of fixed- and floating-rate debt to more desirable levels. Interest rate swap agreements involve the exchange with a counterparty of fixed- and floating-rate interest payments periodically over the life of the agreements without exchange of the underlying notional principal amounts. The differential to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. The Companys counterparties have been major financial institutions.
Energy contracts. The Company has entered into contracts to purchase electricity and natural gas at fixed prices for a portion of its energy needs. Safeway expects to take delivery of the electricity and natural gas in the normal course of business. Contracts that qualify for the normal purchase exception under derivatives and hedging accounting guidance are not marked to market. Energy purchased under these contracts is expensed as delivered.
Fair Value of Financial Instruments Disclosures of the fair value of certain financial instruments are required, whether or not recognized in the balance sheet. The Company estimated the fair values
F-101 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
presented below using appropriate valuation methodologies and market information available as of year end. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, the fair values were estimated at year end, and current estimates of fair value may differ significantly from the amounts presented.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable. The carrying amount of these items approximates fair value.
Short-term investments. These investments are readily convertible to cash, and the carrying amount of these items approximates fair value.
Notes receivables. The Companys notes receivables, included in other assets, are comprised primarily of notes receivable resulting from the sale of real estate. The fair value of note receivables is estimated by discounting expected future cash flows using interest rates, adjusted for credit risk, at which similar loans could be made under current market conditions. The carrying value of notes receivables, which approximates fair value, was $108.0 million at January 3, 2015 and $101.0 million at December 28, 2013. Approximately $27.7 million of the notes receivables at January 3, 2015 were Safeway advances to Blackhawk. These advances funded Blackhawks estimated tax payments on the distribution of Blackhawk shares which are explained in Note B under the caption Blackhawk. With the closing of the Merger on January 30, 2015, Blackhawk is not required to repay these advances.
Long-term debt, including current maturities. Market values quoted in public markets are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted in public markets, the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments.
Store Lease Exit Costs and Impairment Charges Safeway regularly reviews its stores operating performance and assesses the Companys plans for certain store and plant closures. Losses related to the impairment of long-lived assets are recognized when expected future cash flows are less than the assets carrying value. The Company evaluates the carrying value of the assets in relation to its expected future cash flows. If the carrying value is greater than the future cash flows, a provision is made for the impairment of the assets to write the assets down to estimated fair value. Fair value is determined by estimating net future cash flows, discounted using a risk-adjusted rate of return. The Company calculates impairment on a store-by-store basis. These provisions are recorded as a component of operating and administrative expense.
When stores that are under long-term leases close, the Company records a liability for the future minimum lease payments and related ancillary costs, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations, discounted using a risk-adjusted rate of interest. This liability is recorded at the time the store is closed. Activity included in the reserve for store lease exit costs is disclosed in Note E.
F-102 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accumulated Other Comprehensive Loss Accumulated other comprehensive loss, net of applicable taxes, consisted of the following at year-end (in millions):
2014 | 2013 | 2012 | ||||||||||
Translation adjustments |
$ | (136.4 | ) | $ | (139.0 | ) | $ | 399.0 | ||||
Pension and post-retirement benefits adjustment to funded status |
(588.0 | ) | (403.0 | ) | (737.8 | ) | ||||||
Recognition of pension and post-retirement benefits actuarial loss |
304.1 | 272.5 | 265.5 | |||||||||
Other |
(1.4 | ) | (1.6 | ) | (0.5 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | (421.7 | ) | $ | (271.1 | ) | $ | (73.8 | ) | |||
|
|
|
|
|
|
At the closing of the Sale of Canadian Operations, the Company recorded the related balance of cumulative translation adjustment, pension and post-retirement benefit adjustment to funded status and recognition of pension and post-retirement benefits actuarial loss which related to CSL as part of the gain on the sale. See Note B.
Stock-Based Employee Compensation Safeway accounts for all share-based payments to employees, including grants of employee stock options, as compensation cost based on the fair value on the date of grant. The Company determines fair value of such awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as risk-free interest rate, expected volatility, expected dividend yield and expected life of options, in order to arrive at a fair value estimate.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. The standards core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the potential impact of ASU No. 2014-09 on its financial statements.
On April 10, 2014, the FASB issued ASU No. 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. The Company is currently assessing the future impact of ASU No. 2014-08 on its financial statements.
Note B: Assets and Liabilities Held for Sale and Discontinued Operations
Assets and Liabilities Held for Sale In the fourth quarter of 2013, the Company announced its intention to exit the Chicago market, where it operated 72 Dominicks stores. During the fourth quarter of 2013, the Company sold or closed its Dominicks stores. Certain Dominicks properties were classified as held for sale at December 28, 2013, and some Dominicks properties continued to be classified as held
F-103 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for sale at January 3, 2015. Additionally, the Company had other real estate assets held for sale. Assets and liabilities held for sale at January 3, 2015 and December 28, 2013 were as follows (in millions):
January 3,
2015 |
December 28,
2013 |
|||||||
Assets held for sale: |
||||||||
Dominicks property, net, held for sale |
$ | 5.6 | $ | 136.7 | ||||
Other United States real estate assets held for sale |
33.9 | 7.2 | ||||||
|
|
|
|
|||||
Total assets held for sale |
$ | 39.5 | $ | 143.9 | ||||
|
|
|
|
January 3,
2015 |
December 28,
2013 |
|||||||
Liabilities held for sale: |
||||||||
Dominicks |
||||||||
Deferred gain on property dispositions |
$ | | $ | 9.0 | ||||
Obligations under capital leases |
| 5.2 | ||||||
Deferred rent |
| 2.6 | ||||||
Other liabilities |
| 1.4 | ||||||
|
|
|
|
|||||
Total liabilities held for sale(1) |
$ | | $ | 18.2 | ||||
|
|
|
|
(1) | Included in Other Accrued Liabilities on the consolidated balance sheet. |
F-104 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Discontinued Operations The notes to the consolidated financial statements exclude discontinued operations, unless otherwise noted. Historical financial information for CSL, Dominicks and Blackhawk presented in the consolidated income statements has been reclassified to discontinued operations to conform to current-year presentation. The historical operating results of Genuardis stores have not been reflected in discontinued operations because the historical financial operating results were not material to the Companys consolidated financial statements for all periods presented. Financial information for discontinued operations is shown below (in millions):
2014 | 2013 | 2012 | ||||||||||
Sales and other revenue: |
||||||||||||
CSL(1) |
$ | | $ | 5,447.9 | $ | 6,695.8 | ||||||
Dominicks |
7.3 | 1,394.8 | 1,465.2 | |||||||||
Blackhawk(1) |
305.6 | 1,074.2 | 906.8 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 312.9 | $ | 7,916.9 | $ | 9,067.8 | ||||||
|
|
|
|
|
|
|||||||
(Loss) income from discontinued operations, before income taxes: |
||||||||||||
CSL(1) |
$ | | $ | 286.2 | $ | 442.3 | ||||||
Dominicks(2) |
(186.8 | ) | (92.0 | ) | (50.4 | ) | ||||||
Blackhawk(1) |
(4.4 | ) | 84.4 | 74.2 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (191.2 | ) | $ | 278.6 | $ | 466.1 | |||||
|
|
|
|
|
|
|||||||
Gain (loss) on sale or disposal of operations, net of lease exit costs and transaction costs, before income taxes: |
||||||||||||
CSL(3) |
$ | (6.8 | ) | $ | 4,783.1 | $ | | |||||
Dominicks(4) |
140.9 | (493.1 | ) | | ||||||||
Blackhawk |
(5.9 | ) | | | ||||||||
Genuardis |
| | 52.4 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 128.2 | $ | 4,290.0 | $ | 52.4 | ||||||
|
|
|
|
|
|
|||||||
Total (loss) income from discontinued operations, before income taxes |
$ | (63.0 | ) | $ | 4,568.6 | $ | 518.5 | |||||
Income taxes on discontinued operations |
72.3 | (1,263.5 | ) | (169.6 | ) | |||||||
|
|
|
|
|
|
|||||||
Income from discontinued operations, net of tax |
$ | 9.3 | $ | 3,305.1 | $ | 348.9 | ||||||
|
|
|
|
|
|
(1) | For CSL, 2013 reflects 44 weeks of activity compared to 52 weeks in 2012. For Blackhawk, 2014 reflects 15 weeks of activity compared to 52 weeks in the prior years. |
(2) | 2014 includes charges of $159.4 million to increase the multiemployer pension withdrawal liability. |
(3) | In accordance with ASU No. 2013-05, Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, the Company transferred the cumulative translation adjustment relating to Canadian operations from Accumulated Other Comprehensive Loss on the balance sheet to gain on the Sale of Canadian Operations. |
(4) | 2013 includes a charge of $310.8 million for the estimated multiemployer pension plan withdrawal liability. |
Sale of Canadian Operations On November 3, 2013, Safeway completed the Sale of Canadian Operations to Sobeys for CAD5.8 billion (USD5.6 billion) in cash plus the assumption of certain liabilities.
F-105 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dominicks During the fourth quarter of 2013, Safeway sold or closed all Dominicks stores. Cash proceeds on the sale of these stores sold in fiscal 2013 were $72.2 million. Stores closed in 2013 but sold in fiscal 2014 had cash proceeds of $246.3 million. The sale of these stores resulted in a pre-tax gain of $140.9 million in fiscal 2014 and a pre-tax loss of $493.1 million in fiscal 2013, which includes a charge of $310.8 million for the estimated multiemployer pension plan withdrawal liability. During fiscal 2014, the Company increased the estimated multiemployer pension plan withdrawal liability by $159.4 million, which is included in loss from discontinued operations in the following table. See Note O for a discussion and reconciliation of this withdrawal liability.
Blackhawk On March 24, 2014, Safeways Board of Directors declared a special stock dividend to its stockholders of all of the 37.8 million shares of Class B common stock of Blackhawk owned by Safeway, representing approximately 94.2% of the total outstanding shares of Blackhawks Class B common stock and approximately 72% of the total number of shares of Blackhawk common stock of all classes outstanding. On April 14, 2014, Safeway distributed the special stock dividend to all Safeway stockholders of record as of April 3, 2014 (the Record Date). The distribution took place in the form of a pro rata dividend of Blackhawk Class B common stock to each Safeway stockholder of record as of the Record Date.
With the completion of the Merger subsequent to year-end, Safeways distribution of Blackhawk shares is taxable. Based on Safeways preliminary estimates and after the application of $82 million in tax payments previously made in connection with Safeways sale of shares in the initial public offering of Blackhawks Class A common stock in April 2013, Safeway expects that the distribution of Blackhawk shares will result in an incremental tax liability of approximately $360 million, which Safeway is required to fund. In accordance with generally accepted accounting principles, Safeway did not consider the probability of the Merger occurring and, therefore, has not recorded a liability for its obligation to fund Blackhawks tax obligation. During 2014, Safeway paid approximately $355 million of the incremental tax liability.
In addition, during 2014, Blackhawk made certain estimated tax payments to certain state tax jurisdictions. Safeway advanced approximately $27.7 million to Blackhawk to fund these estimated tax payments. Safeway recorded these advances as receivables on the condensed consolidated balance sheet because, in accordance with generally accepted accounting principles, Safeway did not consider the probability of the Merger occurring. In the event the Merger did not occur, Blackhawk would have been required to repay these advances to Safeway.
Genuardis In January 2012, Safeway announced the planned sale or closure of its Genuardis stores, located in the Eastern United States. These transactions were completed during 2012 with cash proceeds of $107.0 million and a pre-tax gain of $52.4 million ($31.9 million after tax).
Note C: Blackhawk
Initial Public Offering of Blackhawk On April 24, 2013, Blackhawk, a former Safeway subsidiary, completed its initial public offering of 11.5 million shares of its Class A common stock at $23.00 per share on the NASDAQ Global Select Market, which included the exercise by the underwriters for the offering of an option to purchase 1.5 million shares of Class A common stock. The offering consisted solely of shares offered by existing stockholders, including Safeway. As part of the IPO, Safeway sold 11.3 million shares of Class A common stock of Blackhawk for proceeds of $243.6 million ($238.0 million, net of professional service fees), reducing the Companys ownership from approximately 95% to approximately 73% of Blackhawks total outstanding shares of common
F-106 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
stock. Safeway recorded these net proceeds as an increase to Additional Paid-In Capital and used these net proceeds to reduce debt. Additionally, the Company recorded a $76.5 million tax liability on the sale of these shares as a reduction to Additional Paid-In Capital and $5.8 million as an increase to tax expense. The taxes were paid in the fourth quarter of 2013. Additionally, Safeway incurred a $17.9 million deferred tax expense related to the retained shares in Blackhawk.
Distribution of Blackhawk Safeway owned 37.8 million shares, or approximately 72%, of Blackhawk, which the Company distributed to its stockholders on April 14, 2014. See Note B.
Acquisitions On November 29, 2013, Blackhawk acquired 100% of the outstanding common stock of Retailo, a German privately-held company which is a third-party gift card distribution network in Germany, Austria and Switzerland. Blackhawk acquired Retailo for total purchase consideration of $70.2 million. The following table summarizes the purchase price allocation which was based upon the estimated fair value of each asset and liability (in millions):
Settlement receivables |
$ | 18.1 | ||
Settlement payables |
(14.8 | ) | ||
Other liabilities, net |
(0.7 | ) | ||
Deferred income taxes, net |
(7.4 | ) | ||
Identifiable technology and intangible assets |
45.7 | |||
Noncontrolling interests |
(6.9 | ) | ||
Goodwill(1) |
36.2 | |||
|
|
|||
Total consideration |
$ | 70.2 | ||
|
|
(1) | See Note D. |
Noncontrolling interests result from third-party ownership interests in certain subsidiaries of Retailo.
On November 12, 2013, Blackhawk acquired substantially all of the net assets of InteliSpend from Maritz Holdings Inc., a privately-held company, for total purchase consideration of $97.5 million. InteliSpend delivers intelligent prepaid solutions for business needs: employee rewards, wellness, sales incentives, expense management and promotional programs. The following table summarizes the purchase price allocation which was based upon the estimated fair value of each asset and liability (in millions):
Cash and cash equivalents |
$ | 15.0 | ||
Trading securities |
29.4 | |||
Accounts receivable |
7.9 | |||
Cardholder liabilities |
(31.4 | ) | ||
Customer deposits |
(12.5 | ) | ||
Other tangible assets, net |
(4.0 | ) | ||
Deferred taxes |
(0.3 | ) | ||
Identifiable technology and intangible assets |
39.2 | |||
Goodwill(1) |
54.2 | |||
|
|
|||
Total consideration |
$ | 97.5 | ||
|
|
(1) | See Note D. |
F-107 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Blackhawk sold the trading securities for cash on the day after closing, and this sale is presented as an inflow from investing activities in the accompanying consolidated statements of cash flows.
Note D: Property Development Centers
On December 23, 2014, Safeway and its wholly owned real estate development subsidiary, PDC, sold substantially all of the net assets of PDC to Terramar. PDCs assets were comprised of shopping centers that are completed or under development. Most of these centers included a grocery store that was leased back to Safeway. The sale was consummated pursuant to an Asset Purchase Agreement dated as of December 22, 2014 by and among Safeway, PDC and Terramar.
The following table summarizes the gain on this transaction (in millions).
Total cash proceeds |
$ | 759.0 | ||
Less proceeds for development properties recorded as Other Notes Payable |
(120.1 | ) | ||
Less cash paid for prorates |
(1.7 | ) | ||
|
|
|||
Total cash proceeds classified as investing activities |
637.2 | |||
Net book value |
(464.9 | ) | ||
|
|
|||
Total gain on sale of PDC |
172.3 | |||
Less gain deferred on sale leasebacks(1) |
(150.3 | ) | ||
|
|
|||
Gain on sale of PDC |
$ | 22.0 | ||
|
|
(1) | Current portion of $25.3 million is included in other accrued liabilities, and the long-term portion of $125.0 million is included in accrued claims and other liabilities in the consolidated balance sheet at year-end 2014. |
Due to leasing back certain of these properties, Safeway has significant continuing involvement with a number of the properties subsequent to the sale. As a result, Safeway deferred the gain on the sale of those properties. Under GAAP, Safeway is still considered the owner of certain properties consisting primarily of the properties under development. Consequently, proceeds of $120.1 million received for those properties have been recorded as Other Notes Payable and classified as a cash inflow from financing activities.
Safeway undertook the sale of PDC in connection with the Merger. See Note V.
Note E: Goodwill
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but must be evaluated for impairment.
Safeway tests goodwill for impairment annually (on the first day of the fourth quarter) or whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying value.
The impairment test is a two-step process. In the first step, the Company determines if the fair value of the reporting units is less than the book value. Under generally accepted accounting
F-108 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
principles, a reporting unit is either the equivalent to, or one level below, an operating segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Safeways operating segments are our retail divisions. Safeways reporting units are generally consistent with its operating segments.
Companies are allowed perform the first step of the two-step impairment process by assessing qualitative factors to determine whether events or circumstances exist which lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, we conclude that it is more likely than not that the fair value of our reporting units with goodwill is greater than the book value and, therefore, that there is no goodwill impairment.
If Safeway concludes that fair value is greater than the book value, Safeway does not have to proceed to step two, and Safeway can conclude there is no goodwill impairment. If the Company concludes that the fair value of a reporting unit is less than book value, the Company must perform step two, in which it calculates the implied fair value of goodwill and compares it to carrying value. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimated fair value of each reporting unit is based on an average of the guideline company method and the discounted cash flow method. These methods are based on historical and forecasted amounts specific to each reporting unit and consider sales, gross profit, operating profit and cash flows and general economic and market conditions, as well as the impact of planned business and operational strategies. Safeway bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Measuring the fair value of reporting units would constitute a Level 3 measurement under the fair value hierarchy. See Note I for a discussion of levels.
Based upon the results of our 2014, 2013 and 2012 analyses, no impairment of goodwill was indicated in 2014, 2013 or 2012.
F-109 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of changes in Safeways goodwill is as follows (in millions):
2014 | 2013 | |||||||||||||||
U.S. | U.S. | Canada | Total | |||||||||||||
Balancebeginning of year: |
||||||||||||||||
Goodwill |
$ | 4,455.8 | $ | 4,364.9 | $ | 97.9 | $ | 4,462.8 | ||||||||
Accumulated impairment charges |
(3,991.3 | ) | (3,991.3 | ) | | (3,991.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
464.5 | 373.6 | 97.9 | 471.5 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Activity during the year: |
||||||||||||||||
Distribution of Blackhawk Stock(2) |
(133.6 | ) | | | | |||||||||||
Disposal of CSL goodwill(1) |
| | (97.9 | ) | (97.9 | ) | ||||||||||
Blackhawk acquisition of Retailo(2) |
| 36.2 | | 36.2 | ||||||||||||
Blackhawk acquisition of InteliSpend(2) |
| 54.2 | | 54.2 | ||||||||||||
Translation adjustments |
| 0.5 | | 0.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(133.6 | ) | 90.9 | (97.9 | ) | (7.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balanceend of year: |
||||||||||||||||
Goodwill |
4,322.2 | 4,455.8 | | 4,455.8 | ||||||||||||
Accumulated impairment charges |
(3,991.3 | ) | (3,991.3 | ) | | (3,991.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 330.9 | $ | 464.5 | $ | | $ | 464.5 | |||||||||
|
|
|
|
|
|
|
|
(1) | See Note B. |
(2) | See Note C. |
Note F: Store Lease Exit Costs and Impairment Charges
Impairment Write-Downs Safeway recognized impairment charges on the write-down of long-lived assets of $56.1 million in 2014, $35.6 million in 2013 and $33.6 million in 2012. These charges are included as a component of operating and administrative expense.
Store Lease Exit Costs The reserve for store lease exit costs includes the following activity for 2014, 2013 and 2012 (in millions):
2014 | 2013 | 2012 | ||||||||||
Beginning balance |
$ | 181.0 | $ | 76.5 | $ | 77.0 | ||||||
Provision for estimated net future cash flows of additional closed stores(1) |
1.2 | 6.1 | 19.4 | |||||||||
Provision for estimated net future cash flows of Dominicks closed stores(2) |
| 113.6 | | |||||||||
Net cash flows, interest accretion, changes in estimates of net future cash flows(3) |
(37.1 | ) | (15.2 | ) | (19.9 | ) | ||||||
Net cash flows, interest accretion, changes in estimates of net future cash flows for Dominicks disposed stores(4) |
(15.9 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 129.2 | $ | 181.0 | $ | 76.5 | ||||||
|
|
|
|
|
|
(1) | Estimated net future cash flows represents future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. |
F-110 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) | Estimated net future cash flows for Dominicks stores closed during the fourth quarter of 2013. |
(3) | Net cash flows, interest accretion, changes in estimates of net future cash flows for all stores other than Dominicks stores disposed of in 2014. |
(4) | Net cash flows, interest accretion, changes in estimates of net future cash flows for Dominicks stores disposed of in 2014. |
Store lease exit costs are included as a component of operating and administrative expense, with the exception of Dominicks locations closed in the fourth quarter of 2013 which are included in the loss on disposal of operations. For all stores, the liability is included in accrued claims and other liabilities.
Note G: Financing
Notes and debentures were composed of the following at year end (in millions):
2014 | 2013 | |||||||
Term credit agreement, unsecured |
$ | | $ | 400.0 | ||||
Mortgage notes payable, secured |
4.7 | 46.8 | ||||||
5.625% Senior Notes due 2014, unsecured |
| 250.0 | ||||||
3.40% Senior Notes due 2016, unsecured |
80.0 | 400.0 | ||||||
6.35% Senior Notes due 2017, unsecured |
100.0 | 500.0 | ||||||
5.00% Senior Notes due 2019, unsecured |
500.0 | 500.0 | ||||||
3.95% Senior Notes due 2020, unsecured |
500.0 | 500.0 | ||||||
4.75% Senior Notes due 2021, unsecured |
400.0 | 400.0 | ||||||
7.45% Senior Debentures due 2027, unsecured |
150.0 | 150.0 | ||||||
7.25% Senior Debentures due 2031, unsecured |
600.0 | 600.0 | ||||||
Other notes payable, unsecured |
141.4 | 21.4 | ||||||
|
|
|
|
|||||
2,476.1 | 3,768.2 | |||||||
Less current maturities |
(3.2 | ) | (252.9 | ) | ||||
|
|
|
|
|||||
Long-term portion |
$ | 2,472.9 | $ | 3,515.3 | ||||
|
|
|
|
Commercial Paper During 2014, the average commercial paper borrowing was $28.5 million and had a weighted-average interest rate of 0.63%. During 2013, the average commercial paper borrowing was $43.9 million which had a weighted-average interest rate of 0.68%.
Bank Credit Agreement At January 3, 2015, the Company had a $1,500.0 million credit agreement (the Credit Agreement) with a syndicate of banks that was scheduled to terminate on June 1, 2015. The Credit Agreement provided to Safeway (i) a four-year revolving domestic credit facility of up to $1,250.0 million for U.S. dollar advances and (ii) a $400.0 million subfacility of the domestic facility for issuance of standby and commercial letters of credit. The Credit Agreement also provided for an increase in the credit facility commitments up to an additional $500.0 million, subject to the satisfaction of certain conditions. On June 30, 2014, the Company terminated a $250.0 million Canadian credit facility. The Credit Agreement contained various covenants that restricted, among other things and subject to certain exceptions, the ability of Safeway and its subsidiaries to incur certain liens, make certain asset sales, enter into certain mergers or amalgamations, engage in certain transactions with stockholders and affiliates and alter the character of its business from that conducted on the closing date. The Credit Agreement also contained two financial maintenance covenants: (i) an interest coverage ratio that required Safeway not to permit the ratio of consolidated Adjusted EBITDA,
F-111 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
as defined in the Credit Agreement, to consolidated interest expense to be less than 2.0:1.0, and (ii) a leverage ratio that required Safeway not to permit the ratio of consolidated total debt, less unrestricted cash in excess of $75.0 million, to consolidated Adjusted EBITDA, to exceed 3.5:1.0. As of January 3, 2015, the Company was in compliance with these covenant requirements. As of January 3, 2015, there were no borrowings, and letters of credit totaled $27.2 million under the Credit Agreement. Total unused borrowing capacity under the credit agreement was $1,472.8 million as of January 3, 2015.
U.S. borrowings under the credit agreement carried interest at one of the following rates selected by the Company: (1) the prime rate; (2) a rate based on rates at which Eurodollar deposits are offered to first-class banks by the lenders in the bank credit agreement plus a pricing margin based on the Companys debt rating or interest coverage ratio (the Pricing Margin); or (3) rates quoted at the discretion of the lenders.
During 2014, the Company paid facility fees ranging from 0.15% to 0.225% on the total amount of the credit facility.
Issuances of Senior Unsecured Indebtedness The Company did not issue any senior unsecured debt in 2014 or 2013.
Redemption of Notes
Fiscal 2014 In August 2014, Safeway paid $802.7 million to redeem $320.0 million of the 3.40% Senior Notes due 2016 and $400.0 million of the 6.35% Senior Notes due 2017. The $802.7 million included principal payments of $720.0 million, make-whole premiums of $80.2 million and accrued interest of $2.5 million. Unamortized deferred finance fees of $2.2 million were also expensed.
In accordance with the Merger Agreement, the Company contributed $40.0 million in cash to PDC in the second quarter of 2014. This cash was to be held in a reserve account until the earlier to occur of (i) payment in full of the mortgage indebtedness encumbering a shopping center in Lahaina, Hawaii and (ii) the release of the Company from any guaranty obligations in connection with such indebtedness. During the third quarter of 2014, the Company deposited $40.0 million with a trustee and achieved a full legal defeasance of the mortgage indebtedness and was released from the guaranty obligations associated with such indebtedness. Therefore, during the third quarter of 2014, the Company extinguished the $40.8 million mortgage from the condensed consolidated balance sheet.
These transactions resulted in a loss on extinguishment of debt of $84.4 million in 2014, which consisted of $80.2 million in make-whole premiums on the Senior Notes, the write-off of $2.4 million of unamortized deferred finance fees and $1.8 million of third-party costs associated with the defeasance of the Lahaina mortgage.
Fiscal 2013 In the fourth quarter of 2013, the Company redeemed $500.0 million of 6.25% Senior Notes due March 15, 2014. This redemption resulted in a make-whole premium of $6.7 million, before tax.
In the fourth quarter of 2013, the Company deposited CAD304.5 million (USD292.2 million) in an account with the Trustee under the indenture governing the CAD300.0 million (USD287.9 million), 3.00% Second Series Notes due March 31, 2014. Safeway met the conditions for satisfaction and discharge of the Companys obligations under the indenture and, as a result, extinguished the CAD300.0 million (USD287.9 million) notes and CAD304.5 million (USD292.2 million) cash from the consolidated balance sheet.
F-112 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
These transactions resulted in a loss on extinguishment of debt of $10.1 million in 2013, which consisted of make-whole premiums of $6.7 million and prepaid interest of $3.4 million.
Mortgage Notes Payable Mortgage notes payable at year-end 2014 have remaining terms ranging from less than four years to approximately seven years, had a weighted-average interest rate during 2014 of 8.10% and are secured by properties with a net book value of approximately $30.1 million.
Other Notes Payable Other notes payable at year-end 2014 have remaining terms ranging from one year to 21 years and had a weighted average interest rate of 7.16% during 2014. At year-end 2014, Other Notes Payable includes $120.1 million of proceeds for PDC properties where Safeway is still considered the owner under GAAP. See Note D.
Annual Debt Maturities As of year-end 2014, annual debt maturities (principal payments only) were as follows (in millions). Many of the notes payable include make-whole provisions:
2015 |
$ | 3.2 | ||
2016 |
84.6 | |||
2017 |
105.0 | |||
2018 |
6.8 | |||
2019 |
505.1 | |||
Thereafter |
1,771.4 | |||
|
|
|||
$ | 2,476.1 | |||
|
|
Letters of Credit The Company had letters of credit of $27.8 million outstanding at year-end 2014, of which $27.2 million were issued under the credit agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company pays commissions ranging from 1.00% to 1.28% on the face amount of the letters of credit.
Fair Value At year-end 2014 and year-end 2013, the estimated fair value of debt, including current maturities, was $2,525.3 million and $3,949.7 million, respectively.
See Note V under the caption Effect of Merger on Debt for additional information.
Note H: Financial Instruments
Safeway manages interest rate risk through the strategic use of fixed- and variable-interest rate debt and, from time to time, interest rate swaps. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. At year-end 2014, the Company had no interest rate swaps outstanding.
F-113 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note I: Fair Value Measurements
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities; | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
The following table presents assets and liabilities which are measured at fair value on a recurring basis at January 3, 2015 (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices in
active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents: |
||||||||||||||||
Money market |
$ | 1,884.0 | $ | 1,884.0 | $ | | $ | | ||||||||
Commercial paper |
124.2 | | 124.2 | | ||||||||||||
Short-term investments(1) |
24.4 | 16.8 | 7.6 | | ||||||||||||
Non-current investments(2) |
46.5 | | 46.5 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,079.1 | $ | 1,900.8 | $ | 178.3 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration(3) |
$ | 2.6 | $ | | $ | | $ | 2.6 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2.6 | $ | | $ | | $ | 2.6 | ||||||||
|
|
|
|
|
|
|
|
(1) | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
(2) | Included in Other Assets on the balance sheet. |
(3) | Included in Other Accrued Liabilities and Accrued Claims and Other Liabilities on the balance sheet. |
A reconciliation of the beginning and ending balances for Level 3 liabilities for the year ended January 3, 2015 follows (in millions):
Contingent
consideration |
||||
Balance, beginning of year |
$ | 2.9 | ||
Settlements |
(0.3 | ) | ||
|
|
|||
Balance, end of year |
$ | 2.6 | ||
|
|
F-114 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents assets and liabilities which are measured at fair value on a recurring basis at December 28, 2013 (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices in
active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
||||||||||||||||
Term deposits |
$ | 2,818.0 | $ | | $ | 2,818.0 | $ | | ||||||||
Money market |
449.0 | 449.0 | | | ||||||||||||
Bankers acceptances |
309.6 | | 309.6 | | ||||||||||||
Commercial paper |
274.0 | | 274.0 | | ||||||||||||
Short-term investments(1) |
81.0 | 42.0 | 39.0 | | ||||||||||||
Non-current investments(2) |
38.0 | | 38.0 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,969.6 | $ | 491.0 | $ | 3,478.6 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration(3) |
$ | 2.9 | $ | | $ | | $ | 2.9 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2.9 | $ | | $ | | $ | 2.9 | ||||||||
|
|
|
|
|
|
|
|
(1) | Included in Prepaid Expenses and Other Current Assets on the balance sheet. |
(2) | Included in Other Assets on the balance sheet. |
(3) | Included in Accrued Claims and Other Liabilities on the balance sheet. |
A reconciliation of the beginning and ending balances for Level 3 liabilities for the year ended December 28, 2013 follows (in millions):
Contingent
consideration |
||||
Balance, beginning of year |
$ | 21.8 | ||
Settlements |
(4.2 | ) | ||
Gains |
(14.7 | ) | ||
|
|
|||
Balance, end of year |
$ | 2.9 | ||
|
|
In determining the fair value of assets and liabilities, the Company maximizes the use of quoted market prices and minimizes the use of unobservable inputs. The Level 1 fair values are based on quoted market values for identical assets. The fair values of Level 2 assets and liabilities are determined using prices from pricing agencies and financial institutions that develop values based on observable inputs in active markets. Level 3 fair values are determined from industry valuation models based on externally developed inputs.
In connection with the Companys evaluation of long-lived assets for impairment, certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows (including rental expense for leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted
F-115 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
rate of interest. Safeway estimates future cash flows based on its experience and knowledge of the market in which the store is located and may use real estate brokers. During fiscal 2014, long-lived assets with a carrying value of $117.0 million were written down to their estimated fair value of $60.9 million, resulting in an impairment charge of $56.1 million. During fiscal 2013, long-lived assets with a carrying value of $63.5 million were written down to their estimated fair value of $27.9 million, resulting in an impairment charge of $35.6 million.
Note J: Lease Obligations
At year-end 2014, Safeway leased approximately 53% of its stores. Most leases have renewal options, typically with increased rental rates during the option period. Certain of these leases contain options to purchase the property at amounts that approximate fair market value.
As of year-end 2014, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of one year were as follows (in millions):
Capital
leases |
Operating
leases |
|||||||
2015 |
$ | 128.9 | $ | 450.7 | ||||
2016 |
118.0 | 424.8 | ||||||
2017 |
98.5 | 380.3 | ||||||
2018 |
70.1 | 328.7 | ||||||
2019 |
59.7 | 279.4 | ||||||
Thereafter |
259.7 | 1,878.5 | ||||||
|
|
|
|
|||||
Total minimum lease payments |
734.9 | $ | 3,742.4 | |||||
|
|
|||||||
Less amounts representing interest |
(211.1 | ) | ||||||
|
|
|||||||
Present value of net minimum lease payments |
523.8 | |||||||
|
|
|||||||
Less current obligations |
(94.7 | ) | ||||||
|
|
|||||||
Long-term obligations |
$ | 429.1 | ||||||
|
|
Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by future minimum sublease rental income of $145.9 million.
Amortization expense for property under capital leases was $73.7 million in 2014, $46.1 million in 2013 and $26.3 million in 2012. Accumulated amortization of property under capital leases was $324.2 million at year-end 2014 and $251.9 million at year-end 2013.
F-116 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following schedule shows the composition of total rental expense for all operating leases (in millions):
2014 | 2013 | 2012 | ||||||||||
Property leases: |
||||||||||||
Minimum rentals |
$ | 379.1 | $ | 365.5 | $ | 365.7 | ||||||
Contingent rentals(1) |
8.8 | 7.3 | 7.7 | |||||||||
Less rentals from subleases |
(11.5 | ) | (11.1 | ) | (9.4 | ) | ||||||
|
|
|
|
|
|
|||||||
376.4 | 361.7 | 364.0 | ||||||||||
Equipment leases |
11.8 | 20.4 | 20.4 | |||||||||
|
|
|
|
|
|
|||||||
$ | 388.2 | $ | 382.1 | $ | 384.4 | |||||||
|
|
|
|
|
|
(1) | In general, contingent rentals are based on individual store sales. |
Note K: Interest Expense
Interest expense consisted of the following (in millions):
2014 | 2013 | 2012 | ||||||||||
Commercial paper |
$ | 0.2 | $ | 3.2 | $ | 6.0 | ||||||
Bank credit agreement |
2.7 | 1.9 | 1.7 | |||||||||
Term credit agreement |
2.3 | 7.3 | 8.7 | |||||||||
Mortgage notes payable |
1.7 | 2.7 | 1.8 | |||||||||
5.80% Senior Notes due 2012 |
| | 29.1 | |||||||||
Floating Rate Senior Notes due 2013 |
| 4.3 | 2.7 | |||||||||
3.00% Second Series Notes due 2014 |
| 7.4 | 9.0 | |||||||||
6.25% Senior Notes due 2014 |
| 29.9 | 31.3 | |||||||||
5.625% Senior Notes due 2014 |
8.7 | 14.1 | 14.1 | |||||||||
3.40% Senior Notes due 2016 |
9.4 | 13.6 | 13.6 | |||||||||
6.35% Senior Notes due 2017 |
22.3 | 31.8 | 31.8 | |||||||||
5.00% Senior Notes due 2019 |
25.0 | 25.0 | 25.0 | |||||||||
3.95% Senior Notes due 2020 |
19.7 | 19.7 | 19.7 | |||||||||
4.75% Senior Notes due 2021 |
19.0 | 19.0 | 19.0 | |||||||||
7.45% Senior Debentures due 2027 |
11.2 | 11.2 | 11.2 | |||||||||
7.25% Senior Debentures due 2031 |
43.5 | 43.5 | 43.5 | |||||||||
Other notes payable |
1.6 | 1.8 | 1.7 | |||||||||
Obligations under capital leases |
33.8 | 38.0 | 39.7 | |||||||||
Amortization of deferred finance costs |
4.0 | 7.4 | 6.9 | |||||||||
Interest rate swap agreements |
| | (5.0 | ) | ||||||||
Capitalized interest |
(6.2 | ) | (8.8 | ) | (10.9 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 198.9 | $ | 273.0 | $ | 300.6 | |||||||
|
|
|
|
|
|
Note L: Capital Stock
Shares Authorized and Issued Authorized preferred stock consists of 25.0 million shares, of which none were outstanding during 2014, 2013 or 2012. Authorized common stock consists of 1.5 billion shares at $0.01 par value per share. Common stock outstanding at year-end 2014 was 231.4 million shares (net of 14.4 million shares of treasury stock) and 230.1 million shares at year-end 2013 (net of 14.1 million shares of treasury stock).
F-117 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Shares Repurchased The Company did not repurchase any common stock during 2014 under its stock repurchase program. Safeway repurchased 19.5 million shares at an average cost of $33.93 and a total cost of $663.7 million (including commissions) during 2013 and 57.6 million shares at an average cost of $21.51 and a total cost of $1,240.3 million (including commissions) during 2012.
Retirement of Treasury Stock In 2014, the Company did not retire any shares of its repurchased common stock. In 2013, the Company retired 371.6 million shares of its repurchased common stock. The par value of the repurchased shares was charged to common stock, with the excess purchase price over par value allocated between paid-in capital and retained earnings. In 2012, the Company did not retire any shares of its repurchased common stock.
Stock Option Plans Under Safeways stock option plans, the Company may grant incentive and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market value at the grant date. Options generally vest over four or five years. Vested options are exercisable in part or in full at any time prior to the expiration date of six to 10 years from the date of the grant.
1999 Amended and Restated Equity Participation Plan Under the 1999 Amended and Restated Equity Participation Plan (the 1999 Plan), options generally vest over four, five or seven years. Although the 1999 Plan remains in full force and effect, there will be no more grants under this plan. Vested options are exercisable in part or in full at any time prior to the expiration date of six to 10 years from the date of the grant. Shares issued as a result of stock option exercises will be funded with the issuance of new shares. The 2007 Equity and Incentive Award Plan (the 2007 Plan) and the 2011 Equity and Incentive Award Plan (the 2011 Plan), discussed below, succeed the 1999 Plan. See Note V for additional information.
2007 Equity and Incentive Award Plan In May 2007, the stockholders of Safeway approved the 2007 Plan. Under the 2007 Plan, Safeway may grant or issue stock options, stock appreciation rights, restricted stock units, deferred stock, dividend equivalents, performance awards and stock payments, or any combination thereof. Safeway may grant incentive and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market value at the grant date. Options to purchase 8.1 million shares were available for grant at January 3, 2015 under this plan. Shares issued as a result of the 2007 Plan may be treasury shares, authorized but unissued shares or shares purchased in the open market. See Note V for additional information.
2011 Equity and Incentive Award Plan In May 2011, the stockholders of Safeway approved the 2011 Plan. Under the 2011 Plan, Safeway may grant or issue stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, dividend equivalents, performance awards and stock payments, or any combination thereof to participants other than Safeways Chief Executive Officer. Safeway may grant incentive and non-qualified options to purchase common stock at an exercise price equal to or greater than the fair market value at the grant date. At January 3, 2015, 6.0 million shares of common stock were available for issuance under this plan. Shares issued as a result of the 2011 Plan may be treasury shares, authorized but unissued shares or shares purchased in the open market. See Note V for additional information.
Restricted Stock Awards and Restricted Stock Units The Company awarded 748,611 shares, 747,708 shares and 695,816 shares of restricted stock in 2014, 2013 and 2012, respectively, to certain officers and key employees. These shares vested over a period of between three to five years and
F-118 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
were subject to certain transfer restrictions and forfeiture prior to vesting. Deferred stock compensation, representing the fair value of the stock at the measurement date of the award, is amortized to compensation expense over the vesting period. The amortization of restricted stock resulted in compensation expense for continuing operations of $25.5 million in 2014, $15.8 million in 2013 and $13.1 million in 2012. See Note V for additional information.
Performance Share Awards In 2014, 2013 and 2012, Safeway granted performance share awards to certain executives. These performance share awards, covering a target of approximately 2.7 million shares, vested over three years. The 2014 performance share awards were subject to the achievement of specified levels of revenue growth and return on invested capital, as modified based on the Companys total stockholder return. The 2013 and 2012 performance share awards were subject to the achievement of earnings per share goals determined on a compound annual growth rate basis relative to the S&P 500. Safeway recorded expense of $3.5 million in 2014 related to the 2014 awards. The Company recorded expense of $14.9 million in 2013 and $9.8 million in 2012 related to the 2013 and 2012 awards based on the then expected achievement of the performance targets. In the second quarter of 2014, the Company determined that it no longer believed that achievement of the performance targets related to the 2013 and 2012 awards was probable. Accordingly, in the second quarter of 2014, the Company reversed $18.8 million of previously recorded expense on unvested performance shares.
Pursuant to the terms of the Merger Agreement, all of the performance shares vested upon closing of the Merger. However, in accordance with generally accepted accounting principles, Safeway did not consider the probability of the Merger occurring in recording stock-based compensation expense.
On January 30, 2015, subsequent to the fiscal 2014 year end and in connection with the Merger, all outstanding stock option awards, performance shares, restricted stock units and restricted stock awards issued pursuant to various stockholder-approved plans and a stockholder-authorized employee stock purchase plan were automatically canceled in exchange for the right to receive certain cash consideration.
Activity in the Companys stock option plans for the year ended January 3, 2015 was as follows:
Options |
Weighted-
average exercise price |
Aggregate
intrinsic value (in millions) |
||||||||||
Outstanding, beginning of year |
7,728,655 | $ | 21.85 | $ | 82.3 | |||||||
|
|
|||||||||||
2014 Activity: |
||||||||||||
Granted |
773,347 | 38.02 | ||||||||||
Canceled |
(433,808 | ) | 22.29 | |||||||||
Exercised |
(1,913,866 | ) | 18.42 | |||||||||
|
|
|||||||||||
Outstanding, end of year |
6,154,328 | $ | 19.95 | $ | 93.4 | |||||||
|
|
|||||||||||
Exercisable, end of year(1) |
2,869,781 | $ | 17.31 | $ | 51.1 | |||||||
|
|
|||||||||||
Vested and expected to vest, end of year(2) |
5,215,892 | $ | 19.38 | $ | 82.2 | |||||||
|
|
(1) | The remaining weighted-average contractual life of these options is 5.3 years. |
(2) | The remaining weighted-average contractual life of these options is 6.6 years. |
F-119 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Weighted-average fair value of options granted during the year:
2012 |
$ | 4.50 | ||
2013 |
6.67 | |||
2014 |
8.13 |
The total intrinsic value of options exercised was $30.7 million in 2014, $47.0 million in 2013 and $0.7 million in 2012. As of year-end 2014, there was $25.4 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Companys stock option plans. That cost is expected to be recognized over a weighted-average period of 2.3 years.
Additional Stock Plan Information Safeway accounts for stock-based employee compensation in accordance with generally accepted accounting principles for stock compensation. The Company determines fair value of such awards using the Black-Scholes option pricing model. The following weighted-average assumptions used, by year, to value Safeways grants are as follows:
2014 | 2013 | 2012 | ||||||||||
Expected life (in years) |
6.25 | 6.25 6.5 | 6.25 6.5 | |||||||||
Expected stock volatility |
27.9 | % | 31.6% 33.0 | % | 30.6% 33.9 | % | ||||||
Risk-free interest rate |
2.0 | % | 1.1% 2.1 | % | 0.9% 1.3 | % | ||||||
Expected dividend yield during the expected term |
2.8 | % | 3.5% 4.0 | % | 2.8% 3.7 | % |
The expected term of the awards was determined utilizing the simplified method outlined in SEC Staff Accounting Bulletin No. 107 that utilizes the following formula: (vesting term + original contract term)/2. Expected stock volatility was determined based upon a combination of historical volatility for periods preceding the measurement date and estimates of implied volatility based upon open interests in traded option contracts on Safeway common stock. The risk-free interest rate was based on the yield curve in effect at the time the options were granted, using U.S. constant maturities over the expected life of the option. Expected dividend yield is based on Safeways dividend policy at the time the options were granted.
The following table summarizes information about unvested Safeway restricted stock as of January 3, 2015:
Awards |
Weighted-
average grant date fair value |
|||||||
Unvested, beginning of year |
2,232,263 | $ | 22.45 | |||||
Granted |
748,611 | 36.84 | ||||||
Vested |
(761,233 | ) | 23.11 | |||||
Canceled |
(137,311 | ) | 25.63 | |||||
|
|
|||||||
Unvested, end of year |
2,082,330 | $ | 27.12 | |||||
|
|
At the date of vest, the fair value of restricted stock awards vested during the year was $28.7 million in 2014, $16.4 million in 2013 and $14.2 million in 2012. At January 3, 2015, there was $52.9 million of total unrecognized compensation cost related to non-vested restricted stock awards. The cost is expected to be recognized over a weighted average period of 2.7 years.
F-120 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total share-based compensation expenses for continuing operations recognized as a component of operating and administrative expense is as follows (in millions):
2014 | 2013 | 2012 | ||||||||||
Share-based compensation expense |
$ | 24.7 | $ | 50.4 | $ | 48.4 | ||||||
Income tax benefit |
(9.7 | ) | (19.6 | ) | (18.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Share-based compensation expense recognized in earnings, net of tax |
$ | 15.0 | $ | 30.8 | $ | 29.7 | ||||||
|
|
|
|
|
|
Note M: Taxes on Income
The components of income before income tax expense are as follows (in millions):
2014 | 2013 | 2012 | ||||||||||
Domestic |
$ | 159.5 | $ | 258.3 | $ | 370.7 | ||||||
Foreign |
5.5 | (6.7 | ) | (8.5 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 165.0 | $ | 251.6 | $ | 362.2 | |||||||
|
|
|
|
|
|
The components of income tax expense are as follows (in millions):
2014 | 2013 | 2012 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (33.9 | ) | $ | 301.7 | $ | 146.9 | |||||
State |
4.2 | 11.8 | 5.1 | |||||||||
Foreign |
1.9 | (2.4 | ) | (2.9 | ) | |||||||
|
|
|
|
|
|
|||||||
(27.8 | ) | 311.1 | 149.1 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
78.5 | (273.9 | ) | (35.4 | ) | |||||||
State |
11.2 | (2.7 | ) | (0.7 | ) | |||||||
Foreign |
(0.1 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
89.6 | (276.6 | ) | (36.1 | ) | ||||||||
|
|
|
|
|
|
|||||||
$ | 61.8 | $ | 34.5 | $ | 113.0 | |||||||
|
|
|
|
|
|
Reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Companys income taxes is as follows (dollars in millions):
2014 | 2013 | 2012 | ||||||||||
Statutory rate |
35 | % | 35 | % | 35 | % | ||||||
Income tax expense using federal statutory rate |
$ | 57.8 | $ | 88.1 | $ | 126.8 | ||||||
State taxes on income net of federal benefit |
9.9 | 5.9 | 2.9 | |||||||||
Charitable donations of inventory |
(9.2 | ) | (9.6 | ) | (4.3 | ) | ||||||
Federal tax credits |
(4.0 | ) | (11.2 | ) | (2.2 | ) | ||||||
Reversal of deferred tax liability on life insurance |
| (17.2 | ) | | ||||||||
Equity earnings of foreign affiliate |
3.6 | (13.3 | ) | (8.4 | ) | |||||||
Other |
3.7 | (8.2 | ) | (1.8 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 61.8 | $ | 34.5 | $ | 113.0 | |||||||
|
|
|
|
|
|
F-121 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 2013, Safeway withdrew $68.7 million from the accumulated cash surrender value of corporate-owned life insurance (COLI) policies purchased in the early 1980s and determined that a majority of the remaining cash surrender value would be received in the future through tax-free death benefits. Consequently, Safeway reversed deferred taxes on that remaining cash surrender value and reduced tax expense by $17.2 million.
Significant components of the Companys net deferred tax asset at year end are as follows (in millions):
2014 | 2013 | |||||||
Deferred tax assets: |
||||||||
Pension liability |
$ | 391.4 | $ | 279.8 | ||||
Workers compensation and other claims |
184.3 | 152.0 | ||||||
Employee benefits |
165.1 | 155.7 | ||||||
Accrued claims and other liabilities |
90.4 | 92.4 | ||||||
Reserves not currently deductible |
77.3 | 63.8 | ||||||
Federal deduction of state taxes |
3.5 | 51.2 | ||||||
State tax credit carryforwards |
21.7 | 21.3 | ||||||
Operating loss carryforwards |
| 8.8 | ||||||
Other assets |
45.6 | 9.5 | ||||||
|
|
|
|
|||||
$ | 979.3 | $ | 834.5 | |||||
|
|
|
|
2014 | 2013 | |||||||
Deferred tax liabilities: |
||||||||
Property |
$ | (546.8 | ) | $ | (430.0 | ) | ||
Inventory |
(311.7 | ) | (273.3 | ) | ||||
Investment in Blackhawk |
| (17.9 | ) | |||||
Investments in foreign operations |
(10.9 | ) | (6.5 | ) | ||||
|
|
|
|
|||||
(869.4 | ) | (727.7 | ) | |||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 109.9 | $ | 106.8 | ||||
|
|
|
|
Deferred tax assets and liabilities are reported in the balance sheet as follows (in millions):
2014 | 2013 | |||||||
Current deferred tax assets(1) |
$ | | $ | 51.8 | ||||
Noncurrent deferred tax assets(2) |
139.3 | 55.0 | ||||||
Current deferred tax liability |
(29.4 | ) | | |||||
Noncurrent deferred tax liability |
| | ||||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 109.9 | $ | 106.8 | ||||
|
|
|
|
(1) | Included in Prepaid Expenses and Other Current Assets. |
(2) | Included in Other Assets. |
At January 3, 2015, the Company had state tax credit carryforwards of $34.6 million which expire in 2023.
F-122 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At year-end 2014, no deferred tax liability has been recognized for the $180.0 million of unremitted foreign earnings because the Company intends to utilize those earnings in the foreign operations for an indefinite period of time. If Safeway did not consider these earnings to be indefinitely reinvested, the deferred tax liability would have been in the range of $50 million to $80 million at year-end 2014.
A reconciliation of the beginning and ending amount of unrecognized tax benefits follows (in millions):
2014 | 2013 | 2012 | ||||||||||
Balance at beginning of year |
$ | 137.5 | $ | 119.4 | $ | 161.3 | ||||||
Additions based on tax positions related to the current year |
12.8 | 75.6 | 2.7 | |||||||||
Reduction for tax positions of current year |
| (4.9 | ) | | ||||||||
Additions for tax positions of prior years |
112.6 | 0.2 | 2.2 | |||||||||
Reductions for tax positions of prior years |
| (47.1 | ) | (46.9 | ) | |||||||
Foreign currency translation |
| (0.3 | ) | 0.1 | ||||||||
Expiration of statute of limitations |
| (1.3 | ) | | ||||||||
Settlements |
(0.2 | ) | (4.1 | ) | | |||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
$ | 262.7 | $ | 137.5 | $ | 119.4 | ||||||
|
|
|
|
|
|
As of January 3, 2015, December 28, 2013 and December 29, 2012, the balance of unrecognized tax benefits included tax positions of $132.8 million (net of tax), $60.1 million (net of tax) and $42.9 million (net of tax), respectively, that would reduce the Companys effective income tax rate if recognized in future periods. The $132.8 million of tax positions as of January 3, 2015 include $125.1 million of tax positions related to discontinued operations and $7.7 million of tax positions related to continuing operations.
Continuing operations income tax expense in 2014, 2013 and 2012 included expense of $0.3 million (net of tax), benefit of $5.9 million (net of tax) and benefit of $5.6 million (net of tax), respectively, related to interest and penalties. As of January 3, 2015 and December 28, 2013, the Companys accrual for net interest and penalties were receivables of $0.2 million and $5.2 million, respectively.
The Company and its domestic subsidiaries file income tax returns with federal, state and local tax authorities within the United States. The Companys foreign affiliates file income tax returns in various foreign jurisdictions, the most significant of which are Canada and certain of its provinces. The Company expects that it will no longer be subject to federal income tax examinations for fiscal years before 2007, and is no longer subject to state and local income tax examinations for fiscal years before 2007. With limited exceptions, including proposed deficiencies which the Company is protesting, Safeways Canadian affiliates are no longer subject to examination by Canada and certain of its provinces for fiscal years before 2006.
The Company does not anticipate that total unrecognized tax benefits will change significantly in the next 12 months.
F-123 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note N: Employee Benefit Plans
Pension Plans The Company maintains defined benefit, non-contributory retirement plans for substantially all of its employees not participating in multiemployer pension plans. Safeway recognizes the funded status of its retirement plans on its consolidated balance sheet.
Other Post-Retirement Benefits In addition to the Companys pension plans, the Company sponsors plans that provide post-retirement medical and life insurance benefits to certain employees. Retirees share a portion of the cost of the post-retirement medical plans. Safeway pays all the costs of the life insurance plans. The Company also sponsors a Retirement Restoration Plan that provides death benefits and supplemental income payments for senior executives after retirement. All of these Other Post-Retirement Benefit Plans are unfunded.
Canadian Pension and Other Post-Retirement Plans Sobeys assumed Safeways Canadian pension and post-retirement plan obligations as part of the overall purchase of Safeways Canadian operations in November 2013. Accordingly, the activity in these plans is not included in this footnote unless otherwise noted.
Beginning in 2013, the Company maintains a defined contribution plan for Safeways continuing employees in Canada. The plan provides an annual retirement benefit into a fund that is managed by the employee. Plan contributions are based on the employees age, earnings and years of participation in the plan. The Company also makes discretionary contributions. Contributions to the defined contribution plan totaled $0.8 million in 2014 and $0.1 million in 2013.
F-124 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the changes in the retirement plans benefit obligation and fair value of assets over the two-year period ended January 3, 2015 and a statement of the funded status as of year-end 2014 and year-end 2013 (in millions):
Pension |
Other Post-Retirement
Benefits |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Change in projected benefit obligation: |
||||||||||||||||
Beginning balance |
$ | 2,023.4 | $ | 2,635.4 | $ | 79.5 | $ | 135.0 | ||||||||
Service cost |
42.5 | 42.0 | 0.9 | 0.7 | ||||||||||||
Interest cost |
96.4 | 85.4 | 3.4 | 3.2 | ||||||||||||
Plan amendments |
0.2 | 0.2 | | |||||||||||||
Actuarial loss (gain) |
254.0 | (56.3 | ) | 12.4 | (5.0 | ) | ||||||||||
Plan participant contributions |
| | 0.9 | 1.0 | ||||||||||||
Benefit payments |
(172.5 | ) | (133.3 | ) | (7.3 | ) | (7.2 | ) | ||||||||
Change in projected benefit obligation related to CSL |
| (39.5 | ) | | 1.3 | |||||||||||
Disposal of CSL |
| (510.5 | ) | | (49.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 2,244.0 | $ | 2,023.4 | $ | 89.8 | $ | 79.5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in fair value of plan assets: |
||||||||||||||||
Beginning balance |
$ | 1,644.2 | $ | 1,845.7 | $ | | $ | | ||||||||
Actual return on plan assets |
82.6 | 268.6 | | | ||||||||||||
Employer contributions |
6.9 | 50.1 | 6.4 | 6.2 | ||||||||||||
Plan participant contributions |
| | 0.9 | 1.0 | ||||||||||||
Benefit payments |
(172.5 | ) | (133.3 | ) | (7.3 | ) | (7.2 | ) | ||||||||
Change in fair value of plan assets related to CSL |
| 32.8 | | | ||||||||||||
Disposal of CSL |
| (419.7 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 1,561.2 | $ | 1,644.2 | $ | | $ | | ||||||||
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|
|
|||||||||
Components of net amount recognized in financial position: |
||||||||||||||||
Other accrued liabilities (current liability) |
$ | (1.1 | ) | $ | (1.1 | ) | $ | (6.4 | ) | $ | (6.2 | ) | ||||
Pension and post-retirement benefit obligations (non-current liability) |
(681.7 | ) | (378.1 | ) | (83.4 | ) | (73.3 | ) | ||||||||
|
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|
|
|
|
|
|
|||||||||
Funded status |
$ | (682.8 | ) | $ | (379.2 | ) | $ | (89.8 | ) | $ | (79.5 | ) | ||||
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|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income consist of the following (in millions):
Pension |
Other Post-Retirement
Benefits |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net actuarial loss |
$ | 611.8 | $ | 365.0 | $ | 22.9 | $ | 10.6 | ||||||||
Prior service cost (credit) |
4.8 | 14.3 | (1.0 | ) | (1.1 | ) | ||||||||||
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|
|
|
|
|||||||||
$ | 616.6 | $ | 379.3 | $ | 21.9 | $ | 9.5 | |||||||||
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|
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|
F-125 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information for Safeways pension plans, all of which have an accumulated benefit obligation in excess of plan assets as of year-end 2014 and 2013, is shown below (in millions):
2014 | 2013 | |||||||
Projected benefit obligation |
$ | 2,244.0 | $ | 2,023.4 | ||||
Accumulated benefit obligation |
2,179.6 | 1,978.3 | ||||||
Fair value of plan assets |
1,561.2 | 1,644.2 |
The following tables provide the components of net expense for the retirement plans and other changes in plan assets and benefit obligations recognized in other comprehensive income (in millions):
Pension |
Other
Post-Retirement
Benefits |
|||||||||||||||||||||||
Components of net expense: |
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||||||
Estimated return on plan assets |
$ | (119.3 | ) | $ | (107.9 | ) | $ | (101.0 | ) | $ | | $ | | $ | | |||||||||
Service cost |
42.5 | 42.0 | 40.3 | 0.9 | 0.7 | 0.6 | ||||||||||||||||||
Interest cost |
96.4 | 85.4 | 91.8 | 3.4 | 3.2 | 3.6 | ||||||||||||||||||
Settlement loss |
| | 5.9 | | | | ||||||||||||||||||
Curtailment loss |
| | 1.8 | | | | ||||||||||||||||||
Amortization of prior service cost (credit) |
9.7 | 12.8 | 15.3 | (0.1 | ) | (0.1 | ) | (0.1 | ) | |||||||||||||||
Amortization of net actuarial loss |
42.3 | 77.8 | 70.3 | 0.4 | 0.9 | 0.5 | ||||||||||||||||||
|
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|
|
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|
|
|
|
|
|
|
|||||||||||||
Net expense |
$ | 71.6 | $ | 110.1 | $ | 124.4 | $ | 4.6 | $ | 4.7 | $ | 4.6 | ||||||||||||
|
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|
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|
|
|
|
|
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|
|||||||||||||
Changes in plan assets and benefit obligations recognized in other comprehensive income: |
||||||||||||||||||||||||
Net actuarial loss (gain) |
$ | 290.6 | $ | (216.9 | ) | $ | 97.8 | $ | 12.7 | $ | (5.0 | ) | $ | 6.6 | ||||||||||
Recognition of net actuarial loss |
(42.3 | ) | (77.8 | ) | (76.3 | ) | (0.4 | ) | (0.9 | ) | (0.5 | ) | ||||||||||||
Prior service credit |
0.2 | 0.2 | 0.5 | | | | ||||||||||||||||||
Recognition of prior service (cost) credit |
(9.7 | ) | (12.8 | ) | (17.0 | ) | 0.1 | 0.1 | 0.1 | |||||||||||||||
Changes relating to discontinued operations |
| (55.5 | ) | 9.0 | | (3.0 | ) | (5.0 | ) | |||||||||||||||
|
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|
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|
|
|
|||||||||||||
Total recognized in other comprehensive income |
238.8 | (362.8 | ) | 14.0 | 12.4 | (8.8 | ) | 1.2 | ||||||||||||||||
|
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|
|||||||||||||
Total net expense and changes in plan assets and benefit obligations recognized in comprehensive income |
$ | 310.4 | $ | (252.7 | ) | $ | 138.4 | $ | 17.0 | $ | (4.1 | ) | $ | 5.8 | ||||||||||
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Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Actuarial gains and losses are amortized over the average remaining service life of active participants when the accumulation of such gains and losses exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets. The Company uses its fiscal year-end date as the measurement date for its plans.
F-126 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actuarial assumptions used to determine year-end projected benefit obligations for pension plans were as follows:
2014 | 2013 | 2012 | ||||||||||
Discount rate: |
||||||||||||
United States plans |
4.00 | % | 4.90 | % | 4.20 | % | ||||||
Canadian plans |
NA | NA | 4.00 | % | ||||||||
Combined weighted-average rate |
NA | NA | 4.16 | % | ||||||||
Rate of compensation increase: |
||||||||||||
United States plans |
3.00 | % | 3.00 | % | 3.00 | % | ||||||
Canadian plans |
NA | NA | 2.75 | % |
The actuarial assumptions used to determine net periodic benefit costs for pension plans were as follows:
2014 | 2013 | 2012 | ||||||||||
Discount rate |
4.90 | % | 4.20 | % | 4.94 | % | ||||||
Expected return on plan assets: |
7.50 | % | 7.50 | % | 7.75 | % | ||||||
Rate of compensation increase |
3.00 | % | 3.00 | % | 3.00 | % |
The Company has adopted and implemented an investment policy for the defined benefit pension plans that incorporates a strategic long-term asset allocation mix designed to meet the Companys long-term pension requirements. This asset allocation policy is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. The following table summarizes actual allocations for Safeways plans at year-end:
Plan assets | ||||||||||||
Asset category |
Target | 2014 | 2013 | |||||||||
Equity |
65 | % | 65.8 | % | 66.4 | % | ||||||
Fixed income |
35 | % | 32.9 | % | 31.9 | % | ||||||
Cash and other |
| 1.3 | % | 1.7 | % | |||||||
|
|
|
|
|
|
|||||||
Total |
100 | % | 100.0 | % | 100.0 | % | ||||||
|
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|
|
|
|
The investment policy also emphasizes the following key objectives: (1) maintain a diversified portfolio among asset classes and investment styles; (2) maintain an acceptable level of risk in pursuit of long-term economic benefit; (3) maximize the opportunity for value-added returns from active investment management while establishing investment guidelines and monitoring procedures for each investment manager to ensure the characteristics of the portfolio are consistent with the original investment mandate; and (4) maintain adequate controls over administrative costs.
Expected return on pension plan assets is based on historical experience of the Companys portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation. Safeways target asset allocation mix is designed to meet the Companys long-term pension requirements.
F-127 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of Safeways pension plan assets at January 3, 2015, excluding pending transactions of $41.5 million, by asset category are as follows (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices
in active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||
Asset category: |
||||||||||||||||
Cash and cash equivalents(1) |
$ | 9.6 | $ | 1.3 | $ | 8.3 | $ | | ||||||||
Short-term investment collective trust(2) |
47.5 | | 47.5 | | ||||||||||||
Common and preferred stock:(3) |
||||||||||||||||
Domestic common and preferred stock |
293.6 | 293.5 | 0.1 | | ||||||||||||
International common stock |
34.6 | 34.6 | | | ||||||||||||
Common collective trust funds(2) |
523.6 | | 523.6 | | ||||||||||||
Corporate bonds(4) |
121.3 | | 120.6 | 0.7 | ||||||||||||
Mortgage- and other asset-backed securities(5) |
63.4 | | 63.4 | | ||||||||||||
Mutual funds(6) |
183.2 | 34.2 | 149.0 | | ||||||||||||
U.S. government securities(7) |
263.8 | | 263.7 | 0.1 | ||||||||||||
Other securities(8) |
62.8 | 0.7 | 37.6 | 24.5 | ||||||||||||
|
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|
|
|
|
|||||||||
Total |
$ | 1,603.4 | $ | 364.3 | $ | 1,213.8 | $ | 25.3 | ||||||||
|
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(1) | The carrying value of these items approximates fair value. |
(2) | These investments are valued based on the Net Asset Value (NAV) of the underlying investments and are provided by the fund issuers. |
(3) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for preferred stock, an industry standard valuation model is used which maximizes observable inputs. |
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs. |
(5) | The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for comparable securities, the fair value is based upon an industry model which maximizes observable inputs. |
(6) | These investments are publicly traded investments which are valued using the NAV. The NAV of the mutual funds is a quoted price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the funds liabilities, expressed on a per-share basis. |
(7) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model which maximizes observable inputs. |
(8) | Other securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. |
F-128 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Also included in Other Securities are exchange-traded derivatives that are valued based on quoted prices in an active market for identical derivatives; assets and liabilities. Non-exchange-traded derivatives are valued using industry valuation models, which maximize observable inputs, such as interest-rate yield curve data, foreign exchange rates and applicable spot and forward rates.
See Note I for a discussion of levels.
A reconciliation of the beginning and ending balances for Level 3 assets for the year ended January 3, 2015 follows (in millions):
Fair Value Measured Using Significant
Unobservable Inputs (Level 3) |
||||||||||||||||
Total |
Corporate
bonds |
U.S.
government securities |
Other
securities |
|||||||||||||
Balance, beginning of year |
$ | 7.9 | $ | | $ | 0.1 | $ | 7.8 | ||||||||
Purchases, sales, settlements, net |
19.7 | 0.7 | | 19.0 | ||||||||||||
Unrealized gains |
(2.3 | ) | | | (2.3 | ) | ||||||||||
|
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|
|||||||||
Balance, end of year |
$ | 25.3 | $ | 0.7 | $ | 0.1 | $ | 24.5 | ||||||||
|
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|
|
The fair value of Safeways pension plan assets at December 28, 2013, excluding pending transactions of $37.2 million, by asset category are as follows (in millions):
Fair Value Measurements | ||||||||||||||||
Total |
Quoted prices in
active markets for identical assets (Level 1) |
Significant
observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||
Asset category: |
||||||||||||||||
Cash and cash equivalents(1) |
$ | 30.2 | $ | 29.0 | $ | 1.2 | $ | | ||||||||
Short-term investment collective trust(2) |
18.2 | | 18.2 | | ||||||||||||
Common and preferred stock:(3) |
||||||||||||||||
Domestic common and preferred stock |
270.4 | 269.9 | 0.5 | | ||||||||||||
International common stock |
38.5 | 38.5 | | | ||||||||||||
Common collective trust funds(2) |
611.2 | | 611.2 | | ||||||||||||
Corporate bonds(4) |
101.1 | | 101.1 | | ||||||||||||
Mortgage- and other asset-backed securities(5) |
62.3 | | 62.3 | | ||||||||||||
Mutual funds(6) |
183.8 | 5.9 | 177.9 | | ||||||||||||
U.S. government securities(7) |
335.8 | | 335.7 | 0.1 | ||||||||||||
Other securities(8) |
29.9 | 3.1 | 19.0 | 7.8 | ||||||||||||
|
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|
|||||||||
Total |
$ | 1,681.4 | $ | 346.4 | $ | 1,327.1 | $ | 7.9 | ||||||||
|
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|
(1) | The carrying value of these items approximates fair value. |
(2) | These investments are valued based on the Net Asset Value (NAV) of the underlying investments and are provided by the fund issuers. |
(3) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for preferred stock, an industry standard valuation model is used which maximizes observable inputs. |
F-129 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs. |
(5) | The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for comparable securities, the fair value is based upon an industry model which maximizes observable inputs. |
(6) | These investments are publicly traded investments which are valued using the NAV. The NAV of the mutual funds is a quoted price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the funds liabilities, expressed on a per-share basis. |
(7) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model which maximizes observable inputs. |
(8) | Other securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. |
Valuation techniques are described earlier in this note. See Note I for a discussion of levels.
A reconciliation of the beginning and ending balances for Level 3 assets for the year ended December 28, 2013 follows (in millions):
Fair Value Measured Using Significant
Unobservable Inputs (Level 3) |
||||||||||||||||||||
Total |
Corporate
bonds |
Mortgage-
and other asset- backed securities |
U.S.
government securities |
Other
Securities |
||||||||||||||||
Balance, beginning of year |
$ | 4.0 | $ | 3.4 | $ | 0.5 | $ | 0.1 | $ | | ||||||||||
Purchases, sales, settlements, net |
4.0 | (3.4 | ) | (0.5 | ) | | 7.9 | |||||||||||||
Unrealized gains |
(0.1 | ) | | | | (0.1 | ) | |||||||||||||
|
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|
|||||||||||
Balance, end of year |
$ | 7.9 | $ | | $ | | $ | 0.1 | $ | 7.8 | ||||||||||
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Contributions Cash contributions are expected to increase to approximately $268 million in 2015, primarily due to the settlement with the Pension Benefit Guaranty Corporation.
Estimated Future Benefit Payments The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (in millions):
Pension benefits | Other benefits | |||||||
2015 |
$ | 140.3 | $ | 6.8 | ||||
2016 |
140.4 | 6.7 | ||||||
2017 |
141.5 | 6.6 | ||||||
2018 |
141.8 | 6.5 | ||||||
2019 |
142.4 | 6.4 | ||||||
20202024 |
709.8 | 23.3 |
F-130 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note O: Multiemployer Benefit Plans
Multiemployer Pension Plans Safeway contributes to a number of multiemployer defined benefit pension plans under the terms of collective bargaining agreements that cover its union-represented employees. Benefits generally are based on a fixed amount for each year of service, and, in some cases, are not negotiated with contributing employers or in some cases even known by contributing employers. None of the Companys collective bargaining agreements require that a minimum contribution be made to these plans.
The risks of participating in U.S. multiemployer pension plans are different from single-employer pension plans in the following aspects:
a. | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
b. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
c. | If Safeway stops participating in some of its multiemployer pension plans, Safeway may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The Company made and charged to expense contributions of $277.1 million in 2014, $259.2 million in 2013 and $248.7 million in 2012 to these plans for continuing operations.
In 2013, the Company sold all Canadian operations which terminated our obligation to contribute to Canadian multiemployer pension plans. Due to provincial law in Canada, Safeway is not expected to incur multiemployer pension withdrawal liability associated with the sale.
Also in 2013, the Company sold or closed all stores in the Dominicks division. As previously reported, Dominicks participated in certain multiemployer pension plans on which withdrawal liabilities have been or we expect will be incurred due to the Dominicks closure. Generally, the Company may pay such withdrawal liabilities in installment payments. Withdrawal liabilities are generally subject to a 20-year payment cap, but may extend into perpetuity if a mass withdrawal from the plan occurs.
During the fourth quarter of 2013, Safeway recorded a liability of $310.8 million, which represented the present value of estimated installment payments to be made to the plans based on the best information available at the time, without having yet received demand letters from the multiemployer pension plans. In April 2014 and September 2014, the Company received demand letters from three of the plans. These demand letters called for installment payments greater than Safeways original actuarial estimate based on calculations Safeway disputes. The Company has requested a review by the plan trustee of the demands made by the three plans.
F-131 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Companys loss estimate is in accordance with ASC 450, Contingencies. The following is a rollforward of the estimated multiemployer pension withdrawal liability (in millions):
Balance at year-end 2013 |
$ | 310.8 | ||
Accrued interest |
13.7 | |||
Adjustment for changes in interest rates |
121.1 | |||
Adjustments to loss estimates based on demand letters |
38.3 | |||
Installment payments |
(9.5 | ) | ||
|
|
|||
Balance at year-end 2014 |
$ | 474.4 | ||
|
|
Accrued interest expense and adjustments to the estimated liability are recorded in discontinued operations. The $455.0 million long-term portion of the estimated liability is included in Accrued Claims and Other Liabilities, and the $19.4 million current portion is included in Other Accrued Liabilities in the condensed consolidated balance sheet.
Pending review of the demand letters received, receipt of a final demand letter, or any negotiated lump sum settlements, the final amount of the withdrawal liability may be greater than or less than the amount recorded, and this difference could be significant. The Company currently estimates the range of potential withdrawal liability to be between $475 million and $607 million.
All information related to multiemployer pension expense or multiemployer post-retirement benefit obligations herein exclude Canada and Dominicks for all purposes unless otherwise stated.
Safeways participation in these plans for the annual period ended January 3, 2015 is outlined in the following tables. All information in the tables is as of January 3, 2015, December 28, 2013 and December 29, 2012 in the columns labeled 2014, 2013 and 2012, respectively, unless otherwise stated. The EIN-PN column provides the Employer Identification Number (EIN) and the Plan Number (PN), if applicable. Unless otherwise noted, the most recent Pension Protection Act (PPA) zone status available in 2014 and 2013 is for the plans year ending at December 31, 2014, and December 31, 2013, respectively. The zone status is based on information that Safeway received from the plan. Among other factors, generally, plans in critical status (red zone) are less than 65 percent funded, plans in endangered or seriously endangered status (yellow zone or orange zone, respectively) are less than 80 percent funded, and plans at least 80 percent funded are said to be in the green zone. The FIP/RP status pending/implemented column indicates plans for which a funding improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented by the trustees of each plan. Information related to the impact of utilization of extended amortization periods on zone status is either not available or not obtainable without undue cost and effort.
Other than the sale of Safeways Canadian operations and Dominicks, there have been no significant changes that affect the comparability of 2014, 2013, and 2012 contributions.
F-132 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following two tables contain information about Safeways U.S. multiemployer pension plans.
EINPN |
Pension Protection
Act zone status |
Safeway 5% of total plan
contributions |
FIP/RP status
pending/ implemented |
|||||||||
Pension fund |
2014 | 2013 | 2013 | 2012 | ||||||||
UFCW-Northern California Employers Joint Pension Trust Fund |
946313554001 | Red | Red | Yes | Yes | Implemented | ||||||
Western Conference of Teamsters Pension Plan |
916145047001 | Green | Green | No | No | No | ||||||
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan |
951939092001 |
Red
3/31/2015 |
Red
3/31/2014 |
Yes
3/31/2014 |
Yes
3/31/2013 |
Implemented | ||||||
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund |
526128473001 | Red | Red | Yes | Yes | Implemented | ||||||
Sound Retirement Trust (formerly Retail Clerks Pension Trust)(3) |
916069306001 |
Red
9/30/2014 |
Red
9/30/2013 |
Yes
9/30/2013 |
Yes
9/30/2012 |
Implemented | ||||||
Bakery and Confectionery Union and Industry International Pension Fund |
526118572001 | Red | Red | Yes | Yes | Implemented | ||||||
Rocky Mountain UFCW Unions & Employers Pension Plan |
846045986001 | Green | Green | Yes | Yes | No | ||||||
Desert States Employers & UFCW Unions Pension Plan |
846277982001 | Green | Green | Yes | Yes | No | ||||||
Mid-Atlantic UFCW and Participating Employers Pension Fund(4) |
461000515001 | NA | NA | Yes | NA | NA | ||||||
Denver Area Meat Cutters and Employers Pension Plan |
846097461001 | Green | Green | Yes | Yes | No | ||||||
Oregon Retail Employees Pension Trust |
936074377001 | Green | Red | Yes | Yes | No | ||||||
Alaska United Food and Commercial Workers Pension Trust |
916123694001 | Red | Red | Yes | Yes | Implemented | ||||||
Safeway Multiple Employer Retirement Plan(5) |
943019135005 | 80%+ | 80%+ |
No
12/30/2013 |
No
12/30/2012 |
NA | ||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
516031512001 | Red | Red | Yes | Yes | Implemented | ||||||
Central Pension Fund of the International Union of Operating Engineers and Participating Employers |
366052390001 |
Green
1/31/2015 |
Green
1/31/2014 |
No
1/31/2014 |
No
1/31/2013 |
No | ||||||
Alaska Teamster-Employer Pension Plan |
926003463024 |
Red
6/30/2015 |
Red
6/30/2014 |
No
6/30/2013 |
No
6/30/2012 |
Implemented |
F-133 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contributions of Safeway
(in millions) |
Surcharge
imposed(1) |
Expiration
date of collective bargaining agreements |
Total
collective bargaining agreements |
Most significant collective
bargaining agreement(s) |
||||||||||||||||||||
Pension fund |
2014 | 2013 | 2012 | Count | Expiration |
% head-
count(2) |
||||||||||||||||||
UFCW-Northern California Employers Joint Pension Trust Fund |
$ | 83.3 | $ | 77.4 | $ | 72.9 | No |
8/3/2013 to
7/23/2016 |
20 | 14 | 10/11/2014 | 93% | ||||||||||||
Western Conference of Teamsters Pension Plan |
$ | 47.0 | $ | 45.7 | $ | 43.9 | No |
9/20/2014 to
10/6/2018 |
45 | 1 | 10/1/2016 | 28% | ||||||||||||
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan |
$ | 46.7 | $ | 42.1 | $ | 39.3 | No |
3/6/2016 to
5/8/2016 |
14 | 12 | 3/6/2016 | 99% | ||||||||||||
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund |
$ | 18.9 | $ | 19.5 | $ | 23.5 | No |
10/29/2016 to
2/25/2017 |
7 | 4 | 10/29/2016 | 97% | ||||||||||||
Sound Retirement Trust (formerly Retail Clerks Pension Trust)(3) |
$ | 16.6 | $ | 15.4 | $ | 14.2 | No |
1/10/2015 to
9/20/2017 |
51 | 3 | 5/7/2016 | 50% | ||||||||||||
Bakery and Confectionery Union and Industry International Pension Fund |
$ | 14.2 | $ | 13.3 | $ | 12.4 | Yes |
11/7/2011 to
9/17/2017 |
39 | 5 | 4/8/2017 | 38% | ||||||||||||
Rocky Mountain UFCW Unions & Employers Pension Plan |
$ | 10.9 | $ | 11.4 | $ | 11.3 | No |
9/12/2015 to
8/27/2016 |
44 | 8 | 9/12/2015 | 53% | ||||||||||||
Desert States Employers & UFCW Unions Pension Plan |
$ | 9.1 | $ | 9.5 | $ | 10.5 | No |
10/29/2016 to
11/3/2018 |
4 | 2 | 10/29/2016 | 97% | ||||||||||||
Mid-Atlantic UFCW and Participating Employers Pension Fund(4) |
$ | 4.9 | $ | 5.0 | NA | NA |
10/29/2016 to
2/25/2017 |
7 | 4 | 10/29/2016 | 97% | |||||||||||||
Denver Area Meat Cutters and Employers Pension Plan |
$ | 4.7 | $ | 5.0 | $ | 5.0 | No |
9/12/2015 to
7/23/2016 |
42 | 8 | 9/12/2015 | 52% | ||||||||||||
Oregon Retail Employees Pension Trust |
$ | 4.7 | $ | 4.5 | $ | 4.2 | No |
7/25/2015 to
1/21/2017 |
34 | 4 | 7/25/2015 | 42% | ||||||||||||
Alaska United Food and Commercial Workers Pension Trust |
$ | 2.1 | $ | 2.0 | $ | 1.9 | No |
5/31/2015 to
2/11/2017 |
10 | 1 | 5/31/2015 | 48% |
F-134 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contributions of Safeway
(in millions) |
Surcharge
imposed(1) |
Expiration
date of collective bargaining agreements |
Total
collective bargaining agreements |
Most significant collective
bargaining agreement(s) |
||||||||||||||||||||
Pension fund |
2014 | 2013 | 2012 | Count | Expiration |
% head-
count(2) |
||||||||||||||||||
Safeway Multiple Employer Retirement Plan(5) |
$ | 1.8 | $ | 1.9 | $ | 2.4 | NA | NA | NA | NA | NA | NA | ||||||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
$ | 1.7 | $ | 1.6 | $ | 1.5 | No |
5/19/2013
to 3/1/2015 |
3 | 2 | 3/1/2015 | 98% | ||||||||||||
Central Pension Fund of the International Union of Operating Engineers and Participating Employers |
$ | 1.5 | $ | 1.5 | $ | 1.5 | No |
6/4/2016
to 6/15/2019 |
6 | 2 | 4/15/2018 | 45% | ||||||||||||
Alaska Teamster-Employer Pension Plan |
$ | 1.0 | $ | 1.0 | $ | 1.0 | No |
3/10/2018
to 10/6/2018 |
3 | 2 | 3/10/2018 | 85% | ||||||||||||
Other funds |
$ | 8.0 | $ | 2.4 | $ | 3.2 | ||||||||||||||||||
|
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|||||||||||||||||||
Total Safeway contributions to U.S. multiemployer pension plans |
$ | 277.1 | $ | 259.2 | $ | 248.7 | ||||||||||||||||||
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NA = not applicable.
(1) | PPA surcharges are 5% or 10% of eligible contributions and may not apply to all collective bargaining agreements or total contributions made to each plan. |
(2) | Employees on which Safeway may contribute under these most significant collective bargaining agreements as a percent of all employees on which Safeway may contribute to the respective fund. |
(3) | Sound Retirement Trust information includes former Washington Meat Industry Pension Trust due to merger into Sound Retirement Trust effective June 30, 2014. |
(4) | The Mid-Atlantic UFCW & Participating Employers Pension Fund is a multiemployer plan effective January 1, 2013 which provides future service benefits to participants who would have otherwise earned future service under the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund. The plan is not expected to be subject to zone status certification or notice or establishment of a funding improvement plan or a rehabilitation plan as per section 432(a) of the Internal Revenue Code since those provisions are required for multiemployer plans in effect on July 16, 2006. |
(5) | The Safeway Multiple Employer Retirement Plan (SMERP) is a multiple employer plan as defined in the Internal Revenue Code. However, the SMERP is characterized as a multiemployer plan by the FASB, even though it is not maintained pursuant to any collective bargaining agreements to which Safeway is party. The plan may be subject to statutory annual minimum contributions based on complex actuarial calculations. Additionally, it has no PPA zone status and is not subject to establishment of a funding improvement plan or a rehabilitation plan or other PPA provisions that apply to multiemployer plans. |
F-135 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At the date the financial statements were issued, Forms 5500 were generally not available for the plan years ending in 2014. Additionally, for the plan year ending March 31, 2012, Safeway contributed more than 5% of the total contributions to the Southern California United Food and Commercial Workers Union and Food Employers Joint Pension Plan.
Multiemployer post-retirement benefit plans other than pensions Safeway contributes to a number of multiemployer post-retirement benefit plans other than pensions under the terms of its collective bargaining agreements that cover union-represented employees. These plans may provide medical, pharmacy, dental, vision, mental health and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. These benefits are not vested. A significant portion of Safeway contributions benefit active employees and, as such, may not constitute contributions to a post-retirement benefit plan. Safeway is unable to separate all contribution amounts paid to benefit active participants in order to separately report contributions paid to provide post-retirement benefits for retirees.
It is estimated that Safeway may have contributed as much as $312.4 million in 2014, $302.0 million in 2013 and as much as $473.3 million in 2012 to fund health and welfare plans for multiemployer post-retirement plans other than pension. Actual funding of post-retirement benefit plans other than pensions is likely much lower as this amount continues to include contributions which benefit active employees.
Note P: Investment in Unconsolidated Affiliates
At year-end 2014, 2013 and 2012, Safeways investment in unconsolidated affiliates includes a 49% ownership interest in Casa Ley, which operated 206 food and general merchandise stores in Western Mexico at year-end 2014. See Note V.
Equity in earnings from Safeways unconsolidated affiliates, which is included in other income, was income of $16.2 million in 2014, $17.6 million in 2013 and $17.5 million in 2012.
Note Q: Commitments and Contingencies
Legal Matters Certain holders of Safeway common stock have sought appraisal rights under Section 262 of the Delaware General Corporation Law, requesting a determination that the per share merger consideration payable in the Merger does not represent fair value for their shares. On February 19, 2015, a petition for appraisal was filed in Delaware Chancery Court entitled Third Motion Equities Master Fund Ltd v. Safeway Inc., by a stockholder claiming to hold 563,000 shares. On February 25, 2015, a petition for appraisal was filed in Delaware Chancery Court entitled Merion Capital LP and Merion Capital II LP v. Safeway Inc. , by stockholders claiming to hold approximately 10.5 million shares. The deadline for filing petitions has not yet expired. If these plaintiffs are successful in any appraisal proceeding, they could be entitled to more for their stock than the per share merger consideration payable in the Merger.
On August 18, 2001, a group of truck drivers from the Companys Tracy, CA distribution center filed an action in California Superior Court, San Joaquin County entitled Cicairos, et al. v. Summit Logistics , alleging that Summit Logistics, the entity with whom Safeway contracted to operate the distribution center until August 2003, failed to provide meal periods, rest periods and itemized wage statements to the drivers in violation of California state law. Under its contract with Summit, Safeway is obligated to defend and indemnify Summit Logistics in this lawsuit. On February 6, 2007, another
F-136 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
group of truck drivers from the Tracy distribution center filed a similar action in the same court, entitled Bluford, et al. v. Safeway Inc. , alleging essentially the same claims against the Company. Both cases were subsequently certified as class actions. After lengthy litigation in the trial and appellate courts. On February 20, 2015, the parties signed a preliminary agreement of settlement that calls for the Company to pay approximately $31 million in total. This amount consists of a settlement fund of $30.2 million, out of which will be paid relief to the class, and attorneys fees and costs as awarded by the court. In addition to this settlement fund, the Company will pay interest of $10,000 if the distribution to the class is made in August 2015, with additional monthly amounts of interest if later. The Company will also pay third party settlement administrator costs, and its employer share of FICA/Medicare taxes. The Company anticipates that a motion for preliminary court approval of the settlement will be heard in the Spring of 2015. If such preliminary approval is granted, class members will be notified and given the opportunity to file objections to the settlement. Following that, a motion for final approval of the settlement would be filed in mid-2015.
As previously reported, in the second quarter of 2014, the Company received two subpoenas from the Drug Enforcement Administration (DEA) concerning the Companys record keeping, reporting and related practices associated with the loss or theft of controlled substances. The Company continues to cooperate with the DEA on this matter.
As previously reported, in February 2012, Safeway was served with a subpoena issued by a group of California District Attorneys seeking documents and information related to the handling, disposal and reverse logistics of potential hazardous waste within the State. The subject matter of the subpoena relates to the handling and transportation of unsaleable household items, including, but not limited to, cleaners, aerosols, hair shampoos, dye, lotions, light bulbs, batteries, over-the-counter and similar items. On January 2, 2015, the Company settled an action with the State of California, including various California counties, on this matter by agreeing to pay civil penalties and costs and to fund specified Supplemental Environmental Projects in the amount of $9.9 million. As part of the settlement, the Company also agreed to certain ongoing compliance activities with respect to both potential hazardous waste and private health information.
The Company is subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes and other matters. Some of these suits purport or may be determined to be class actions and/or seek substantial damages.
It is managements opinion that although the amount of liability with respect to all of the above matters cannot be ascertained at this time, any resulting liability, including any punitive damages, will not have a material adverse effect on the Companys business or financial condition.
Commitments The Company has commitments under contracts for the purchase of property and equipment and for the construction of buildings, the purchase of energy and other purchase obligations. Portions of such contracts not completed at year end are not reflected in the consolidated financial statements. These purchase commitments were $257.8 million at year-end 2014.
Note R: Segments
Safeways retail business operates in the United States. Safeway is organized into seven geographic retail operating segments (Denver, Eastern, Northern California, Phoenix, Northwest, Texas and Southern California). Across all seven retail operating segments, the Company operates
F-137 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
primarily one store format, where each store offers the same general mix of products with similar pricing to similar categories of customers. Safeway does not operate supercenters, warehouse formats, combination clothing/grocery stores or discount stores.
The seven operating segments have been aggregated into one reportable segment called Safeway, because, in the Companys judgment, the operating segments have similar historical economic characteristics and are expected to have similar economic characteristics and similar long-term financial performance in the future. The principal measures and factors the Company considered in determining whether the economic characteristics are similar are gross margin percentage, operating profit margin, sales growth, capital expenditures, competitive risks, operational risks and challenges, retail store sales, costs of goods sold and employees. In addition, each operating segment has similar products, similar production processes, similar types of customers, similar methods of distribution and a similar regulatory environment. The Company believes that disaggregating its operating segments would not provide material or meaningful additional information.
The following table presents sales revenue by type of similar product (dollars in millions):
2014 | 2013 | 2012 | ||||||||||||||||||||||
Amount | % of total | Amount | % of total | Amount | % of total | |||||||||||||||||||
Non-perishables(1) |
$ | 15,266.7 | 42.0 | % | $ | 14,811.7 | 42.2 | % | $ | 14,738.0 | 41.9 | % | ||||||||||||
Perishables(2) |
13,656.5 | 37.6 | % | 12,809.8 | 36.6 | % | 12,548.1 | 35.7 | % | |||||||||||||||
Fuel |
3,962.2 | 10.9 | % | 4,168.4 | 11.9 | % | 4,594.2 | 13.1 | % | |||||||||||||||
Pharmacy |
2,805.1 | 7.7 | % | 2,674.9 | 7.6 | % | 2,755.4 | 7.8 | % | |||||||||||||||
Other(3) |
639.7 | 1.8 | % | 600.1 | 1.7 | % | 525.8 | 1.5 | % | |||||||||||||||
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|
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|
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|
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|
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|
|||||||||||||
Total sales and other revenue |
$ | 36,330.2 | 100.0 | % | $ | 35,064.9 | 100.0 | % | $ | 35,161.5 | 100.0 | % | ||||||||||||
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(1) | Consists primarily of grocery, soft drinks and other beverages, general merchandise, meal ingredients, frozen foods and snacks. |
(2) | Consists primarily of produce, meat, dairy, bakery, deli, floral and seafood. |
(3) | Consists primarily of wholesale sales, commissions on gift cards and other revenue. |
As a result of the Blackhawk IPO and until Safeway distributed all of the Class B common stock of Blackhawk that it owned to Safeway stockholders, the Company presented Blackhawk as a separate reportable segment.
F-138 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents certain balance sheet information about the Company (in millions):
Long-lived
Assets, Net |
Total Assets | |||||||
2014 |
||||||||
Safeway U.S. |
$ | 6,776.5 | $ | 13,371.4 | ||||
Dominicks assets held for sale |
| 5.6 | ||||||
|
|
|
|
|||||
Total |
$ | 6,776.5 | $ | 13,377.0 | ||||
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|
|||||
2013 |
||||||||
Safeway U.S. |
$ | 7,457.8 | $ | 15,129.9 | ||||
Blackhawk |
79.7 | 1,952.9 | ||||||
Dominicks assets held for sale |
| 136.7 | ||||||
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|
|
|
|||||
Total |
$ | 7,537.5 | $ | 17,219.5 | ||||
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|
|||||
2012 |
||||||||
Safeway U.S. |
$ | 7,991.1 | $ | 11,007.6 | ||||
Blackhawk |
67.0 | 1,528.1 | ||||||
Canada |
1,166.5 | 2,121.3 | ||||||
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|
|||||
Total |
$ | 9,224.6 | $ | 14,657.0 | ||||
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|
Note S: Income Per Share
The Company computes earnings per share under the two-class method, which is a method of computing earnings per share when an entity has both common stock and participating securities. Unvested restricted stock is considered a participating security because it contains rights to receive nonforfeitable dividends at the same rate as common stock. Under the two-class method, the calculation of basic and diluted earnings per common share excludes the income attributable to participating securities. Additionally, the weighted average shares outstanding exclude the impact of participating securities.
The following table provides reconciliations of net earnings and shares used in calculating income per basic common share to those used in calculating income per diluted common share.
(In millions, except per-share amounts) |
2014 | 2013 | 2012 | |||||||||||||||||||||
Diluted | Basic | Diluted | Basic | Diluted | Basic | |||||||||||||||||||
Income from continuing operations, net of tax |
$ | 103.2 | $ | 103.2 | $ | 217.1 | $ | 217.1 | $ | 249.2 | $ | 249.2 | ||||||||||||
Distributed and undistributed earnings allocated to participating securities |
(2.8 | ) | (2.8 | ) | (2.1 | ) | (2.1 | ) | (2.3 | ) | (2.3 | ) | ||||||||||||
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|||||||||||||
Income from continuing operations available to common stockholders |
100.4 | 100.4 | 215.0 | 215.0 | 246.9 | 246.9 | ||||||||||||||||||
Income from discontinued operations, net of tax |
9.3 | 9.3 | 3,305.1 | 3,305.1 | 348.9 | 348.9 | ||||||||||||||||||
Noncontrolling interestsdiscontinued operations |
0.9 | 0.9 | (14.7 | ) | (14.7 | ) | (1.6 | ) | (1.6 | ) | ||||||||||||||
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F-139 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In millions, except per-share amounts) |
2014 | 2013 | 2012 | |||||||||||||||||||||
Diluted | Basic | Diluted | Basic | Diluted | Basic | |||||||||||||||||||
Income from discontinued operations attributable to Safeway Inc. |
10.2 | 10.2 | 3,290.4 | 3,290.4 | 347.3 | 347.3 | ||||||||||||||||||
Distributed and undistributed earnings allocated to participating securities |
(0.3 | ) | (0.3 | ) | (32.1 | ) | (32.1 | ) | (3.1 | ) | (3.1 | ) | ||||||||||||
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Income from discontinued operations available to common stockholders |
9.9 | 9.9 | 3,258.3 | 3,258.3 | 344.2 | 344.2 | ||||||||||||||||||
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|||||||||||||
Net income |
$ | 113.4 | $ | 113.4 | $ | 3,507.5 | $ | 3,507.5 | $ | 596.5 | $ | 596.5 | ||||||||||||
Distributed and undistributed earnings allocated to participating securities |
(3.1 | ) | (3.1 | ) | (34.2 | ) | (34.2 | ) | (5.4 | ) | (5.4 | ) | ||||||||||||
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|||||||||||||
Net income available to common stockholders after earnings allocated to participating securities |
$ | 110.3 | $ | 110.3 | $ | 3,473.3 | $ | 3,473.3 | $ | 591.1 | $ | 591.1 | ||||||||||||
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Weighted-average common shares outstanding |
228.8 | 228.8 | 239.1 | 239.1 | 245.6 | 245.6 | ||||||||||||||||||
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Common share equivalents |
1.9 | 2.4 | 0.3 | |||||||||||||||||||||
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|||||||||||||||||||
Weighted-average shares outstanding |
230.7 | 241.5 | 245.9 | |||||||||||||||||||||
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|||||||||||||||||||
Earnings (loss) per common share: |
||||||||||||||||||||||||
Continuing operations |
$ | 0.44 | $ | 0.44 | $ | 0.89 | $ | 0.90 | $ | 1.00 | $ | 1.01 | ||||||||||||
Discontinued operations |
$ | 0.04 | $ | 0.04 | $ | 13.49 | $ | 13.63 | $ | 1.40 | $ | 1.40 | ||||||||||||
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Total |
$ | 0.48 | $ | 0.48 | $ | 14.38 | $ | 14.53 | $ | 2.40 | $ | 2.41 | ||||||||||||
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Anti-dilutive shares totaling 0.3 million in 2014, 7.8 million in 2013 and 21.6 million in 2012 have been excluded from diluted weighted-average shares outstanding.
Additionally, performance shares totaling 1.9 million for which the Company did not forecast achievement of target have been excluded from diluted weighted average shares for 2014.
Note T: Guarantees
Safeway applies the accounting guidance for guarantees to the Companys agreements that contain guarantee and indemnification clauses. This guidance requires that, upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under the guarantee. As of January 3, 2015, Safeway did not have any material guarantees. However, the Company is party to a variety of contractual agreements under which Safeway may be obligated to indemnify the other party for certain matters. These contracts primarily relate to Safeways commercial contracts, operating leases, including those that have been assigned, and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, the Company may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, Safeway has not made significant payments for these indemnifications.
F-140 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Additionally, the Company is party to a variety of lease agreements related to the disposition of Genuardis, the Companys Canadian operations and Dominicks in 2012, 2013 and 2014 for which the Company is now secondarily liable. While the Company may be liable for future payment upon default of these leases, there has been no event that would indicate the Company is liable for future payment , and therefore the Company has not recorded a liability related to these leases at this time.
The Company believes that if it were to incur a loss in any of these matters, the loss would not have a material effect on the Companys financial condition or results of operations.
Note U: Other Comprehensive Income or Loss
Total comprehensive earnings are defined as all changes in stockholders equity during a period, other than those resulting from investments by and distributions to stockholders. Generally, for Safeway, total comprehensive earnings equal net earnings plus or minus adjustments for pension and other post-retirement liabilities and foreign currency translation adjustments. Total comprehensive earnings represent the activity for a period net of tax and were a loss of $152.8 million in 2014, income of $179.7 million in 2013 and a loss of $12.3 million in 2012.
While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period, accumulated other comprehensive income or loss (AOCI) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For Safeway, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and foreign currency translation adjustments. Changes in the AOCI balance by component are shown below (in millions):
2014 | ||||||||||||||||
Pension
and Post- Retirement Benefit Plan Items |
Foreign
Currency Items |
Other |
Total
Comprehensive (Loss) Income Including Noncontrolling Interests |
|||||||||||||
Beginning balance |
$ | (130.7 | ) | $ | (138.8 | ) | $ | (1.6 | ) | $ | (271.1 | ) | ||||
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|||||||||
Other comprehensive income (loss) before reclassifications |
(303.5 | ) | 0.2 | 0.4 | (302.9 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income |
52.3 | | 52.3 | |||||||||||||
Tax benefit (expense) |
98.0 | | (0.2 | ) | 97.8 | |||||||||||
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|||||||||
Net current-period other comprehensive income (loss) |
(153.2 | ) | 0.2 | 0.2 | (152.8 | ) | ||||||||||
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|||||||||
Distribution of Blackhawk |
| 2.2 | | 2.2 | ||||||||||||
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|||||||||
Ending balance |
$ | (283.9 | ) | $ | (136.4 | ) | $ | (1.4 | ) | $ | (421.7 | ) | ||||
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F-141 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2013 | ||||||||||||||||
Pension
and Post- Retirement Benefit Plan Items |
Foreign
Currency Items |
Other |
Total
Comprehensive (Loss) Income Including Noncontrolling Interests |
|||||||||||||
Beginning balance |
$ | (472.3 | ) | $ | 399.0 | $ | (0.5 | ) | $ | (73.8 | ) | |||||
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|||||||||
Other comprehensive income (loss) before reclassifications |
266.6 | (65.0 | ) | (1.7 | ) | 199.9 | ||||||||||
Amounts reclassified from accumulated other comprehensive income |
105.0 | | | 105.0 | ||||||||||||
Tax benefit (expense) |
(125.8 | ) | | 0.6 | (125.2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net current-period other comprehensive income (loss) |
245.8 | (65.0 | ) | (1.1 | ) | 179.7 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Sale of CSL |
95.8 | (472.8 | ) | | (377.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | (130.7 | ) | $ | (138.8 | ) | $ | (1.6 | ) | $ | (271.1 | ) | ||||
|
|
|
|
|
|
|
|
2012 | ||||||||||||||||
Pension
and Post- Retirement Benefit Plan Items |
Foreign
Currency Items |
Other |
Total
Comprehensive (Loss) Income Including Noncontrolling Interests |
|||||||||||||
Beginning balance |
$ | (462.1 | ) | $ | 402.1 | $ | (1.5 | ) | $ | (61.5 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive (loss) income before reclassifications |
(125.2 | ) | (3.1 | ) | 1.5 | (126.8 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income |
110.0 | | | 110.0 | ||||||||||||
Tax benefit (expense) |
5.0 | | (0.5 | ) | 4.5 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net current-period other comprehensive (loss) income |
(10.2 | ) | (3.1 | ) | 1.0 | (12.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | (472.3 | ) | $ | 399.0 | $ | (0.5 | ) | $ | (73.8 | ) | |||||
|
|
|
|
|
|
|
|
Note V: Subsequent Event
Merger Closing Pursuant to the Merger Agreement, on January 30, 2015, Merger Sub merged with and into Safeway with Safeway surviving the Merger as a wholly owned subsidiary of Albertsons Holdings. Further, each share of common stock of Safeway issued and outstanding immediately prior to the effective time of the Merger was cancelled and converted automatically into the right to receive the following (together, the Per Share Merger Consideration):
i. | $34.92 in cash (the Per Share Cash Merger Consideration) which consists of $32.50 in initial cash consideration, $2.412 in consideration relating to the sale of PDC and $0.008 in cash consideration relating to a dividend that Safeway received in December 2014 on its 49% interest in Casa Ley, |
ii. | one contingent value right (CVR) relating to Safeways interest in Casa Ley, and |
iii. | one contingent value right relating to any deferred consideration relating to the sale of the PDC assets. |
F-142 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the closing of the Merger and immediately prior to the effective time of the Merger, each outstanding, unexpired and unexercised option to purchase shares of Safeway common stock (each, a Safeway Option), that was granted under any equity incentive plan of Safeway, including the 1999 Amended and Restated Equity Participation Plan, the 2007 Equity and Incentive Award Plan and the 2011 Equity and Incentive Award Plan or any other plan, agreement or arrangement (collectively, the Safeway Equity Incentive Plans), whether or not then exercisable or vested, was accelerated, vested and cancelled and converted into the right to receive an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the total number of shares of Safeway common stock subject to such Safeway Option as of immediately prior to the effective time of the Merger and (B) the excess, if any, of the Per Share Cash Merger Consideration over the exercise price per share (the Option Price) of such Safeway Option (the Option Payment). In addition, each such Safeway Option that had an Option Price less than the Per Share Cash Merger Consideration received one Casa Ley CVR and one PDC CVR in respect of each share of Safeway common stock subject to such cancelled Safeway Option.
Immediately prior to the effective time of the Merger, each restricted share of Safeway common stock that was outstanding and that was granted pursuant to any Safeway Equity Incentive Plan, whether or not then exercisable or vested, automatically vested and all restrictions thereon lapsed, and all such restricted shares were cancelled and converted into the right to receive the Per Share Merger Consideration.
Immediately prior to the effective time of the Merger, each outstanding performance share award covering shares of Safeway common stock (each a Performance Share Award) that was granted under any Safeway Equity Incentive Plan vested at the target levels specified for each such award and was cancelled in exchange for (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Safeway common stock subject to such Performance Share Award (after taking into account any vesting as a result of the Merger) and (B) the Per Share Cash Merger Consideration and (ii) one Casa Ley CVR and one PDC CVR in respect of each vested share of Safeway common stock subject to such Performance Share Award.
Immediately prior to the effective time of the Merger, each outstanding restricted stock unit covering shares of Safeway common stock (each a Restricted Stock Unit), that was granted under any Safeway Equity Incentive Plan, whether or not then vested, was accelerated, vested and cancelled in exchange for the right to receive (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Safeway common stock subject to such Restricted Stock Unit and (B) the Per Share Cash Merger Consideration and (ii) one Casa Ley CVR and one PDC CVR in respect of each vested share of Safeway common stock subject to such Restricted Stock Unit.
On January 30, 2015, Safeway entered into a contingent value rights agreement with respect to the Casa Ley CVRs with AB Acquisition, the Shareholder Representative (as defined in the agreement), Computershare Inc. and Computershare Trust Company, N.A., as rights agent (the Casa Ley CVR Agreement) providing for the terms of the Casa Ley CVRs. Pursuant to the Casa Ley CVR Agreement, a Casa Ley CVR will entitle the holder to a pro rata share of the net proceeds from the sale of Safeways interest in Casa Ley. In the event that Safeways interest in Casa Ley is not sold prior to January 30, 2018, holders of the Casa Ley CVRs will be entitled to receive their pro rata portion of the fair market value of such remaining interest minus certain fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted from the proceeds of a sale of the Casa Ley interest.
F-143 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On January 30, 2015, Safeway entered into a contingent value rights agreement with respect to the PDC CVRs with AB Acquisition, the Shareholder Representative (as defined in the agreement), Computershare Inc. and Computershare Trust Company, N.A., as rights agent (the PDC CVR Agreement) providing for the terms of the PDC CVRs. Pursuant to the PDC CVR Agreement, a PDC CVR will entitle the holder to a pro rata share of the net proceeds from any deferred consideration relating to the sale of the assets of PDC.
Sale of Eastern Division As contemplated by the Merger Agreement, immediately after the closing of the Merger, Safeway completed the sale of its Eastern division business (EDS) to New Albertsons, Inc., an Ohio corporation and indirect subsidiary of Safeways ultimate parent company AB Acquisition (New Albertsons). In a two-step sale process, Safeway contributed certain EDS assets and liabilities to a newly formed subsidiary and sold the interests in the subsidiary to New Albertsons. New Albertsons acquired the new EDS subsidiary for a purchase price of approximately $659 million, subject to customary adjustments. Safeway also agreed to provide certain intercompany services and licenses to the new EDS subsidiary after the sale.
Effect of Merger on Debt
Change of Control Tender Offer In December 2014, Safeway commenced a change of control tender offer to purchase any and all of the outstanding series of the $500 million of 5.00% Senior Notes due August 15, 2019, the $500 million of 3.95% Senior Notes due August 15, 2020 and the $400 million of 4.75% Senior Notes due December 1, 2021. This offer expired on January 30, 2015 and required Safeway to pay $1,010 per $1,000 principal amount of the senior notes, plus accrued and unpaid interest that were validly tendered. On February 2, 2015, a change of control payment of $873.2 million, based on a principal amount of $864.6 million of tendered notes and $14.2 million of accrued interest was paid.
Credit Agreement At the closing of the Merger, Safeways credit agreement, as discussed under the caption Bank Credit Agreement in Note G, was terminated.
New Bonds In connection with the Merger, Safeway is an obligor and its domestic subsidiaries are guarantors of $609.7 million in principal amount of 7.750% senior secured notes due 2022 (the 2022 Notes), after repayment of some of the 2022 Notes on February 9, 2015. As a result of the issuance of these notes and pursuant to Safeways existing indenture, our Senior Notes due 2016, Senior Notes due 2017 and Senior Notes due 2019 were guaranteed by Albertsons Holdings LLC and its domestic subsidiaries, including Safeways domestic subsidiaries, and are ratably and equally secured by the assets, subject to certain limited exceptions, of Albertsons Holdings LLC and its subsidiaries that are co-issuers or guarantors of the 2022 Notes, including Safeway and its subsidiaries. Our Senior Notes due 2020, Senior Notes due 2021, Senior Notes due 2027 and Senior Notes due 2031 are equally and ratably secured by the assets (other than accounts receivable, merchandise inventory, equipment or intellectual property) of Safeway and its domestic subsidiaries, but are not guaranteed by Albertsons Holdings LLC or any of its subsidiaries, including the Safeway subsidiaries.
ABL Agreement On March 21, 2013, our parent company, Albertsons Holdings LLC, entered into an asset-based revolving credit agreement among Albertsons Holdings LLC, Albertsons LLC, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America N.A., as administrative and collateral agent. This agreement was amended on January 30, 2015 (as amended, the ABL Agreement) in connection with the Merger, whereby Albertsons LLC, Safeway and certain of their affiliates became the borrowers thereunder (the ABL Borrowers).
F-144 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The ABL Agreement provides for a $3 billion revolving credit facility (with subfacilities for letters of credit and swingline loans) (the New ABL Facility). On January 30, 2015, $980 million of the New ABL Facility was used to repay all debt outstanding under Albertsons LLCs existing credit facility, to pay a portion of the Merger consideration and fees and expenses, and to provide working capital to the borrowers. After January 30, 2015, the New ABL Facility may be utilized to fund working capital and general corporate purposes, including permitted acquisitions and other investments.
The New ABL Facility matures on the earlier to occur of (a) January 30, 2020 and (b) the date that is 91 days prior to the final maturity of certain material indebtedness (if such other indebtedness has not been repaid or extended prior to such 91st day).
Note W: Quarterly Information (Unaudited)
The summarized quarterly financial data presented below reflects all adjustments, which in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented. (Rounding affects some totals. In millions, except per-share amounts.)
53 Weeks |
Last 17
Weeks |
Third 12
Weeks(1) |
Second 12
Weeks |
First 12
Weeks |
||||||||||||||||
2014 |
||||||||||||||||||||
Sales and other revenue |
$ | 36,330.2 | $ | 11,677.4 | $ | 8,307.9 | $ | 8,307.2 | $ | 8,037.7 | ||||||||||
Gross profit |
9,682.0 | 3,258.6 | 2,174.6 | 2,139.5 | 2,109.3 | |||||||||||||||
Operating profit |
534.5 | 258.3 | 94.2 | 121.5 | 60.5 | |||||||||||||||
Income (loss) before income taxes(2),(3) |
165.0 | 201.5 | (32.3 | ) | 125.9 | (130.1 | ) | |||||||||||||
Income (loss) from continuing operations, net of tax |
103.2 | 127.5 | (21.2 | ) | 80.6 | (83.7 | ) | |||||||||||||
Income (loss) from discontinued operations, net of tax(4) |
9.3 | (21.5 | ) | 30.7 | 15.0 | (14.9 | ) | |||||||||||||
Net income (loss) attributable to Safeway Inc. |
113.4 | 106.0 | 9.5 | 95.6 | (97.6 | ) | ||||||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.44 | $ | 0.55 | $ | (0.09 | ) | $ | 0.35 | $ | (0.37 | ) | ||||||||
Discontinued operations(4) |
0.04 | (0.09 | ) | 0.13 | 0.06 | (0.06 | ) | |||||||||||||
Total |
0.48 | 0.46 | 0.04 | 0.41 | (0.43 | ) | ||||||||||||||
Diluted earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.44 | $ | 0.55 | $ | (0.09 | ) | $ | 0.34 | $ | (0.37 | ) | ||||||||
Discontinued operations(4) |
0.04 | (0.10 | ) | 0.13 | 0.07 | (0.06 | ) | |||||||||||||
Total |
0.48 | 0.45 | 0.04 | 0.41 | (0.43 | ) |
(1) | Includes loss on extinguishment of debt of $84.4 million. |
(2) | Includes loss (gain) on foreign currency translation of $19.6 million in the last 17 weeks, $3.8 million in the third 12 weeks, $(45.3) million in the second 12 weeks and $153.1 million in the first 12 weeks. |
(3) | Includes Merger- and integration-related expenses of $29.7 million in the last 17 weeks, $11.2 million in the third 12 weeks, $3.9 million in the second 12 weeks and $6.3 million in the first 12 weeks. |
(4) | See Note B Discontinued Operations. |
F-145 | (Continued) |
SAFEWAY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
52 Weeks |
Last 16
Weeks(2) |
Third 12
Weeks |
Second 12
Weeks |
First 12
Weeks |
||||||||||||||||
2013 |
||||||||||||||||||||
Sales and other revenue |
$ | 35,064.9 | $ | 10,814.7 | $ | 8,099.2 | $ | 8,149.8 | $ | 8,001.2 | ||||||||||
Gross profit |
9,231.5 | 2,865.7 | 2,094.7 | 2,145.8 | 2,125.3 | |||||||||||||||
Operating profit |
551.5 | 209.9 | 87.9 | 139.4 | 114.2 | |||||||||||||||
Income before income taxes |
251.6 | 73.6 | 29.8 | 92.0 | 56.2 | |||||||||||||||
Income from continuing operations, net of tax |
217.1 | 71.6 | 23.4 | 62.5 | 59.6 | |||||||||||||||
Income (loss) from discontinued operations, net of tax(1) |
3,305.1 | 3,256.5 | 43.0 | (53.7 | ) | 59.2 | ||||||||||||||
Net income attributable to Safeway Inc. |
3,507.5 | 3,314.3 | 65.8 | 8.4 | 118.9 | |||||||||||||||
Basic earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.90 | $ | 0.29 | $ | 0.10 | $ | 0.26 | $ | 0.25 | ||||||||||
Discontinued operations(1) |
13.63 | 13.36 | 0.17 | (0.23 | ) | 0.25 | ||||||||||||||
Total |
14.53 | 13.65 | 0.27 | 0.03 | 0.50 | |||||||||||||||
Diluted earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.89 | $ | 0.29 | $ | 0.10 | $ | 0.26 | $ | 0.25 | ||||||||||
Discontinued operations(1) |
13.49 | 13.17 | 0.17 | (0.23 | ) | 0.24 | ||||||||||||||
Total |
14.38 | 13.46 | 0.27 | 0.03 | 0.49 |
(1) | See Note B, Discontinued Operations. |
(2) | In the fourth quarter of 2013, the Company recorded a loss on foreign currency translation of $57.4 million and an impairment of notes receivable of $30.0 million. |
F-146 | (Continued) |
The Board of Directors
New Albertsons, Inc.:
We have audited the accompanying combined financial statements of the New Albertsons Business of SUPERVALU INC. and subsidiaries, which comprise the combined balance sheets as of February 21, 2013 and February 23, 2012, and the related combined statements of operations and comprehensive income (loss), parent company deficit, and cash flows for each of the fiscal years in the three-year period ended February 21, 2013, and the related notes to the combined financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the New Albertsons Business of SUPERVALU INC. and subsidiaries as of February 21, 2013 and February 23, 2012, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 21, 2013 in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Boise, Idaho
February 7, 2014
F-147
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Combined Balance Sheets
(In millions)
February 21,
2013 |
February 23,
2012 |
|||||||
Assets | ||||||||
Current assets: |
||||||||
Cash |
$ | 34 | 34 | |||||
Receivables, net |
248 | 267 | ||||||
Inventories, net |
1,167 | 1,255 | ||||||
Other current assets |
53 | 55 | ||||||
|
|
|
|
|||||
Total current assets |
1,502 | 1,611 | ||||||
Property, plant and equipment, net |
3,891 | 4,268 | ||||||
Intangible assets, net |
550 | 757 | ||||||
Deferred tax assets |
90 | 50 | ||||||
Other assets |
276 | 266 | ||||||
|
|
|
|
|||||
Total assets |
$ | 6,309 | 6,952 | |||||
|
|
|
|
|||||
Liabilities and Parent Company Deficit | ||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 678 | 803 | |||||
Accrued vacation, compensation and benefits |
257 | 305 | ||||||
Current maturities of long-term debt and capital lease obligations |
211 | 322 | ||||||
Current portion of self-insurance liability |
213 | 242 | ||||||
Deferred tax liabilities |
184 | 182 | ||||||
Other current liabilities |
229 | 246 | ||||||
|
|
|
|
|||||
Total current liabilities |
1,772 | 2,100 | ||||||
|
|
|
|
|||||
Long-term debt and capital lease obligations |
4,841 | 5,076 | ||||||
Pension and other obligations |
112 | 104 | ||||||
Long-term tax liabilities |
147 | 132 | ||||||
Long-term self-insurance liability |
686 | 755 | ||||||
Other long-term liabilities |
288 | 295 | ||||||
Commitments and contingencies |
||||||||
Parent company deficit: |
||||||||
Parent company net investment |
(1,474 | ) | (1,445 | ) | ||||
Accumulated other comprehensive loss |
(63 | ) | (65 | ) | ||||
|
|
|
|
|||||
Total parent company deficit |
(1,537 | ) | (1,510 | ) | ||||
|
|
|
|
|||||
Total liabilities and parent company deficit |
$ | 6,309 | 6,952 | |||||
|
|
|
|
See accompanying notes to combined financial statements.
F-148
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Combined Statements of Operations and Comprehensive Income (Loss)
(In millions)
February 21,
2013 |
February 23,
2012 |
February 24,
2011 |
||||||||||
Net sales |
$ | 17,229 | 18,762 | 19,833 | ||||||||
Cost of sales |
12,136 | 13,243 | 14,010 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
5,093 | 5,519 | 5,823 | |||||||||
Selling and administrative expenses |
5,021 | 5,187 | 5,459 | |||||||||
Goodwill and intangible asset impairment charges |
170 | 1,000 | 1,668 | |||||||||
|
|
|
|
|
|
|||||||
Operating loss |
(98 | ) | (668 | ) | (1,304 | ) | ||||||
|
|
|
|
|
|
|||||||
Interest: |
||||||||||||
Interest expense |
455 | 431 | 466 | |||||||||
Interest income |
(2 | ) | (1 | ) | (2 | ) | ||||||
|
|
|
|
|
|
|||||||
Interest expense, net |
453 | 430 | 464 | |||||||||
|
|
|
|
|
|
|||||||
Loss from operations before income taxes |
(551 | ) | (1,098 | ) | (1,768 | ) | ||||||
Income tax (benefit) provision |
(16 | ) | (108 | ) | 291 | |||||||
|
|
|
|
|
|
|||||||
Net loss |
(535 | ) | (990 | ) | (2,059 | ) | ||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss): |
||||||||||||
Recognition of pension income (loss), net of tax of $1, tax of $0, and tax of $2, respectively |
2 | (43 | ) | 2 | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive loss |
$ | (533 | ) | (1,033 | ) | (2,057 | ) | |||||
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-149
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Combined Statements of Parent Company Deficit
(In millions)
Parent
company net investment |
Accumulated
other comprehensive earnings (loss) |
Total parent
company deficit |
||||||||||
Balance, February 25, 2010 |
$ | 802 | (24 | ) | 778 | |||||||
Net loss |
(2,059 | ) | | (2,059 | ) | |||||||
Change in parent company net investment |
521 | | 521 | |||||||||
Other comprehensive earnings, net of tax of $2 |
| 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
Balance, February 24, 2011 |
(736 | ) | (22 | ) | (758 | ) | ||||||
Net loss |
(990 | ) | | (990 | ) | |||||||
Change in parent company net investment |
281 | | 281 | |||||||||
Other comprehensive loss, net of tax of $0 |
| (43 | ) | (43 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance, February 23, 2012 |
(1,445 | ) | (65 | ) | (1,510 | ) | ||||||
Net loss |
(535 | ) | | (535 | ) | |||||||
Change in parent company net investment |
506 | | 506 | |||||||||
Other comprehensive earnings, net of tax of $1 |
| 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
Balance, February 21, 2013 |
$ | (1,474 | ) | (63 | ) | (1,537 | ) | |||||
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-150
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Combined Statements of Cash Flows
(In millions)
February 21,
2013 |
February 23,
2012 |
February 24,
2011 |
||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (535 | ) | (990 | ) | (2,059 | ) | |||||
Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||||||
Goodwill and intangible asset impairment charges |
170 | 1,000 | 1,668 | |||||||||
Property, plant and equipment impairment charges |
58 | 9 | 26 | |||||||||
Net gain on sale of assets and closed properties reserve |
(23 | ) | (1 | ) | (24 | ) | ||||||
Depreciation and amortization |
524 | 533 | 551 | |||||||||
LIFO charge |
17 | 43 | 13 | |||||||||
Deferred income taxes |
(38 | ) | (152 | ) | 252 | |||||||
Net pension cost |
19 | 14 | 11 | |||||||||
Contributions to pension plan |
(8 | ) | (10 | ) | (18 | ) | ||||||
Self-insurance expense |
57 | 60 | 112 | |||||||||
Self-insurance claim payments |
(155 | ) | (147 | ) | (186 | ) | ||||||
Amortization of debt premium/discount |
12 | 10 | 8 | |||||||||
Write offs and amortization of deferred financing fees |
31 | 12 | 12 | |||||||||
(Gain) loss on debt extinguishment |
| (11 | ) | 7 | ||||||||
Other adjustments |
7 | 29 | (22 | ) | ||||||||
Changes in assets and liabilities: |
||||||||||||
Receivables |
8 | (3 | ) | 60 | ||||||||
Inventories |
70 | 49 | 49 | |||||||||
Accounts payable and accrued liabilities |
(135 | ) | (58 | ) | (108 | ) | ||||||
Income tax liabilities |
15 | (18 | ) | 34 | ||||||||
Other changes in operating assets and liabilities |
| (12 | ) | 51 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
94 | 357 | 437 | |||||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sale of assets |
66 | 114 | 71 | |||||||||
Purchases of property, plant and equipment |
(235 | ) | (310 | ) | (253 | ) | ||||||
Other |
(7 | ) | (11 | ) | (21 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(176 | ) | (207 | ) | (203 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of long-term debt |
6,241 | 4,452 | 2,949 | |||||||||
Payments of long-term debt |
(6,566 | ) | (4,842 | ) | (3,648 | ) | ||||||
Payments of capital lease obligations |
(40 | ) | (36 | ) | (35 | ) | ||||||
Payments for debt financing costs |
(59 | ) | (7 | ) | (22 | ) | ||||||
Change in parent company net investment |
506 | 281 | 521 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
82 | (152 | ) | (235 | ) | |||||||
|
|
|
|
|
|
|||||||
Net decrease in cash |
| (2 | ) | (1 | ) | |||||||
Cash at beginning of year |
34 | 36 | 37 | |||||||||
|
|
|
|
|
|
|||||||
Cash at end of year |
$ | 34 | 34 | 36 | ||||||||
|
|
|
|
|
|
|||||||
Supplemental cash flow information: |
||||||||||||
Noncash investing and financing activities were as follows: |
||||||||||||
Capital lease asset additions and related obligations |
$ | 24 | 40 | 7 | ||||||||
Purchases of property, plant and equipment included in accounts payable |
9 | 46 | 29 | |||||||||
Interest paid (net of amount capitalized) |
409 | 401 | 430 |
See accompanying notes to combined financial statements.
F-151
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(1) Description of Business and Basis of Presentation
(a) Business Description
The New Albertsons Business (NAI or the Business) is not a stand-alone legal entity, however it is a combination of supermarket businesses operating under the banners Jewel-Osco, Shaws, Star Market, Acme and Albertsons and their associated in-store pharmacies and dedicated distribution centers, which were part of the retail segment of SUPERVALU INC. (Parent or SUPERVALU) through March 21, 2013. These supermarket stores offer a wide variety of nationally advertised brand name and private-label products, primarily including grocery (both perishable and nonperishable), general merchandise and health and beauty care, as well as pharmacy and fuel.
On March 21, 2013, Parent sold NAI to AB Acquisition LLC (NAI Banner Sale). Immediately after AB Acquisition LLCs purchase of NAI, NAI sold its Albertsons banner operations, Albertsons dedicated distribution centers and certain other assets (Albertsons Business) to Albertsons LLC, a wholly owned subsidiary of AB Acquisition LLC (Albertsons Banner Sale). Subsequent to the Albertsons Banner Sale, the Albertsons Business and the remaining supermarket operations within the New Albertsons Business remain under the common control of AB Acquisition LLC.
(b) Basis of Presentation
These combined financial statements represent the financial position, result of operations and comprehensive income (loss), changes in Parent company deficit, and cash flows of the Business, and were derived by extracting the assets, liabilities, revenues and expenses directly attributable to the Business from the historical accounting records of the Parent, based on accounting policies historically used by Parent. The combined financial statements have been prepared in accordance with SEC Financial Reporting Manual Section 2065, Acquisition of Selected Parts of an Entity May Result in Less Than Full Financial Statements , and Staff Accounting Bulletin (SAB) Topic 1.B ., Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity .
Financial statement items related specifically to the Business have been identified and included in the combined financial statements. These include balance sheet items, revenue, direct costs, labor and benefits, facilities and maintenance, consulting and outside services, and general and administrative costs.
Certain support functions are provided on a centralized basis by Parent on behalf of all its subsidiaries, including the Business, such as distribution, finance, human resources, information technology, facilities, marketing and merchandising, and legal, among others. These expenses have been allocated to NAI on the basis of direct usage when identifiable, with the remainder allocated pro rata based on sales, headcount or other relevant measures of NAI and Parent. The service charges and corporate expense allocations have been determined on a basis that NAI considers to be a reasonable reflection of the utilization of the services provided or the benefit received by NAI during the periods presented. Management believes the assumptions underlying the combined financial statements, including the assumptions used in allocating general corporate expenses from Parent, are reasonable. The allocations may not, however, reflect the expense NAI would have incurred as an
F-152 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
independent business for the periods presented. Actual costs that may have been incurred if NAI had been a stand-alone business would depend on a number of factors, including the actual organizational structure, whether functions were outsourced or performed by employees and strategic decisions made in areas such as procurement, vendor management and distribution. See further discussions in note 12Related Parties and Allocations.
Certain property, plant, and equipment owned by the Business, including a shared distribution center and a shared service center, are included in these combined financial statements.
Cash was managed centrally by Parent and included daily sweeps of cash receipts to corporate SUPERVALU cash accounts and periodic funding by SUPERVALU of cash disbursements for capital expenditures and operating expenses of NAI. Accordingly, the cash managed by Parent at the corporate level was not allocated to NAI for any of the periods presented. The NAI financial statements reflect transfers of cash to and from Parents cash management system as a component of Parent company net investment. Cash in the Combined Balance Sheets as of February 21, 2013 and February 23, 2012 primarily consists of cash held at the retail stores (Store Cash).
Parent debt utilized to fund the original June 2006 Parent acquisition of NAI, and related debt acquisition costs and interest expense, has been allocated to NAI and is reflected in the Combined Statements of Operations and Comprehensive Income (Loss), Balance Sheets and Statements of Cash Flows.
NAI reports and manages its business under one reportable segment. All of NAIs operations are domestic.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). All significant transactions and balances between operations within the Business have been eliminated.
(2) Summary of Significant Accounting Policies
(a) Fiscal Year
NAIs fiscal year ends on the Thursday before the last Saturday in February. NAIs first quarter consists of 16 weeks while the second, third, and fourth quarters each consist of 12 weeks. The last three fiscal years consist of the 52-week periods ended February 21, 2013 (fiscal 2012), February 23, 2012 (fiscal 2011), and February 24, 2011 (fiscal 2010). Unless the context otherwise indicates, reference to NAIs fiscal year refers to the calendar year in which such fiscal year commences.
(b) Use of Estimates
The preparation of the Businesss combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods presented. Actual results could differ from those estimates.
F-153 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(c) Revenue Recognition
Revenues from product sales are recognized at the point of sale. Discounts and allowances provided to customers at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in Net sales as the products are sold to customers. Sales tax is excluded from Net sales.
(d) Cost of Sales
Cost of sales includes the cost of inventory sold during the period, including purchasing, receiving, warehousing and distribution costs, associated depreciation expense, and shipping and handling fees.
Advertising expenses are a component of Cost of sales and are expensed as incurred. Advertising expenses were $144, $130 and $88 for fiscal 2012, 2011 and 2010, respectively.
NAI receives allowances and credits from vendors for volume incentives, promotional allowances and, to a lesser extent, new product introductions all of which are typically based on contractual arrangements covering a period of one year or less. NAI recognizes vendor funds for merchandising and buying activities as a reduction of Cost of sales when the related products are sold. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The reduction of inventory for these vendor funds was $38 and $46 as of February 21, 2013 and February 23, 2012, respectively. When payments or rebates can be reasonably estimated and it is probable that the specified target will be met, the payment or rebate is accrued. However, when attaining the milestone is not considered probable, the payment or rebate is recognized only when and if the milestone is achieved. Any upfront payments received for multi-period contracts are generally deferred and amortized on a straight-line basis over the life of the contracts.
(e) Selling and Administrative Expenses
Selling and administrative expenses consist primarily of compensation and benefits of store and corporate employees, marketing and merchandising expense, rent, occupancy, depreciation, amortization and other operating and administrative costs.
(f) Cash
NAI participates in a centralized cash management and financing program established by the Parent.
(g) Allowances for Losses on Receivables
Management makes estimates of the uncollectibility of its accounts receivable. In determining the recorded allowances, management analyzes the value of the collateral, customer financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the results of the estimation process could be materially impacted by different judgments,
F-154 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
estimations, and assumptions made based on the information considered. The allowance for losses on receivables was $4 as of February 21, 2013 and February 23, 2012. Bad debt expense was $10, $12 and $11 in fiscal 2012, 2011 and 2010, respectively.
(h) Inventories, Net
Inventories are valued at the lower of cost or net realizable value. Substantially all of NAIs inventory consists of finished goods.
NAI uses either replacement cost or weighted average cost to value discrete inventory items at lower of cost or market before application of any last-in, first-out (LIFO) reserve. As of February 21, 2013 and February 23, 2012, approximately $1,215, or 93%, and $1,289, or 94%, respectively, of NAIs inventories were valued under the LIFO method.
As of February 21, 2013 and February 23, 2012, approximately 74% and 75%, respectively, of NAIs inventories were valued under the replacement cost method, before application of any LIFO reserve. The weighted average cost valuation method was used to value approximately 19% of NAIs inventories as of February 21, 2013 and February 23, 2012, before application of any LIFO reserve.
Under the replacement cost method, the most recent purchase cost is used to calculate the current cost of inventory before application of any LIFO reserve. The replacement cost approach results in inventories being valued at the lower of cost or market because of the high inventory turnover and the resulting low inventory days supply on hand combined with infrequent vendor price changes for these items of inventory.
NAI uses either replacement cost or weighted average cost to value certain discrete inventory items under the first-in, first-out method (FIFO). The replacement cost approach under the FIFO method is predominantly utilized in determining the value of high turnover perishable items, including Produce, Deli, Bakery, and Floral.
As of February 21, 2013 and February 23, 2012, approximately seven percent and six percent, respectively, of NAIs inventories were valued using the replacement cost and weighted average cost methods under the FIFO method of inventory accounting. The replacement cost approach applied under the FIFO method results in inventories being valued at the lower of cost or market because of the very high inventory turnover and the resulting low inventory days supply for these items of inventory.
During fiscal 2012, 2011 and 2010, 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 fiscal 2012, 2011 and 2010 purchases. As a result, Cost of sales decreased by $13, $10 and $6 in fiscal 2012, 2011 and 2010, respectively. If the FIFO method had been used to determine the cost of inventories for which the LIFO method is used, NAIs inventories would have been higher by approximately $138 and $121 as of February 21, 2013 and February 23, 2012, respectively.
F-155 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
NAI evaluates inventory shortages throughout each fiscal year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year.
(i) Reserves for Closed Properties
NAI maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. NAI provides for closed property lease liabilities based on the present value of the remaining noncancelable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. The closed property lease liabilities usually are paid over the remaining lease terms, which generally range from one to 20 years. Adjustments to closed property reserves primarily relate to changes in expected subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
(j) Property, Plant and Equipment, Net
Property, plant and equipment are carried at cost. Depreciation or amortization is calculated based on the estimated useful lives of the assets using the straight-line method. Estimated useful lives generally are 10 to 40 years for buildings and major improvements, three to ten years for equipment, and the shorter of the term of the lease or expected life for leasehold improvements and capitalized lease assets. Interest capitalized on property under construction was $1 annually during fiscal 2012, 2011, and 2010.
(k) Goodwill
Parent acquired NAI on June 2, 2006 (the Acquisition). Goodwill represents the excess of the cost of the acquisition over the fair value of the net identifiable assets of the acquired business at the date of the Acquisition. Goodwill was allocated in purchase accounting to NAIs banner operations based upon the relative fair values as of the date of the Acquisition. NAI reviews goodwill for impairment during the fourth quarter of each year and also if events occur or circumstances change that would more-likely than-not reduce the fair value of the reporting unit below its carrying amount. The reviews consist of comparing estimated fair value to the carrying value at the reporting unit level. NAIs reporting unit consists of all the banners of NAI and their dedicated distribution centers. During fiscal 2011 and 2010, NAI recorded noncash impairment charges of $697 and $1,411, respectively as a result of the annual goodwill impairment test. The impairment charges were due to the significant and sustained decline in Parents market capitalization and estimated discounted future cash flows. As of the end of fiscal 2011 there was no remaining goodwill.
Fair values are determined by using both the market approach, applying a multiple of earnings based on the guideline publicly traded business method, and the income approach, discounting projected future cash flows based on managements expectations of the current and future operating environment. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on NAIs industry, capital structure and risk premiums including those reflected in the
F-156 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
market capitalization of Parent. If management identifies the potential for impairment of goodwill, the implied fair value of goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value.
NAI reviews the composition of its reporting unit on an annual basis and on an interim basis if events or circumstances indicate that the composition of NAIs reporting unit may have changed. There were no changes in NAIs reporting unit as a result of the fiscal 2012, 2011, and 2010 reviews.
(l) Intangible Assets
Intangible assets are specific to NAI and were assigned at the time of the Acquisition. NAI reviews intangible assets with indefinite useful lives, which primarily consist of trade names, for impairment during the fourth quarter of each year, and also if events or changes in circumstances indicate that the asset may be impaired. The reviews consist of comparing estimated fair value to the carrying value. Fair values of NAIs trade names are determined primarily by discounting an assumed royalty value applied to managements estimate of projected future revenues associated with the trade names. The cash flows are discounted using rates based on the weighted average cost of capital discussed above and the specific risk profile of the trade names relative to NAIs other assets. Refer to note 3Goodwill and Intangible Assets for the results of the goodwill and indefinite useful lives testing performed during fiscal 2012, 2011 and 2010.
Intangible assets with finite lives primarily include favorable operating leases, prescription records and scripts, customer lists, and customer relationships. Intangible assets with a finite life are amortized on a straight-line basis over an estimated economic useful life which ranges from one to 31 years. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable.
(m) Impairment of Long-Lived Assets
NAI monitors the recoverability of its long-lived assets, such as buildings and equipment, on an ongoing basis and tests the carrying amount of these assets whenever events or changes in circumstances indicate that their carrying amount may not be fully recoverable, including, for example, as a result of current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or NAIs plans for store closures. When such events or changes in circumstances occur, a recoverability test is performed by comparing projected undiscounted future cash flows to the carrying value of the asset or group of assets being tested.
If impairment is identified for long-lived assets to be held and used, the fair value is compared to the carrying value of the group of assets and an impairment charge is recorded for the excess of the carrying value over the fair value. For long-lived assets that are classified as assets held for sale, NAI recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the estimated fair value. Fair value is based on current market values or discounted future cash flows that are estimated using Level 3 inputs. NAI estimates fair value based on NAIs experience and
F-157 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
knowledge of the market in which the property is located and, when necessary, utilizes local real estate brokers. NAIs estimate of undiscounted cash flows attributable to the asset groups includes only future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. Long-lived asset impairment charges are a component of Selling and administrative expenses in the Combined Statements of Operations and Comprehensive Income (Loss).
NAI groups long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets, which historically has been at the geographic market level. During the second and third quarters of fiscal 2012, certain markets were disaggregated to the store level as economic factors indicated the geographic market level was no longer appropriate.
(n) Deferred Rent
NAI recognizes rent holidays, including the time period during which NAI has access to the property prior to the opening of the site, as well as construction allowances and escalating rent provisions, on a straight-line basis over the term of the operating lease. The deferred rents are included as a component of Other current liabilities and Other long-term liabilities in the Combined Balance Sheets.
(o) Self-Insurance Liabilities
NAI is primarily self-insured for workers compensation, automobile and general liability costs. It is NAIs policy to record its self-insurance liabilities based on managements estimate of the ultimate cost of reported claims and claims incurred but not yet reported and related expenses, discounted at a risk-free interest rate. The present value of such claims was calculated using discount rates ranging from 0.4% to 5.1% for fiscal 2012, 0.5% to 5.1% for fiscal 2011, and 0.6% to 5.1% for fiscal 2010.
Changes in NAIs self-insurance liabilities consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Beginning balance |
$ | 997 | 1,084 | 1,158 | ||||||||
Charge to expense |
57 | 60 | 112 | |||||||||
Claim payments |
(155 | ) | (147 | ) | (186 | ) | ||||||
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Ending balance |
899 | 997 | 1,084 | |||||||||
Less current portion |
(213 | ) | (242 | ) | (281 | ) | ||||||
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Long-term portion |
$ | 686 | 755 | 803 | ||||||||
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The self-insurance liabilities are net of discounts of $196 and $207 as of February 21, 2013 and February 23, 2012, respectively.
As of February 21, 2013 and February 23, 2012, NAI had reinsurance receivables of $36 and $40, respectively, recorded in Receivables, net, and $110 and $122, respectively, recorded in Other assets in the Combined Balance Sheets.
F-158 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(p) Benefit Plans
NAI recognizes the funded status of the specific defined benefit plan it sponsors in its Combined Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Other comprehensive income (loss), net of tax, in the Combined Statements of Operations and Comprehensive Income (Loss) and Combined Statements of Parent Company Deficit. The determination of NAIs obligation and related expense for the NAI sponsored pension benefits is dependent, in part, on managements selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets. These assumptions are disclosed in note 10Benefit Plans. Actual results that differ from the assumptions are accumulated and amortized over future periods in accordance with accounting standards.
The Parent sponsors other pension and postretirement plans in various forms covering substantially all employees, including NAI employees, who meet eligibility requirements.
NAI and Parent also contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. Pension expense for these plans is recognized as contributions are funded. Refer to note 10Benefit Plans for additional information on NAIs participation in those multiemployer plans.
(q) Stock-Based Compensation
Parent maintains various stock option, restricted stock, and performance award plans for benefit of certain key salaried employees, including NAIs employees. Parent accounts for stock-based compensation in accordance with the Financial Accounting Standards Board (FASB) guidance, which requires all share-based payments to employees to be recognized in the Combined Statements of Operations and Comprehensive Income (Loss) based upon their fair values.
Parent uses the straight-line method to recognize compensation expense based on the fair value on the date of grant, net of the estimated forfeitures, over the requisite period related to each award. The fair value of stock options is estimated as of the date of grant using the Black-Scholes option pricing model using Level 3 inputs. The estimation of the fair value of stock options incorporates certain assumptions, such as risk-free interest rate and expected volatility, dividend yield and life of options.
The fair value of performance awards granted under Parents long-term incentive program (LTIP), is estimated as of the date of the grant using the Monte Carlo option pricing model using Level 3 inputs. Certain performance awards contain a variable cash settlement feature that is measured at fair value on a recurring basis using Level 3 inputs as described in note 6Fair Value Measurements. The estimation of the fair value of each performance award, including the cash settlement feature, incorporates certain assumptions such as risk-free interest rate and expected volatility, dividend yield, and life of the awards. The fair value of the cash settlement feature that is subject to fair value measurement on a recurring basis was insignificant as of February 21, 2013 and February 23, 2012.
Stock-based employee compensation expenses specifically charged to NAI for NAI employees and recognized as a component of Selling and administrative expense within the Combined Statements of Operations and Comprehensive Income (Loss) was $7 annually for fiscal year 2012, 2011 and 2010.
F-159 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(r) Income Taxes
NAIs operations are subject to United States federal, state and local income taxes. NAIs operations have historically been included in the Parents income tax returns. In preparing its combined financial statements, NAI has determined its tax provision on a separate return, stand-alone basis.
Because portions of NAIs operations are included in the Parents tax returns, payments to certain tax authorities are made by Parent, and not by NAI. The resulting settlements are reflected as changes in Parent company net investment within the Combined Balance Sheets.
NAI accounts for income taxes in accordance with Accounting Standards Codification (ASC) 740, Income Taxes (ASC 740). ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes.
Valuation allowances are established where management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Forecasted earnings, future taxable income and future prudent and feasible tax planning strategies are considered in determining the need for a valuation allowance. In the event NAI was not able to realize all or part of its net deferred tax assets in the future, the valuation allowance would be increased. Likewise, if it was determined that NAI was more-likely than-not to realize the net deferred tax assets, the applicable portion of the valuation allowance would reverse.
Deferred income taxes represent future net tax effects of temporary differences between the financial statement and tax basis of assets and liabilities and are measured using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. In addition to differences between the financial statement and tax basis of recorded assets or liabilities, NAI has also recorded certain deferred tax assets not associated with recorded financial statement assets or liabilities, such as tax credit or tax loss carry-forwards. Refer to note 9Income Taxes for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income tax assets are reported as a current or noncurrent asset or liability based on the classification of the related asset or liability or the expected date of reversal.
NAI, through its Parent, is currently in various stages of audits, appeals or other methods of review with authorities from various taxing jurisdictions. NAI establishes liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite managements belief that NAIs tax return positions are supportable, certain positions may be challenged and may need to be revised. NAI adjusts these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. NAI also provides interest on these liabilities at the appropriate statutory interest rate. NAI recognizes interest related to unrecognized tax benefits in interest expense and penalties in Selling and administrative expenses in the Combined Statements of Operations and Comprehensive Income (Loss).
F-160 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(s) Parent Company Deficit
Parent company net investment represents Parents net investment in NAI, and reflects the cumulative effects of intercompany transactions between NAI and Parent, Parent contributions to NAI, distributions from NAI to Parent and accumulated net earnings (loss) after taxes of NAI, and is a component of Parent company deficit within the Combined Balance Sheets. Accumulated other comprehensive income (loss) is shown separately within Parent company deficit.
(t) Recently Adopted Accounting Standards
In June 2011, the FASB issued authoritative guidance through Accounting Standard Update (ASU) 2011-05, which amended certain rules regarding the presentation of comprehensive earnings (loss). This amendment requires that all nonowner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 became effective for NAI in fiscal 2012. In December 2011, the FASB deferred the provisions dealing with reclassification adjustments beyond ASU 2011-05s effective date. NAI adopted this amended standard in fiscal 2012 by presenting Combined Statements of Operations and Comprehensive Income (Loss). This standard did not have a material effect on NAIs Combined Financial Statements, as the standard only affected the presentation of comprehensive earnings (loss).
(u) Recently Issued Accounting Standards
In February 2013, the FASB issued authoritative guidance through ASU 2013-02 surrounding the presentation of items reclassified from Accumulated other comprehensive earnings (loss) to net income. This guidance requires entities to disclose, either in the notes to the financial statements or parenthetically on the face of the statement that reports comprehensive earnings (loss), items reclassified out of Accumulated other comprehensive earnings (loss) and into net earnings in their entirety and the effect of the reclassification on each affected Statement of Operations line item. In addition, for Accumulated other comprehensive earnings (loss) reclassification items that are not reclassified in their entirety into net earnings, a cross reference to other required accounting standard disclosures is required. This guidance is effective for NAI in fiscal 2013. NAI believes that the adoption of this guidance will not have a material impact on its financial condition or results of operations.
(3) Goodwill and Intangible Assets
Changes in the carrying value of NAIs Goodwill and Intangible assets consisted of the following:
February 24,
2011 |
Dispositions | Impairments |
February 23,
2012 |
|||||||||||||
Goodwill |
$ | 5,318 | (14 | ) | | 5,304 | ||||||||||
Accumulated impairment losses |
(4,607 | ) | | (697 | ) | (5,304 | ) | |||||||||
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Total goodwill |
$ | 711 | (14 | ) | (697 | ) | | |||||||||
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F-161 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
February 24,
2011 |
Additions | Impairments |
Other
net adjustments |
February 23,
2012 |
Additions | Impairments |
Other
net adjustments |
February 21,
2013 |
||||||||||||||||||||||||||||
Trade namesindefinite useful lives |
$ | 758 | | (303 | ) | | 455 | | (158 | ) | (2 | ) | 295 | |||||||||||||||||||||||
Favorable operating leases, prescription records and scripts, customer lists, customer relationships, and other (accumulated amortization of $297 and $327 as of February 23, 2012 and February 21, 2013, respectively) |
595 | 7 | | (5 | ) | 597 | 1 | (12 | ) | (9 | ) | 577 | ||||||||||||||||||||||||
Noncompete agreements (accumulated amortization of $3 and $2 as of February 23, 2012 and February 21, 2013, respectively) |
5 | 1 | | (1 | ) | 5 | | | 2 | 7 | ||||||||||||||||||||||||||
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Total intangible assets |
1,358 | 8 | (303 | ) | (6 | ) | 1,057 | 1 | (170 | ) | (9 | ) | 879 | |||||||||||||||||||||||
Accumulated amortization |
(254 | ) | (47 | ) | | 1 | (300 | ) | (40 | ) | | 11 | (329 | ) | ||||||||||||||||||||||
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|||||||||||||||||||
Total intangible assets, net |
$ | 1,104 | 757 | 550 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
Fair values of NAIs trade names were determined primarily by discounting an assumed royalty value applied to projected future revenues associated with the trade names based on managements expectations of the current and future operating environment. The tax effected royalty cash flows are discounted using rates based on the weighted average cost of capital and the specific risk profile of the trade names relative to NAIs other assets. These estimates are impacted by variable factors including inflation, the general health of the economy and market competition. The calculation of the impairment charge contains significant judgments and estimates related to such items as the weighted average cost of capital and the specified risk profile of the trade names, as well as future revenue and profitability.
NAI has a single reporting unit, operating segment, and reportable segment. NAI performed reviews of goodwill and intangible assets with indefinite useful lives for impairment, which indicated that the carrying value of the reporting units goodwill and certain intangible assets with indefinite useful lives exceeded their estimated fair values.
During fiscal 2012, 2011, and 2010, NAI recorded noncash intangible asset impairment charges of $170, $303 and $257, respectively. During fiscal 2011 and 2010, NAI recorded goodwill impairment charges of $697 and $1,411, respectively. NAI disposed of $14 of goodwill associated with the sale of 107 NAI fuel centers during fiscal 2011. As of year-end 2011, there was no remaining goodwill.
The impairment charges were due to the significant and sustained decline in Parents market capitalization and estimated discounted future cash flows. The calculation of the impairment charges
F-162 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
contains significant judgments and estimates related to such items as the weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
Amortization expense for intangible assets with definite useful lives of $40, $47 and $48 was recorded in fiscal 2012, 2011, and 2010. Future amortization expense will average approximately $22 per year for the next five years.
NAI had unfavorable operating lease intangibles, related to certain above-market leases acquired and pushed down by Parent, of $110 and $121 as of February 21, 2013 and February 23, 2012, respectively, included as a component of Other long-term liabilities within the Combined Balance Sheets. Amortization benefit relating to these unfavorable operating leases was $11, $15 and $20 for fiscal 2012, 2011 and 2010, respectively.
(4) Reserves for Closed Properties and Property, Plant and Equipment-Related Impairment Charges
Reserves for Closed Properties
NAI maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. NAI provides for closed property operating lease liabilities based on the present value of the remaining noncancelable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. Adjustments to closed property reserves primarily relate to changes in expected subtenant income or actual exit costs differing from original estimates.
Changes in NAIs reserves for closed properties consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Beginning balance |
$ | 79 | 92 | 74 | ||||||||
Additions |
26 | 9 | 36 | |||||||||
Payments |
(21 | ) | (26 | ) | (22 | ) | ||||||
Adjustments |
1 | 4 | 4 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 85 | 79 | 92 | ||||||||
|
|
|
|
|
|
During fiscal 2010, NAI recorded additional reserves primarily related to the closure of nonstrategic stores in the fourth quarter of fiscal 2010, which resulted in increased payments during fiscal 2011.
During fiscal 2012, the closure of 35 nonstrategic stores was announced. Reserves for operating leases related to these closed properties were recorded at the time of closing and the majority of these store closings were completed in fiscal 2012. The calculation of the closed property charges requires significant judgments and estimates related to such items as future subtenant rentals, discount rates, and future cash flows based on Parents experience and knowledge of the market in which the closed property is located, and previous efforts to dispose of similar assets and existing market conditions.
F-163 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Property, plant and equipment related impairment charges
In fiscal 2012, long-lived assets with a carrying amount of $131 were written down to their fair value of $73, resulting in an impairment charge of $58. NAI groups long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets, which historically has been at the geographic market level. During the second and third quarters of fiscal 2012, certain markets were disaggregated to the store level as economic factors indicated the geographic market level was no longer appropriate. NAI recorded impairment charges of $41 as a result of the impairment reviews performed during the second and third quarters of fiscal 2012. NAI also reviewed its disaggregated store level long-lived asset groupings during the fourth quarter of fiscal 2012 and recorded impairment charges of $1 as a result of these reviews. The remaining $16 of impairment charges in fiscal 2012 primarily related to the closure of nonstrategic stores.
In fiscal 2011, long-lived assets with a carrying amount of $44 were written down to their fair value of $35, resulting in an impairment charge of $9. In fiscal 2010, NAI recorded $26 of property, plant and equipment related impairment charges.
These impairment charges were measured at fair value on a nonrecurring basis using Level 3 inputs as described in note 6Fair Value Measurements.
Additions and adjustments to the reserves for closed properties and property, plant and equipment related impairment charges for fiscal 2012, 2011, and 2010 were recorded as a component of Selling and administrative expenses in the Combined Statements of Operations and Comprehensive Income (Loss).
(5) Property, Plant and Equipment
Property, plant and equipment, net, consisted of the following:
February 21,
2013 |
February 23,
2012 |
|||||||
Land |
$ | 1,057 | 1,090 | |||||
Buildings |
2,388 | 2,343 | ||||||
Property under construction |
9 | 93 | ||||||
Leasehold improvements |
1,022 | 1,014 | ||||||
Equipment |
2,081 | 2,015 | ||||||
Capitalized lease assets |
567 | 570 | ||||||
|
|
|
|
|||||
Total property, plant and equipment |
7,124 | 7,125 | ||||||
Accumulated depreciation |
(3,034 | ) | (2,680 | ) | ||||
Accumulated amortization on capitalized lease assets |
(199 | ) | (177 | ) | ||||
|
|
|
|
|||||
Total property, plant and equipment, net |
$ | 3,891 | 4,268 | |||||
|
|
|
|
Depreciation expense was $462, $468, and $489 for fiscal 2012, 2011, and 2010, respectively. Amortization expense related to capitalized lease assets was $33, $33 and $34 for fiscal 2012, 2011, and 2010, respectively.
F-164 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Parent sold 107 fuel centers for $89 in cash and recognized a pre-tax loss of $7 during fiscal 2011 which is included in the accompanying Combined Statements of Operations and Comprehensive Income (Loss). NAI disposed of $14 of goodwill associated with the sale of its fuel centers.
(6) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
Level 1 |
Quoted prices in active markets for identical assets or liabilities; | |
Level 2 |
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; | |
Level 3 |
Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability. |
Impairment charges recorded during fiscal 2012, 2011, and 2010 discussed in note 3Goodwill and Intangible Assets and note 4Reserves for Closed Properties and Property, Plant and Equipment-Related Impairment Charges were measured at fair value using Level 3 inputs.
Financial Instruments
For certain of NAIs financial instruments, including cash, receivables, accounts payable, accrued salaries and other current assets and liabilities, the fair values approximate carrying values due to their short maturities.
The estimated fair value of NAIs long-term debt (including current maturities) was lower than the book value by approximately $168 and $183 as of February 21, 2013 and February 23, 2012, respectively. The estimated fair value was based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs.
F-165 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(7) Long-Term Debt
NAIs long-term debt and capital lease obligations consisted of the following:
February 21,
2013 |
February 23,
2012 |
|||||||
7.45% Debentures due August 2029 |
$ | 650 | 650 | |||||
6.34% to 7.15% Medium term notes due through June 2028 |
434 | 440 | ||||||
8.00% Debentures due May 2031 |
400 | 400 | ||||||
8.00% Debentures due June 2026 |
272 | 272 | ||||||
8.70% Debentures due May 2030 |
225 | 225 | ||||||
7.75% Debentures due June 2026 |
200 | 200 | ||||||
7.25% Debentures due May 2013 |
140 | 140 | ||||||
7.90% Debentures due May 2017 |
96 | 96 | ||||||
Mortgages |
20 | 22 | ||||||
Capital lease obligations |
798 | 830 | ||||||
Debt allocated from Parent |
2,021 | 2,315 | ||||||
Net discount on debt |
(204 | ) | (192 | ) | ||||
|
|
|
|
|||||
Total debt and capital lease obligations |
5,052 | 5,398 | ||||||
Less current maturities of long-term debt and capital lease obligations |
(211 | ) | (322 | ) | ||||
|
|
|
|
|||||
Long-term debt and capital lease obligations |
$ | 4,841 | 5,076 | |||||
|
|
|
|
As of February 21, 2013, NAIs debentures and medium term notes are unsecured and interest is payable semi-annually in accordance with the underlying terms of the debentures and medium term notes.
Debt allocated from Parent represents NAIs proportionate share of Parents long-term debt based on the relative portion of Parent debt utilized to fund the initial acquisition of NAI. The debt allocated from Parent had a stated weighted average interest rate of approximately 7.4% and 6.2% as of February 21, 2013 and February 23, 2012, respectively.
Future maturities of long-term debt, including debt allocated from Parent, which excludes the related net discount on debt of $204 and capital lease obligations, as of February 21, 2013 consisted of the following:
Amount | ||||
Fiscal year: |
||||
2013 |
$ | 174 | ||
2014 |
498 | |||
2015 |
8 | |||
2016 |
898 | |||
2017 |
316 | |||
Thereafter |
2,564 |
F-166 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The maturities above reflect contractual maturities of debt (excluding any remaining debt discounts or premiums) and do not include the potential accelerations of debt allocated from Parent that could arise due to the debt holders ability to cause Parent to repurchase the debt.
A significant portion of NAIs assets were pledged as collateral to secure certain of Parents debt. The debt agreements relating to the allocated debt from Parent contain certain operating covenants, which restrict the ability of Parent to take certain actions without permission of the lenders or as otherwise permitted under the agreements. However, these facilities do not require Parent to comply with any financial ratio maintenance covenants. Parent has separately guaranteed the NAI obligations associated with the 8.00% Debentures due June 2026, the 7.90% Debentures due May 2017 and a 7.10% Medium Term Note, due March 2028 with an outstanding balance of $100 as of February 21, 2013.
Deferred financing costs relating to debt allocated from Parent have been allocated by Parent to NAI based on NAIs proportionate share of Parents combined long-term debt. Deferred financing costs included as a component of Other Assets in the Combined Balance Sheets were $71 and $43 as of February 21, 2013 and February 23, 2012, respectively. Deferred financing costs are being amortized over the life of the related debt allocated from Parent. Parent allocated amortization expense, excluding write offs, relating to the deferred financing costs was $11, $12 and $12 for the years ended February 21, 2013, February 23, 2012 and February 24, 2011, respectively, and was included as a component of interest expense within the Combined Statements of Operations and Comprehensive Income (Loss).
Interest expense relating to debt allocated from Parent has been allocated by Parent to NAI based on NAIs proportionate share of Parents combined long-term debt. Parent allocated interest expense was $154, $154 and $135 for the years ended February 21, 2013, February 23, 2012 and February 24, 2011, respectively. The write off of deferred financing fees allocated to NAI related to Parent debt refinancing was $20, $0, and $0 for fiscal years 2012, 2011, and 2010, respectively.
F-167 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(8) Leases
NAI leases certain retail stores, distribution centers, office facilities and equipment from third parties. Many of these leases include renewal options and, to a limited extent, options to purchase. Future minimum lease payments to be made by NAI for noncancelable operating and capital leases as of February 21, 2013, consist of the following:
Lease obligations | ||||||||
Operating
leases |
Capital
leases |
|||||||
Fiscal year: |
||||||||
2013 |
$ | 230 | 98 | |||||
2014 |
225 | 98 | ||||||
2015 |
204 | 97 | ||||||
2016 |
181 | 95 | ||||||
2017 |
164 | 93 | ||||||
Thereafter |
971 | 866 | ||||||
|
|
|
|
|||||
Total future minimum obligations |
$ | 1,975 | 1,347 | |||||
|
|
|||||||
Less interest |
(549 | ) | ||||||
|
|
|||||||
Present value of net future minimum obligations |
798 | |||||||
Less current obligations |
(37 | ) | ||||||
|
|
|||||||
Long-term obligations |
$ | 761 | ||||||
|
|
Total future minimum obligations have not been reduced for future minimum subtenant rentals due under certain operating subleases.
Rent expense and subtenant rentals under operating leases consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Minimum rent |
$ | 256 | 268 | 276 | ||||||||
Contingent rent |
3 | 4 | 5 | |||||||||
|
|
|
|
|
|
|||||||
259 | 272 | 281 | ||||||||||
Subtenant rentals |
(32 | ) | (37 | ) | (38 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 227 | 235 | 243 | |||||||||
|
|
|
|
|
|
The Business leases certain owned properties to unrelated outside parties. Rental income under those lease agreements was $22, $24, and $24, for the fiscal years 2012, 2011, and 2010, respectively.
F-168 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The carrying value of owned property leased to third parties under operating leases was as follows:
February 21,
2013 |
February 23,
2012 |
|||||||
Property, plant and equipment |
$ | 18 | 19 | |||||
Less accumulated depreciation |
(6 | ) | (4 | ) | ||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 12 | 15 | |||||
|
|
|
|
Future minimum lease receipts due under these noncancelable operating leases as of February 21, 2013, consist of the following:
Fiscal year: |
||||
2013 |
$ | 13 | ||
2014 |
10 | |||
2015 |
8 | |||
2016 |
7 | |||
2017 |
5 | |||
Thereafter |
7 | |||
|
|
|||
Total minimum receipts |
$ | 50 | ||
|
|
(9) Income Taxes
The provision for income taxes (benefit) consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 19 | 38 | 34 | ||||||||
State |
3 | 6 | 5 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
22 | 44 | 39 | |||||||||
Deferred |
(38 | ) | (152 | ) | 252 | |||||||
|
|
|
|
|
|
|||||||
Total income tax provision (benefit) |
$ | (16 | ) | (108 | ) | 291 | ||||||
|
|
|
|
|
|
The difference between the actual tax provision and the tax provision computed by applying the statutory U.S. federal income tax rate to losses before income taxes is attributable to the following:
2012 | 2011 | 2010 | ||||||||||
Federal taxes based on statutory rate |
$ | (193 | ) | (384 | ) | (619 | ) | |||||
State income taxes, net of federal benefit |
(31 | ) | (60 | ) | (93 | ) | ||||||
Goodwill impairment |
| 286 | 567 | |||||||||
Change in valuation allowance |
210 | 46 | 432 | |||||||||
Change in long-term tax liabilities |
1 | 9 | 13 | |||||||||
Charitable contributions |
| (3 | ) | (5 | ) | |||||||
IRS settlement |
| (2 | ) | | ||||||||
Other |
(3 | ) | | (4 | ) | |||||||
|
|
|
|
|
|
|||||||
Total income tax provision (benefit) |
$ | (16 | ) | (108 | ) | 291 | ||||||
|
|
|
|
|
|
F-169 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. NAIs deferred tax assets and liabilities consisted of the following:
February 21,
2013 |
February 23,
2012 |
|||||||
Deferred tax assets: |
||||||||
Compensation and benefits |
$ | 93 | 88 | |||||
Self-insurance |
251 | 210 | ||||||
Property and equipment and capitalized lease assets |
358 | 354 | ||||||
Net operating loss carryforward |
324 | 232 | ||||||
Other |
83 | 87 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
1,109 | 971 | ||||||
Valuation allowance |
(727 | ) | (510 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
382 | 461 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Property and equipment and capitalized lease assets |
(31 | ) | (74 | ) | ||||
Inventories |
(206 | ) | (213 | ) | ||||
Intangible assets |
(158 | ) | (217 | ) | ||||
Debt discount |
(74 | ) | (76 | ) | ||||
Other |
(7 | ) | (13 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(476 | ) | (593 | ) | ||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (94 | ) | (132 | ) | |||
|
|
|
|
Net deferred tax liabilities of $94 as of February 21, 2013 include long-term deferred tax assets of $90 recorded in Deferred tax assets in the Combined Balance Sheets and current deferred tax liabilities of $184 recorded in Deferred tax liabilities. Net deferred tax liabilities of $132 as of February 23, 2012 include long-term deferred tax assets of $50 recorded in Deferred tax assets and current deferred tax liabilities of $182 recorded in Deferred tax liabilities in the Combined Balance Sheets.
On a separate company basis, NAI would have state and federal net operating loss (NOL) carry forwards of $775 for tax purposes that are not more likely than not to be realized if NAI filed a separate tax return. Accordingly, NAI has recorded a full valuation allowance against such NOL carry forwards. These NOL carry forwards will expire beginning in 2014 and continuing through 2032. In its consolidated tax return, Parent utilized a majority of these NOL carry forwards.
F-170 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Changes in NAIs unrecognized tax benefits consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Beginning balance |
$ | 132 | 150 | 115 | ||||||||
Increase related to tax positions taken in current year |
2 | 10 | 12 | |||||||||
Decrease related to tax positions taken in current year |
(1 | ) | (1 | ) | (1 | ) | ||||||
Increase related to tax positions taken in prior years |
92 | 15 | 29 | |||||||||
Decrease related to tax position taken in prior years |
(77 | ) | (39 | ) | (6 | ) | ||||||
Increase (decrease) related to lapse of statute of limitations |
(1 | ) | (3 | ) | 1 | |||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 147 | 132 | 150 | ||||||||
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits as of February 21, 2013, February 23, 2012 and February 24, 2011 are tax positions of $32 net of tax, $44 net of tax, and $48 net of tax, respectively, which would reduce NAIs effective tax rate if recognized in future periods.
NAI, through its Parent, expects to resolve, net of any state tax effect, matters relating to $6 of unrecognized tax benefits within the next 12 months, representing several individually insignificant income tax positions. These unrecognized tax benefits represent items in which NAI may not prevail with certain taxing authorities, based on varying interpretations of the applicable tax law. NAI, through its Parent, is currently in various stages of audits, appeals or other methods of review with authorities from various taxing jurisdictions. The resolution of these unrecognized tax benefits would occur as a result of potential settlements of these negotiations. Based on the information available as of February 21, 2013, NAI does not anticipate significant additional changes to its unrecognized tax benefits.
NAI recognized expense related to interest and penalties, net of settlement adjustments, of $7, $2 and $6 for fiscal 2012, 2011 and 2010, respectively.
NAI, through its Parent, is currently under examination or other methods of review in several tax jurisdictions and remains subject to examination until either the statute of limitations expires for the respective taxing jurisdiction or an agreement is reached between the taxing jurisdiction and NAI. As of February 21, 2013, NAI, through its Parent, is no longer subject to federal income tax examinations for fiscal years before 2007 and in most states is no longer subject to state income tax examinations for fiscal years before 2005.
(10) Benefit Plans
Substantially all employees of NAI are covered by various contributory and noncontributory pension, profit sharing or 401(k) plans. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by Parent. In addition, Parent provides healthcare and life insurance
F-171 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
benefits for eligible retired employees under postretirement benefit plans. Parent also provides certain health and welfare benefits, including short-term and long-term disability benefits, to inactive disabled employees prior to retirement.
(a) Shaws Pension Plan
NAI sponsors a defined benefit pension plan (Shaws Pension Plan) covering employees of one of its banners. Participants earn pension benefits based on years of service. The benefit obligation, fair value of plan assets and funded status of the Shaws Pension Plan as of February 21, 2013 and February 23, 2012 consisted of the following:
February 21,
2013 |
February 23,
2012 |
|||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of year |
$ | 290 | 228 | |||||
Service cost |
11 | 8 | ||||||
Interest cost |
13 | 13 | ||||||
Actuarial loss |
12 | 46 | ||||||
Benefits paid |
(6 | ) | (5 | ) | ||||
|
|
|
|
|||||
Benefit obligation at end of year |
320 | 290 | ||||||
|
|
|
|
February 21,
2013 |
February 23,
2012 |
|||||||
Changes in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 189 | 173 | |||||
Actual return on plan assets |
20 | 11 | ||||||
Employer contributions |
8 | 10 | ||||||
Plan participants contributions |
| | ||||||
Benefits paid |
(6 | ) | (5 | ) | ||||
|
|
|
|
|||||
Fair value of plan assets at end of year |
211 | 189 | ||||||
|
|
|
|
|||||
Funded status at end of year |
$ | (109 | ) | (101 | ) | |||
|
|
|
|
Amounts recognized in accumulated other comprehensive loss for Shaws Pension Plan consists of the following:
2012 | 2011 | |||||||
Amount recognized in accumulated other comprehensive loss |
$ | (78 | ) | (81 | ) | |||
Total recognized in accumulated other comprehensive loss, net of tax |
(63 | ) | (65 | ) |
F-172 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Net periodic benefit expense (income) for Shaws Pension Plan consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Net periodic benefit cost: |
||||||||||||
Service cost |
$ | 11 | 8 | 8 | ||||||||
Interest cost |
13 | 13 | 12 | |||||||||
Expected return on plan assets |
(14 | ) | (12 | ) | (12 | ) | ||||||
Amortization of net actuarial loss |
9 | 5 | 3 | |||||||||
|
|
|
|
|
|
|||||||
Net periodic benefit cost |
19 | 14 | 11 | |||||||||
|
|
|
|
|
|
2012 | 2011 | 2010 | ||||||||||
Net periodic benefit cost: |
||||||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): |
||||||||||||
Net actuarial (gain) loss |
$ | 6 | 48 | (1 | ) | |||||||
Amortization of net actuarial loss |
(9 | ) | (5 | ) | (3 | ) | ||||||
|
|
|
|
|
|
|||||||
Total recognized in other comprehensive income (loss) |
(3 | ) | 43 | (4 | ) | |||||||
|
|
|
|
|
|
|||||||
Total recognized in net periodic benefit expense and other comprehensive income (loss) |
$ | 16 | 57 | 7 | ||||||||
|
|
|
|
|
|
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost for Shaws Pension Plan during fiscal 2013 is $8.
(b) Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost for Shaws Pension Plan consisted of the following:
2012 | 2011 | 2010 | ||||||||||
Benefit obligation assumptions: |
||||||||||||
Discount rate(1) |
4.25 | % | 4.25 | % | 5.60 | % | ||||||
Net periodic benefit cost assumptions:(2) |
||||||||||||
Discount rate(1) |
4.55 | 5.60 | 6.00 | |||||||||
Expected rate of return on plan assets(3) |
7.25 | 7.50 | 7.75 |
(1) | NAI reviews the discount rate to be used in connection with Shaws Pension Plan annually. In determining the discount rate, NAI uses the yields on corporate bonds (rated AA or better) that coincide with the cash flows of Shaws Pension Plans estimated benefit payouts. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective cash flow. The model totals the present value of all cash flows and calculates the equivalent weighted average discount rate by imputing the singular interest rate that equates the total present value with the stream of cash flows. This resulting weighted average discount rate is then used in evaluating the final discount rate used by NAI. |
F-173 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(2) | Net periodic benefit cost is measured using weighted average assumptions as of the beginning of each year. |
(3) | Expected rate of return on plan assets is estimated by utilizing forward-looking, long-term return, risk and correlation assumptions developed and updated annually by NAI. These assumptions are weighted by actual or target allocations to each underlying asset class represented in the pension plan asset portfolio. NAI also assesses the expected long-term rate of return on plan assets assumption by comparison to long-term historical performance on an asset class to ensure the assumption is reasonable. Long-term trends are also evaluated relative to market factors such as inflation, interest rates, and fiscal and monetary policies in order to assess the capital market assumptions. |
NAI calculates its expected return on plan assets by using the market related value of plan assets determined by adjusting the actual fair value of plan assets for unrecognized gains or losses on plan assets. Unrecognized gains or losses represent the difference between actual returns and expected returns on plan assets for each fiscal year and are recognized by NAI evenly over a three year period. Since the market-related value of assets recognizes gains or losses over a three-year period, the future value of assets will be impacted as previously deferred gains or losses are recognized.
(c) Pension Plan Assets
Plan assets are held in a master trust of Parent and invested in separately managed accounts and other commingled investment vehicles holding domestic and international equity securities, domestic fixed income securities and other investment classes. Parent employs a total return approach whereby a diversified mix of asset class investments is used to maximize the long-term return of plan assets for an acceptable level of risk. Alternative investments are also used to enhance risk-adjusted long-term returns while improving portfolio diversification. Risk management is managed through diversification across asset classes, multiple investment manager portfolios and both general and portfolio-specific investment guidelines. Risk tolerance is established through careful consideration of the plan liabilities, plan funded status and Parents financial condition. This asset allocation policy mix is reviewed annually and actual versus target allocations are monitored regularly and rebalanced on an as-needed basis. Plan assets are invested using a combination of active and passive investment strategies. Passive, or indexed strategies, attempt to mimic rather than exceed the investment performance of a market benchmark. The trusts active investment strategies employ multiple investment management firms. Managers within each asset class cover a range of investment styles and approaches and are combined in a way that controls for capitalization, and style biases (equities) and interest rate exposures (fixed income) versus benchmark indices. Monitoring activities to evaluate performance against targets and measure investment risk take place on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.
F-174 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The asset allocation targets and the actual allocation of pension plan assets are as follows:
Target | 2012 | 2011 | ||||||||||
Asset category: |
||||||||||||
Domestic equity |
30.5 | % | 32.9 | % | 33.9 | % | ||||||
International equity |
14.0 | 15.3 | 17.8 | |||||||||
Private equity |
8.0 | 5.4 | 4.8 | |||||||||
Fixed income |
37.5 | 37.3 | 35.0 | |||||||||
Real estate |
10.0 | 9.1 | 8.5 | |||||||||
|
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|
|||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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|
The following is a description of the valuation methodologies used for investments measured at fair value:
Common stock Valued at the closing price reported in the active market in which the individual securities are traded.
Common collective trusts Valued at net asset value (NAV), which is based on the fair value of the underlying securities owned by the fund and divided by the number of shares outstanding. The NAV unit price is quoted on a private market that is not active. However, the NAV is based on the fair value of the underlying securities within the fund, which are traded on an active market, and valued at the closing price reported on the active market on which those individual securities are traded.
Government securities Certain government securities are valued at the closing price reported in the active market in which the security is traded. Other government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Mutual funds Mutual funds are valued at the closing price reported in the active market in which the individual securities are traded.
Corporate bonds Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Real estate partnerships and Private equity Valued using the most recent general partner statement of fair value, updated for any subsequent partnership interests cash flows or expected changes in fair value.
Mortgage backed securities Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Other Valued under an approach that maximizes observable inputs, such as gathering consensus data from the market participants best estimate of mid-market for actual trades or positions held.
F-175 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The fair value of assets of Shaws Pension Plan held in a master trust as of February 21, 2013, by asset category, consisted of the following:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Common stock |
$ | 58 | | | 58 | |||||||||||
Common collective trustsfixed income |
| 26 | | 26 | ||||||||||||
Common collective trustsequity |
| 34 | | 34 | ||||||||||||
Government securities |
6 | 10 | | 16 | ||||||||||||
Mutual funds |
5 | 23 | | 28 | ||||||||||||
Corporate bonds |
| 19 | | 19 | ||||||||||||
Real estate partnerships |
| | 15 | 15 | ||||||||||||
Private equity |
| | 11 | 11 | ||||||||||||
Mortgage-backed securities |
| 4 | | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total plan assets at fair value |
$ | 69 | 116 | 26 | 211 | |||||||||||
|
|
|
|
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|
|
The fair value of assets of Shaws Pension Plan held in a master trust as of February 23, 2012, by asset category, consisted of the following:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Common stock |
$ | 57 | | | 57 | |||||||||||
Common collective trustsfixed income |
| 27 | | 27 | ||||||||||||
Common collective trustsequity |
| 31 | | 31 | ||||||||||||
Government securities |
11 | 8 | | 19 | ||||||||||||
Mutual funds |
| 18 | | 18 | ||||||||||||
Corporate bonds |
| 11 | | 11 | ||||||||||||
Real estate partnerships |
| | 12 | 12 | ||||||||||||
Private equity |
| | 9 | 9 | ||||||||||||
Mortgage-backed securities |
| 4 | | 4 | ||||||||||||
Others |
| 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total plan assets at fair value |
$ | 68 | 100 | 21 | 189 | |||||||||||
|
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|
F-176 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The following is a summary of changes in the fair value for Level 3 investments for fiscal years 2012 and 2011:
Real estate
partnerships |
Private
equity |
|||||||
Beginning balance, February 24, 2011 |
$ | 9 | 6 | |||||
Purchases |
2 | 3 | ||||||
Sales |
| (1 | ) | |||||
Unrealized gains |
1 | 1 | ||||||
Realized gains and losses |
| | ||||||
|
|
|
|
|||||
Ending balance, February 23, 2012 |
12 | 9 | ||||||
Purchases |
2 | 2 | ||||||
Sales |
| (1 | ) | |||||
Unrealized gains |
1 | 1 | ||||||
Realized gains and losses |
| | ||||||
|
|
|
|
|||||
Ending balance, February 21, 2013 |
$ | 15 | 11 | |||||
|
|
|
|
Contributions
NAI expects to contribute approximately $15 to Shaws Pension Plan in fiscal 2013. NAIs funding policy for the defined benefit pension plan is to contribute the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, and other applicable laws as determined by NAIs external actuarial consultant. At NAIs discretion, additional funds may be contributed to the pension plan. NAI assesses the relative attractiveness of the use of cash including expected return on assets, discount rates, and cost of debt in order to achieve exemption from participant notices of underfunding. NAI will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
Estimated Future Benefit Payments
The estimated future benefit payments to be paid from Shaws Pension Plan are as follows:
Pension
benefits |
||||
Fiscal year: |
||||
2013 |
$ | 8 | ||
2014 |
9 | |||
2015 |
10 | |||
2016 |
11 | |||
2017 |
12 | |||
Years 20182022 |
73 |
F-177 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
(d) Multiemployer Pension Plans
Multiemployer Pension Plans
NAI contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement. Expense is recognized in connection with these plans as contributions are funded, in accordance with U.S. GAAP.
The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
a. | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
b. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
c. | If NAI chooses to stop participating in some multiemployer plans, or makes market exits or store closures or otherwise has participation in the plan drop below certain levels, NAI may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
NAIs participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employer Identification Number (EIN) and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act zone status (PPA) available in fiscal 2012 and fiscal 2011 relates to the plans two most recent fiscal year-ends. The zone status is based on information that Parent received from the plan and is certified by each plans actuary. The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented by the trustees of each plan.
Certain plans have been aggregated in the All Other Multiemployer Pension Plans line in the following table, as the contributions to each of these plans are not individually material. None of NAIs collective bargaining agreements require that a minimum contribution be made to these plans. Finally, the number of employees covered by NAIs multiemployer plans decreased by 14% from fiscal 2011 to fiscal 2012 and by eight percent from fiscal 2010 to fiscal 2011, affecting the period-to-period comparability of the contributions for fiscal years 2012, 2011 and 2010. The reduction in covered employees corresponded to store closures and reductions in headcount.
F-178 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The following table contains information about NAIs multiemployer plans:
EINPension
plan number |
Plan
month/day end date |
Pension Protection |
FIP/RP
status |
|||||||||||||||||||||||||||||||||||||
Act zone status(3) | Contributions | Surcharges | Amortization | |||||||||||||||||||||||||||||||||||||
Pension Fund |
2012 | 2011 | 2012 | 2011 | 2010 | Imposed (1) | Provisions | |||||||||||||||||||||||||||||||||
Southern California UFCW Unions and Food Employers Joint Pension Fund |
951939092-001 | 31-Mar | Red | Red | Implemented | $ | 30 | 35 | 37 | No | Yes | |||||||||||||||||||||||||||||
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund |
236396097-001 | 31-Dec | Red | Red | Implemented | 16 | 15 | 17 | Yes | Yes | ||||||||||||||||||||||||||||||
Western Conference of Teamsters Pension Plan |
916145047-001 | 31-Dec | Green | Green | No | 10 | 13 | 14 | No | No | ||||||||||||||||||||||||||||||
UFCW Local 152 Retail Meat Pension Fund |
236209656-001 | 30-Jun | Red | Red | Implemented | 7 | 7 | 7 | Yes | Yes | ||||||||||||||||||||||||||||||
UFCW International Union Industry Pension Fund |
516055922-001 | 30-Jun | Green | Green | No | 4 | 4 | 5 | No | No | ||||||||||||||||||||||||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
516031512-001 | 31-Dec | Red | Red | Implemented | 3 | 5 | 4 | Yes | Yes | ||||||||||||||||||||||||||||||
Sound Retirement Fund (AKA Retail Clerks Pension Fund) |
916069306-001 | 30-Sep | Red | Red | Implemented | 3 | 3 | 3 | Yes | Yes | ||||||||||||||||||||||||||||||
Teamsters Pension Trust Fund of Philadelphia and Vicinity |
231511735-001 | 31-Dec | Yellow | Yellow | Implemented | 2 | | 1 | No | No | ||||||||||||||||||||||||||||||
Oregon Retail Employees Pension Trust |
936074377-001 | 31-Dec | Red | Red | Implemented | 1 | 1 | 1 | Yes | No | ||||||||||||||||||||||||||||||
Intermountain Retail Store Employees Pension Trust |
916187192-001 | 31-Aug | Red | Red | Implemented | 1 | 1 | 1 | Yes | Yes | ||||||||||||||||||||||||||||||
All Other Multiemployer Pension Plans(2) |
6 | 5 | 6 | |||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||
Total |
$ | 83 | 89 | 96 | ||||||||||||||||||||||||||||||||||||
|
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|
|
|
(1) | PPA surcharges are five percent or ten percent of eligible contributions and may not apply to all collective bargaining agreements or total contributions to each plan. |
(2) | All Other Multiemployer Pension Plans include plans, none of which are individually significant when considering NAIs contributions to the plan, severity of the underfunded status or other factors. |
(3) | PPA established three categories (or zones) of plans: (1) Green Zone for healthy; (2) Yellow Zone for endangered; and (3) Red Zone for critical. These categories are based upon the funding ratio of the plan assets to plan liabilities. In general, Green Zone plans have a funding ratio greater than 80%, Yellow Zone plans have a funding ratio between 6579%, and Red Zone plans have a funding ratio less than 65%. |
F-179 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The following table describes the expiration of NAIs collective bargaining agreements associated with the significant multiemployer plans in which NAI participates:
Pension Fund |
Range of collective
bargaining agreement expiration dates |
Total
collective bargaining agreements |
Expiration
date |
Association
under collective bargaining agreement |
Over 5%
contribution 2013 |
|||||||||||||||
Southern California UFCW Unions and Food Employers Joint Pension Fund |
03/07/201103/05/2017 | 4 | 3/2/2014 | 98.1 | % | Yes | ||||||||||||||
Western Conference of Teamsters Pension Plan |
03/01/201009/01/2016 | 12 | 9/10/2016 | 24.0 | No | |||||||||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund |
05/10/201203/01/2015 | 4 | 3/1/2015 | 90.3 | Yes | |||||||||||||||
Sound Retirement Fund (AKA Retail Clerks Pension Fund) |
01/04/200911/07/2015 | 22 | 8/3/2013 | 19.4 | Yes | |||||||||||||||
Teamsters Pension Trust Fund of Philadelphia and Vicinity |
07/01/201107/01/2014 | 1 | 7/1/2014 | 100.0 | No | |||||||||||||||
Oregon Retail Employees Pension Trust |
01/20/200808/06/2016 | 15 | 8/1/2015 | 43.6 | Yes | |||||||||||||||
Intermountain Retail Store Employees Pension Trust |
02/17/200807/25/2015 | 44 | 3/31/2014 | 18.7 | Yes | |||||||||||||||
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund |
02/03/200801/25/2014 | 4 | 02/02/2012 | 43.5 | % | Yes | ||||||||||||||
UFCW Local 152 Retail Meat Pension Plan |
05/04/200905/04/2013 | 2 | 05/04/2013 | 93.5 | Yes | |||||||||||||||
UFCW International Union-Industry Pension Fund |
03/07/201009/05/2015 | 3 | 08/23/2014 | 97.4 | No |
(1) | NAI participating employees in the most significant collective bargaining agreement as a percent of all NAI employees participating in the respective fund. |
F-180 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Collective Bargaining Agreements
As of February 21, 2013, NAI had approximately 82,000 employees. Approximately 61,000 employees were covered by collective bargaining agreements. During fiscal 2012, 55 collective bargaining agreements covering 12,000 employees were renegotiated. During fiscal 2013, 36 collective bargaining agreements covering approximately 11,500 employees are scheduled to expire.
Multiemployer Health and Welfare Plans
NAI makes contributions to multiemployer health and welfare plans, which cover certain NAI union employees, in amounts set forth in the related collective bargaining agreements. These plans provide medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The vast majority of contributions benefit active employees and as such, may not constitute contributions to a postretirement benefit plan. However, NAI is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to active plans.
NAI contributed $265, $274, and $273 for fiscal years 2012, 2011 and 2010, respectively, to multiemployer health and welfare plans.
(e) Participation in Parent Benefit Plans
Certain employees of NAI are eligible to participate in various Parent sponsored benefit plans.
Defined Contribution Plans
Many of NAIs employees are eligible to contribute to the Parents defined contribution plans, whereby employees can contribute a portion of their compensation, a portion of which is matched by the Parent. Once the contribution has been paid, the Parent and NAI have no further payment obligation.
Total NAI contribution expenses for these plans were $53, $56, and $61 for fiscal years 2012, 2011 and 2010, respectively. Matching contributions were reduced or eliminated in January 2013 for most employees.
Defined Benefit Pension Plan
Certain of NAIs employees meeting minimum age and service requirements participate in the SUPERVALU INC. Retirement Plan (Parent Pension Plan), which is a defined benefit plan sponsored by Parent. The NAI allocated expense related to this Parent sponsored defined benefit pension plan was $52, $54 and $38 for fiscal years 2012, 2011 and 2010, respectively.
For fiscal years 2012 and 2011, the Parent Pension Plan was approximately 71% and 67% funded, respectively. Parent made total contributions to the SUPERVALU Inc. Retirement Plan of $90 and $72 for fiscal years 2012 and 2011, respectively.
F-181 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Post-Employment Benefits
NAI recognizes an obligation for benefits provided to former or inactive employees. NAI, through its Parent, is self-insured for certain disability plan programs, the primary benefits paid to inactive employees prior to retirement. As of February 21, 2013 and February 23, 2012, NAIs obligation for post-employment benefits was $32 and $30, respectively, with $18 and $15, respectively, included in Accrued vacation, compensation and benefits, and $14 and $15, respectively, included in Other long-term liabilities within the Combined Balance Sheets. Annual expenses were insignificant for fiscal years 2012, 2011, and 2010.
Health and Welfare Plan
NAIs employees are eligible to participate in a Parent-sponsored health and welfare plan. This plan provides medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees as determined by the trustees of the plan.
Total Parent allocated expense related to this plan is $199, $201, and $222 for fiscal years 2012, 2011, and 2010, respectively.
(11) Segments
NAI reports and manages its business under one reportable segment. The following table presents net sales by type of similar product:
2012 | 2011 | 2010 | ||||||||||
Nonperishable(1) |
$ | 8,795 | 9,413 | 10,059 | ||||||||
Perishable(2) |
6,451 | 6,902 | 7,224 | |||||||||
Pharmacy |
1,830 | 1,883 | 1,938 | |||||||||
Other(3) |
153 | 564 | 612 | |||||||||
|
|
|
|
|
|
|||||||
$ | 17,229 | 18,762 | 19,833 | |||||||||
|
|
|
|
|
|
(1) | Consists primarily of general merchandise, grocery, and frozen foods. |
(2) | Consists primarily of produce, dairy, meat, bakery, deli, floral, and seafood. |
(3) | Consists primarily of fuel, lottery and various other commissions, and other miscellaneous income. |
(12) Related Parties and Allocations
NAIs fiscal year ends on the Thursday before the last Saturday in February. Parents fiscal year ends on the last Saturday in February. Because of differences in the accounting calendars of NAI and Parent, the February 21, 2013 and February 23, 2012 Combined Balance Sheets include certain assets and liabilities allocated from Parent as of February 23, 2013 and February 25, 2012, respectively.
F-182 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
Product Purchases and Allocation of General Corporate and Other Expenses
NAI purchases product from certain of Parents shared distribution centers for sale at certain of its retail grocery stores. Such purchases are generally recorded at cost.
The Combined Financial Statements also include expense allocations for certain support functions provided by Parent, including, but not limited to, amounts related to finance, legal, information technology, warehouse and distribution, human resources, communications, compliance, and employee benefits and incentives. These expenses have been allocated to NAI on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, headcount or other measures. Expense allocations include expenses incurred by Parents distribution centers serving NAI, which include direct labor, utilities and depreciation and freight.
The expense allocations have been determined on a basis that both NAI and Parent consider to be a reasonable reflection of the utilization of services provided to or the benefit received by NAI during the periods presented. The allocations may not, however, reflect the expense NAI would have incurred as an independent business for the periods presented. Actual costs that may have been incurred if NAI had been a stand-alone business would depend on a number of factors, including the organization structure adopted, whether functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
All transactions with the Parent, including these expense allocations, are accounted for within the Parent company net investment balance, with changes in the Parent company net investment flowing through the financing section of the Combined Statements of Cash Flows.
During the years ended February 21, 2013, February 23, 2012 and February 24, 2011, NAI purchased product or was allocated the following general corporate and other expenses incurred by Parent, which are included in the Combined Statements of Operations and Comprehensive Income (Loss) as outlined below.
2012 | 2011 | 2010 | ||||||||||
Cost of sales |
$ | 2,630 | 2,801 | 2,853 | ||||||||
Sales and administrative expenses |
430 | 410 | 381 | |||||||||
|
|
|
|
|
|
|||||||
$ | 3,060 | 3,211 | 3,234 | |||||||||
|
|
|
|
|
|
Interest Expense and Amortization of Deferred Financing Costs, Net
Debt allocated from Parent represents NAIs proportionate share of Parents long-term debt based on the relative portion of Parent debt utilized to fund the initial acquisition of NAI. NAI was also allocated the same relative proportion of Parent interest expense and amortization of deferred financing costs as summarized below:
2012 | 2011 | 2010 | ||||||||||
Parent allocated interest expense and amortization of deferred financing costs, net |
$ | 165 | 165 | 147 |
F-183 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
The write off of deferred financing fees allocated to NAI related to Parent debt refinancing was $20, $0, and $0 for fiscal years 2012, 2011, and 2010, respectively.
(13) Commitments, Contingencies and Off-Balance Sheet Arrangements
(a) Guarantees
NAI has outstanding guarantees related to certain leases as of February 21, 2013. For each guarantee issued, if the assignee defaults on a payment, NAI would be required to make payments under its guarantee. As of February 21, 2013, the maximum amount of undiscounted guarantee payments NAI would be required to make in the event of default of all of these guarantees was $1. NAI believes the likelihood that it will be required to assume any of these obligations is remote. Accordingly, no amount has been recorded in the Combined Balance Sheets for these contingent obligations under NAIs guarantee arrangements.
NAI is also contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. NAI could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of NAIs assignments among third parties, and various other remedies available, NAI believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the accompanying Combined Balance Sheets for these contingent obligations.
In the ordinary course of business, Parent enters into various supply contracts to purchase products for resale as well as purchase and service contracts for fixed asset and information technology resources. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of February 21, 2013, NAI had approximately $67 of noncancelable future purchase obligations. These contracts primarily relate to Parents commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services to Parents subsidiaries and agreements to indemnify officers, directors and employees in the performance of their work. NAI is a party to these Parent contractual agreements under which NAI may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. While NAIs aggregate indemnification obligation could result in a material liability, NAI is not aware of any matters that are expected to result in a material liability.
(b) Legal Proceedings
NAI is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business. In the opinion of management, based upon currently available facts, it is remote that the ultimate outcome of any lawsuits, claims and other proceedings will have a material adverse effect on the overall results of NAIs operations, its cash flows or its financial position.
On October 24, 2012, the Office of Self-Insurance Plans, a program within the directors office of the California Department of Industrial Relations (the DIR), notified SUPERVALU that additional security was required to be posted in connection with SUPERVALUs California self-insured workers
F-184 | (Continued) |
NEW ALBERTSONS BUSINESS OF SUPERVALU INC.
AND SUBSIDIARIES
Notes to Combined Financial Statements
February 21, 2013 and February 23, 2012
(Dollars in millions)
compensation obligations of NAI and certain other subsidiaries pursuant to applicable regulations. The notice from the DIR stated that the additional security was required as a result of an increase in estimated future liabilities, as determined by the DIR pursuant to a review of the self-insured California workers compensation claims with respect to the applicable businesses, and a decline in SUPERVALU net worth. A security deposit of $271 was demanded in addition to security of $427 provided through SUPERVALUs participation in Californias Self-Insurers Security Fund. SUPERVALU appealed this demand. The California Self-Insurers Security Fund (the Fund) attempted to create a secured interest in certain assets of NAI for the total amount of the additional security deposit. The dispute with the Fund and the DIR was resolved through a settlement agreement as part of the NAI Banner Sale on March 21, 2013 and the primary obligation to the Fund and the DIR was retained by NAI following the NAI Banner Sale. Subsequent to the banner sale, NAI set up a fund of $75 to be used for the payment of future claims. In addition, NAI provided to the DIR a $225 letter of credit to secure any of the self-insurance workers compensation future obligations in excess of the $75 fund. The DIR also has filed a lien against the Jewel real estate assets.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. NAI regularly monitors its exposure to 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. With respect to the pending matter discussed above, NAI believes the chance of a negative outcome is remote. It is possible, although management believes it is remote, 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 NAIs financial condition, results of operations or cash flows.
(14) Subsequent Events
During the fourth quarter of fiscal 2012, Parent entered into a stock purchase agreement to sell the operations of NAI, including the stores operating under the Acme, Albertsons, Jewel-Osco, Shaws, and Star Market banners and related Osco and Sav-On in-store pharmacies (collectively, the NAI Banners) to AB Acquisition LLC (ABA). ABA is an affiliate of a Cerberus Capital Management, L.P. (Cerberus)-led consortium which also includes Kimco Realty, Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group. Parent completed the sale of NAI for $203 in cash, including working capital adjustments, and the assumption by the buyer of certain debt and capital lease obligations of approximately $3,200.
NAI has evaluated subsequent events through April 24, 2013, which is the date that the consolidated financial statements of Parent were issued.
F-185 | (Continued) |
To the Board of Advisors
United Supermarkets, L.L.C.
Lubbock, Texas
Report on the Financial Statements
We have audited the accompanying financial statements of United Supermarkets, L.L.C. which comprise the balance sheets as of December 28, 2013 and January 26, 2013, and the related statements of comprehensive income, members equity and cash flows for the eleven-month period ended December 28, 2013 and the year ended January 26, 2013 and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Supermarkets, L.L.C. as of December 28, 2013 and January 26, 2013, and the results of its operations and its cash flows for the eleven-month period ended December 28, 2013 and the year ended January 26, 2013 in accordance with accounting principles generally accepted in the United States of America.
/s/ McGladrey LLP
Dallas, Texas
April 4, 2014
Member of the RSM International network of Independent accounting, tax and consulting firms.
F-186
UNITED SUPERMARKETS, L.L.C.
(In thousands)
December 28,
2013 |
January 26,
2013 |
|||||||
Assets | ||||||||
Current assets: |
||||||||
Cash |
$ | 11,247 | $ | 10,595 | ||||
Accounts receivable, net of allowance for doubtful accounts |
36,938 | 26,451 | ||||||
Inventories |
90,589 | 88,608 | ||||||
Prepaid expenses and other current assets |
3,700 | 3,213 | ||||||
Deferred income taxes |
5,258 | 5,148 | ||||||
|
|
|
|
|||||
Total current assets |
147,732 | 134,015 | ||||||
Property and equipment, net |
209,648 | 184,732 | ||||||
Other assets, net |
5,961 | 5,151 | ||||||
|
|
|
|
|||||
Total assets |
$ | 363,341 | $ | 323,898 | ||||
|
|
|
|
|||||
Liabilities and Members Equity | ||||||||
Current liabilities: |
||||||||
Current maturities of capital lease obligations |
$ | 2,477 | $ | 2,323 | ||||
Current maturities of notes payable |
| 1,755 | ||||||
Accounts payable |
55,840 | 64,111 | ||||||
Accrued payroll and team member benefits |
35,323 | 24,819 | ||||||
Accrued expenses and other liabilities |
20,202 | 12,005 | ||||||
Income taxes payable |
| 6,540 | ||||||
|
|
|
|
|||||
Total current liabilities |
113,842 | 111,553 | ||||||
Capital lease obligations, net of current maturities |
4,785 | 7,055 | ||||||
Notes payable, net of current maturities |
| 88,183 | ||||||
Deferred rent payable |
2,263 | 2,280 | ||||||
Deferred income taxes |
17,611 | 15,194 | ||||||
Other long-term liabilities |
7,016 | 13,810 | ||||||
|
|
|
|
|||||
Total liabilities |
145,517 | 238,075 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
| | ||||||
Members equity: |
||||||||
Contributed capital |
127,988 | 223 | ||||||
Accumulated other comprehensive loss |
(6,059 | ) | (11,436 | ) | ||||
Undistributed earnings |
95,895 | 97,036 | ||||||
|
|
|
|
|||||
Total members equity |
217,824 | 85,823 | ||||||
|
|
|
|
|||||
Total liabilities and members equity |
$ | 363,341 | $ | 323,898 | ||||
|
|
|
|
See Notes to Financial Statements.
F-187
Statements of Comprehensive Income
(In thousands)
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Sales |
$ | 1,499,623 | $ | 1,572,653 | ||||
Cost of merchandise sold: |
||||||||
FIFO cost of merchandise |
1,126,603 | 1,189,767 | ||||||
LIFO adjustment |
1,263 | 1,171 | ||||||
|
|
|
|
|||||
Total cost of merchandise sold |
1,127,866 | 1,190,938 | ||||||
|
|
|
|
|||||
Gross profit |
371,757 | 381,715 | ||||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Compensation and team member benefits |
208,018 | 219,009 | ||||||
Other operating and administrative |
89,813 | 91,231 | ||||||
Transaction expense |
32,514 | | ||||||
Rent |
16,111 | 18,073 | ||||||
Depreciation |
20,920 | 21,888 | ||||||
Amortization of capital leases |
1,436 | 1,706 | ||||||
|
|
|
|
|||||
Total operating expenses |
368,812 | 351,907 | ||||||
|
|
|
|
|||||
Operating income |
2,945 | 29,808 | ||||||
Interest expense, notes payable |
1,153 | 859 | ||||||
Interest expense, capital leases |
683 | 929 | ||||||
|
|
|
|
|||||
Income before provision for income taxes |
1,109 | 28,020 | ||||||
Provision for income taxes |
1,661 | 10,055 | ||||||
|
|
|
|
|||||
Net income (loss) |
(552 | ) | 17,965 | |||||
Other comprehensive income (loss): |
||||||||
Reduction (addition) of minimum pension liability, net of tax expense (benefit) of $2,895 and $(2,616), respectively |
5,377 | (4,859 | ) | |||||
|
|
|
|
|||||
Comprehensive income |
$ | 4,825 | $ | 13,106 | ||||
|
|
|
|
See Notes to Financial Statements.
F-188
Statements of Members Equity
(In thousands)
Contributed
Capital |
Accumulated
Other Comprehensive Loss |
Undistributed
Earnings |
Total | |||||||||||||
Balance, January 28, 2012 |
$ | 223 | $ | (6,577 | ) | $ | 130,516 | $ | 124,162 | |||||||
Net income |
| | 17,965 | 17,965 | ||||||||||||
Addition of minimum pension liability |
| (4,859 | ) | | (4,859 | ) | ||||||||||
Distributions |
| | (51,445 | ) | (51,445 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, January 26, 2013 |
223 | (11,436 | ) | 97,036 | 85,823 | |||||||||||
Net loss |
| | (552 | ) | (552 | ) | ||||||||||
Member contributions |
127,765 | | | 127,765 | ||||||||||||
Reduction of minimum pension liability |
| 5,377 | | 5,377 | ||||||||||||
Distributions |
| | (589 | ) | (589 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, December 28, 2013 |
$ | 127,988 | $ | (6,059 | ) | $ | 95,895 | $ | 217,824 | |||||||
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-189
Statements of Cash Flows
(In thousands)
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (552 | ) | $ | 17,965 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
26,365 | 27,480 | ||||||
Gain on disposal of property and equipment |
(464 | ) | (296 | ) | ||||
Deferred income taxes |
(588 | ) | (246 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(10,487 | ) | (2,329 | ) | ||||
Inventories |
(1,981 | ) | 126 | |||||
Prepaid expenses and other current assets |
(487 | ) | 67 | |||||
Other assets |
(909 | ) | (1,320 | ) | ||||
Accounts payable |
(8,271 | ) | 8,162 | |||||
Accrued payroll and team member benefits |
10,504 | 1,654 | ||||||
Accrued expenses and other liabilities |
8,082 | (80 | ) | |||||
Income taxes payable |
(6,540 | ) | 2,822 | |||||
Deferred rent payable |
(17 | ) | (40 | ) | ||||
Other long-term liabilities |
1,478 | 545 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
16,133 | 54,510 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases and/or construction of property and equipment |
(51,463 | ) | (38,291 | ) | ||||
Proceeds from sales of property and equipment |
859 | 435 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(50,604 | ) | (37,856 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Cash contributions from members |
127,765 | | ||||||
Cash distributions to members |
(589 | ) | (51,445 | ) | ||||
Principal payments on capital lease obligations |
(2,116 | ) | (2,148 | ) | ||||
Borrowings from notes payable |
2,259 | 52,626 | ||||||
Payments on notes payable |
(74,696 | ) | (1,849 | ) | ||||
Net payments on revolving line of credit |
(17,500 | ) | (14,200 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities |
35,123 | (17,016 | ) | |||||
|
|
|
|
|||||
Net increase (decrease) in cash |
652 | (362 | ) | |||||
Cash, beginning of year |
10,595 | 10,957 | ||||||
|
|
|
|
|||||
Cash, end of year |
$ | 11,247 | $ | 10,595 | ||||
|
|
|
|
|||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 1,235 | $ | 1,151 | ||||
|
|
|
|
|||||
Income taxes |
$ | 8,376 | $ | 7,380 | ||||
|
|
|
|
See Notes to Financial Statements.
F-190
Notes to Financial Statements
(Dollars in thousands)
Note 1. Organization and Business
United Supermarkets, L.L.C. is a Texas limited liability company that operates a chain of 51 retail grocery stores and 26 fuel facilities that include 7 convenience stores and 19 convenience kiosks throughout Texas. United also operates two distribution centers, an ice manufacturing plant and a food manufacturing plant, all located in Lubbock, Texas, as well as a third distribution center located in Roanoke, Texas.
The Company was acquired by Albertsons LLC on December 29, 2013. All of pre-existing notes payable were paid off. Expenses related to the transaction (primarily for employee compensation and advisory fees) for the eleven-month period ended December 28, 2013 were $32,514, which is recorded in the statement of comprehensive income.
These financial statements were prepared using the Companys historical basis of accounting applicable to periods before the acquisition and therefore these financial statements do not reflect any change in accounting basis resulting from the acquisition.
Note 2. Summary of Significant Accounting Policies
Fiscal year: Prior to 2014, the Companys fiscal year ended on the last Saturday of January. The eleven-month period ended December 28, 2013 consisted of 48 weeks and the fiscal year ended January 26, 2013 consisted of 52 weeks.
Accounts receivable: Accounts receivable are typically unsecured and are derived from revenues earned from the Companys customers, third-party insurance carriers or vendors. The Company maintains an allowance for doubtful accounts based upon the expected collectability of all receivables. The allowance for doubtful accounts is based on managements assessment of the collectability of specific customer accounts, the aging of the accounts receivable, historical experience, and other currently available evidence. The Company continually reviews its allowance for doubtful accounts. The allowance for doubtful accounts was $458 and $611 as of December 28, 2013 and January 26, 2013, respectively. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Inventories: Inventories are valued at cost, which is not in excess of market, using the last-in, first-out (LIFO) method for grocery, dairy, frozen foods, pharmacy products, general merchandise, and health and beauty aids. The first-in, first-out (FIFO) method is used for other inventories, consisting primarily of meat, produce, and bakery products. The following is a summary of inventory at December 28, 2013 and January 26, 2013:
December 28,
2013 |
January 26,
2013 |
|||||||
Inventories recorded at LIFO |
$ | 59,820 | $ | 59,834 | ||||
Inventories recorded at FIFO |
30,769 | 28,774 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 90,589 | $ | 88,608 | ||||
|
|
|
|
If inventories recorded at LIFO would have been valued on a FIFO basis, inventories would have been approximately $26,393 and $25,993 higher at December 28, 2013 and January 26, 2013, respectively.
F-191 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
Property and equipment: Property and equipment are stated at cost. Depreciation is provided on a straight-line basis. Fixtures and equipment and transportation equipment are depreciated over lives ranging from 3 to 20 years. Capitalized leases (buildings and equipment) are amortized over the lives of the respective leases. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Buildings are depreciated over 20 or 30 years.
Maintenance, repairs and minor replacements are charged to expense as incurred; major replacements and betterments that extend asset lives are capitalized. The cost of assets sold, retired, or otherwise disposed of is removed from the accounts at the time of disposition, and any resulting gain or loss is reflected in income for the period. Total depreciation and amortization for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, was approximately $26,365 and $27,480, including approximately $3,418 and $3,886, respectively, of depreciation allocated to cost of sales. Depreciation and amortization expense includes a portion related to capital leases, which was approximately $1,436 and $1,706 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively. Property and equipment at December 28, 2013 and January 26, 2013 consisted of the following:
December 28,
2013 |
January 26,
2013 |
|||||||
Fixtures and equipment |
$ | 293,507 | $ | 273,829 | ||||
Capitalized leases |
37,819 | 37,858 | ||||||
Leasehold improvements |
70,420 | 63,128 | ||||||
Land and buildings |
69,109 | 64,259 | ||||||
Transportation equipment |
16,076 | 13,927 | ||||||
Construction-in-progress |
16,966 | 4,170 | ||||||
|
|
|
|
|||||
Total property and equipment |
503,897 | 457,171 | ||||||
Less accumulated depreciation and amortization |
(294,249 | ) | (272,439 | ) | ||||
|
|
|
|
|||||
Total property and equipment, net |
$ | 209,648 | $ | 184,732 | ||||
|
|
|
|
Long-lived assets: Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable from estimated future cash flows. Impairments, if any, are measured as the difference between the carrying value and the fair value of the related asset(s). Based on the Companys analysis, there has been no impairment of long-lived assets as of December 28, 2013 and January 26, 2013.
Preopening store costs: Preopening store costs are expensed as incurred.
Company owned life insurance: The Company has purchased life insurance policies to fund possible retirement benefits for certain team members that have a nonqualified retirement plan with the Company. The cash surrender value of these policies is included in other assets in the Companys balance sheets.
Income taxes: Deferred taxes are based on the estimated future tax effects of differences between the financial reporting and tax bases of assets and liabilities. For federal income tax purposes, the Company has elected to be taxed as a corporation.
F-192 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
Revenue recognition: Revenue is recognized at the point of sale. Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Sales exclude sales taxes collected from customers.
Advertising costs: Advertising costs are expensed in the period that the related advertising services are provided. Advertising costs were $15,496 and $13,162 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively, and are included in other operating and administrative expenses.
Comprehensive income: Comprehensive income is the change in equity of a business enterprise during a period from net income and other events, except activity resulting from investments by owners and distribution to owners. Other comprehensive income (loss) for the eleven-month period ended to December 28, 2013 and for the year ended January 26, 2013 resulted from pension activity, net of taxes.
Fair value of financial instruments: For certain of the Companys financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to their short maturities.
Concentration of credit risks: The Company maintains part of its cash in bank deposit accounts at financial institutions where balances, at times, may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limitation. Historically, the Company has not experienced any losses due to such concentration of risk.
Use of estimates: The preparation of the financial statements requires management of the Company to make estimates and assumptions in conformity with U.S. generally accepted accounting principles relating to the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Subsequent events: Management evaluates events or transactions that occur after the balance sheet date for potential recognition or disclosure in the financial statements. Management has considered subsequent events through April 4, 2014.
F-193 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
Note 3. Notes Payable
Notes payable consisted of the following:
Note 4. Lease Obligations
The Company leases certain of its operating facilities under terms ranging from five to twenty years, with renewal options ranging from five to twenty years. Most leases require the payment of fixed minimum rentals or a percentage of sales, whichever is greater.
F-194 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
The following summarizes the future minimum lease payments under capital and operating lease obligations that have initial or remaining noncancelable lease terms in excess of one year at December 28, 2013:
Capital
Leases |
Operating
Leases |
|||||||
2014 |
$ | 2,804 | $ | 21,503 | ||||
2015 |
2,264 | 20,824 | ||||||
2016 |
1,726 | 20,399 | ||||||
2017 |
445 | 20,056 | ||||||
2018 |
323 | 19,493 | ||||||
Thereafter |
802 | 88,004 | ||||||
|
|
|
|
|||||
Total minimum payments |
8,364 | $ | 190,279 | |||||
|
|
|||||||
Less amount representing interest |
(1,102 | ) | ||||||
|
|
|||||||
Present value of net minimum lease payments, including current portion of $2,477 |
$ | 7,262 | ||||||
|
|
The components of rent expense were as follows:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Minimum rents |
$ | 15,387 | $ | 17,307 | ||||
Contingent rents based on sales |
723 | 766 | ||||||
|
|
|
|
|||||
$ | 16,110 | $ | 18,073 | |||||
|
|
|
|
Note 5. Related-Party Transactions
The Company leased three of its properties from HDS Properties, Inc. (the Related Company), a company affiliated with members of United, for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013. Rental payments to the Related Company for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013 were $278 and $304, respectively.
Certain assets of a distribution facility were purchased by the Company on July 29, 2007. The purchase price included a note payable to RC Taylor Distributing, Inc. (now Taylor Keeling, Inc.) of $4,200. Principal and interest payments to the related company for the year ended January 26, 2013 was $499. This note was paid off in the year ended January 26, 2013.
Note 6. Team Member Benefits
Defined benefit plan: Until November 2005, the Company sponsored a noncontributory defined benefit plan (the Plan) for all United team members who were at least 21 years of age and had completed 1,000 hours of service in any year of employment. In November 2005, the Board of Advisors amended the Plan to freeze benefit accruals effective March 31, 2006. Participants were
F-195 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
credited for service after March 31, 2006, solely for vesting purposes pursuant to the terms of the Plan. The Companys measurement date is December 31, 2013 and January 31, 2013, for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively. The Company is required to make annual contributions to the Plan equal to the amounts actuarially required to fund the prior service costs. The Company contributed $0 and $864 to the defined benefit plan for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively.
Net periodic pension costs included the following:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Interest expense on projected benefit obligations |
$ | 2,322 | $ | 2,570 | ||||
Expected return on plan assets |
(2,755 | ) | (2,986 | ) | ||||
Amortization of initial unrecognized net obligations |
987 | 450 | ||||||
|
|
|
|
|||||
$ | 554 | $ | 34 | |||||
|
|
|
|
The amounts recorded in accumulated other comprehensive loss for the defined benefit plans consist of the following:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Net loss |
$ | 9,169 | $ | 17,441 | ||||
Deferred income taxes |
(3,110 | ) | (6,005 | ) | ||||
|
|
|
|
|||||
Accumulated other comprehensive loss |
$ | 6,059 | $ | 11,436 | ||||
|
|
|
|
The funded status of the Companys defined benefit plan were as follows:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Funded status at the beginning of the year |
$ | (11,860 | ) | $ | (5,215 | ) | ||
Interest cost |
(2,322 | ) | (2,570 | ) | ||||
Actual return on assets |
2,755 | 1,644 | ||||||
Actuarial gain (loss) |
7,285 | (6,583 | ) | |||||
Employer contributions |
| 864 | ||||||
|
|
|
|
|||||
Funded status |
$ | (4,142 | ) | $ | (11,860 | ) | ||
|
|
|
|
Following is a summary of significant actuarial assumptions used:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Weighted-average discount rates |
5.00 | % | 5.25 | % | ||||
Expected long-term rate of return on assets |
6.75 | % | 6.75 | % |
F-196 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
The Company expects net periodic pension income for 2014 to be approximately $580, using actuarial assumptions of a 5.00% discount rate and a 6.75% return on assets rate.
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:
Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
Level 2 | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. | |
Level 3 | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. |
The following table sets forth, by level, the Plans assets at fair value:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
December 28, 2013: |
||||||||||||||||
Cash and cash equivalents |
$ | 7,983 | $ | | $ | | $ | 7,983 | ||||||||
U.S. government securities |
| 8,591 | 8,591 | |||||||||||||
Corporate bondsinvestment grade |
| 7,773 | | 7,773 | ||||||||||||
Corporate stocksU.S. companies |
25,425 | | | 25,425 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 33,408 | $ | 16,364 | $ | | $ | 49,772 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
January 26, 2013: |
||||||||||||||||
Cash and cash equivalents |
$ | 6,312 | $ | | $ | | $ | 6,312 | ||||||||
U.S. government securities |
| 9,268 | | 9,268 | ||||||||||||
Corporate bondsinvestment grade |
| 7,467 | | 7,467 | ||||||||||||
Corporate stocksU.S. companies |
22,643 | | | 22,643 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 28,955 | $ | 16,735 | $ | | $ | 45,690 | |||||||||
|
|
|
|
|
|
|
|
The fair values of the Plans Level 1 assets are based on quoted market prices of the identical underlying security. The fair values of the Plans Level 2 assets are obtained from readily-available pricing sources for the identical underlying security that may not be actively traded. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of the Plan assets. The Company conducts reviews on an annual basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure. During the eleven-month period ended December 28, 2013, the Plan did not make significant transfers between Level 1 and Level 2 assets. As of December 28, 2013 and January 26, 2013, the Plan did not have any significant Level 3 financial assets.
F-197 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
The following table sets forth the Plans funded status and the amounts recognized in the Companys balance sheets at:
December 28,
2013 |
January 26,
2013 |
|||||||
Accumulated benefit obligations |
$ | (53,914 | ) | $ | (57,550 | ) | ||
|
|
|
|
|||||
Projected benefit obligations adjusted for services rendered to date |
$ | (53,914 | ) | $ | (57,550 | ) | ||
Plan assets at fair value |
49,772 | 45,690 | ||||||
|
|
|
|
|||||
Funded status |
$ | (4,142 | ) | $ | (11,860 | ) | ||
|
|
|
|
|||||
Unrecognized actuarial loss |
$ | 9,169 | $ | 17,441 | ||||
|
|
|
|
The following table summarizes the targeted and actual asset allocation ranges of the Companys plan, by asset category:
Percentage of Pension
Plan Assets as of |
||||||||
December 28,
2013 |
January 26,
2013 |
|||||||
Asset category: |
||||||||
Equity securities |
51.08 | % | 49.56 | % | ||||
Debt securities |
32.88 | % | 36.63 | % | ||||
Other |
16.04 | % | 13.81 | % | ||||
|
|
|
|
|||||
100.00 | % | 100.00 | % | |||||
|
|
|
|
The Company considered several factors in developing the expected rate of return on plan assets based on input from external advisors. Individual asset class return forecasts were developed and tested for reasonableness based upon historical returns. The expected long-term rate of return is the weighted average of the target asset allocation of each asset class.
The pension plan assets are held in a pension trust and are managed by independent investment advisors with the objective of maximizing returns with a prudent level of risk. The target market value of equity securities is 50% of the plan assets. If the equity percentage exceeds 60% or drops below 40%, the asset allocation will be adjusted to the target.
The Plan paid benefits of $1,727 and $1,535 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively.
Following is a summary of expected benefit payments during the calendar year ended:
2014 |
$ | 2,022 | ||
2015 |
2,040 | |||
2016 |
2,063 | |||
2017 |
2,178 | |||
2018 to 2023 |
16,017 | |||
|
|
|||
$ | 24,320 | |||
|
|
F-198 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
Defined contribution plan: The Company sponsors a defined contribution plan (the Contribution Plan) available to all eligible team members. On August 15, 2011, the Company amended certain terms of the Contribution Plan. Team members who are at least 21 years old, 20 1 ⁄ 2 years old (prior to August 15, 2011) and have one year (1,000 hours), six months (500 hours) (prior to August 15, 2011) of service as of the monthly enrollment dates are eligible to participate in the Contribution Plan. Each participant makes voluntary contributions to the Contribution Plan in amounts up to 80% (92% prior to August 15, 2011 and 5% for highly compensated employees as of January 1, 2012) of compensation or the dollar limit set by the IRS annually, whichever is less. For the Contribution Plan years ended December 31, 2012 and 2011, the Company contributed at the rate of 40%, as determined by the Board of Advisors, of the participants contributions up to 6% of compensation. The Company incurred expenses of approximately $1,564 and $1,446 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively, for the purpose of funding the Companys contribution.
In 2014 and 2013, the Board approved $4,000 and $4,800 in discretionary contributions, respectively, made to the Plan. For the eleven-month period ended December 28, 2013, a total of $3,700 of the total approved $4,000 had been expensed and recorded. Team members who are at least 21 years old (20 1 ⁄ 2 years old prior to August 15, 2012), have one year of service, worked at least 1,000 hours during the year and were employed at December 31, 2013 and 2012, respectively, shared in the discretionary contributions.
Nonqualified retirement plan: On June 1, 2011, the Company established a nonqualified retirement plan (the Supplemental Plan) for a selected group of management or highly compensated employees. The Supplemental Plan is a plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits employees to elect contributions up to a maximum percentage at 80% of eligible compensation. The Company may make voluntary matching contributions, which are determined by the Board annually. Employee contributions and the related investment income vest immediately. Discretionary company contributions vest immediately. Company matching contributions, if applicable, are subject to vesting based on years of service. The vested portion of employees accounts in the Supplemental Plan will be distributed upon termination of employment in either a lump sum or in equal annual installments over a specified period of up to 5 years. Total expense recognized related to the Supplemental Plan was $890 and $730 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively.
The Company elected to account for this cash balance plan based on the participant account balances, excluding actuarial considerations as permitted by the applicable authoritative guidance.
F-199 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
The annual activity for the Companys Supplemental Plan was as follows:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Balance, beginning of period |
$ | 1,641 | $ | 397 | ||||
Contributions: |
||||||||
Employee |
343 | 521 | ||||||
Company |
538 | 584 | ||||||
Investment income |
352 | 146 | ||||||
Distribution |
| (7 | ) | |||||
Forfeitures |
| | ||||||
|
|
|
|
|||||
Balance, end of period |
$ | 2,874 | $ | 1,641 | ||||
|
|
|
|
The above-mentioned balances for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, are included in other long-term liabilities on the consolidated balance sheets.
Note 7. Income Taxes
The provision (benefit) for income taxes included the following:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Federal: |
||||||||
Current |
$ | 1,252 | $ | 9,220 | ||||
Deferred |
(588 | ) | (85 | ) | ||||
|
|
|
|
|||||
Total provision for income taxesfederal |
664 | 9,135 | ||||||
State: |
||||||||
Current |
997 | 920 | ||||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 1,661 | $ | 10,055 | ||||
|
|
|
|
The provision for income taxes differs from amounts computed at the statutory rate as follows:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Federal income taxes at statutory federal income tax rate |
35.0 | % | 35.0 | % | ||||
State income tax, net of federal income tax benefit |
58.4 | % | 2.1 | % | ||||
Other |
56.4 | % | (1.2 | %) | ||||
|
|
|
|
|||||
Effective tax rate |
149.8 | % | 35.9 | % | ||||
|
|
|
|
As of February 1, 2009, the Company adopted guidance related to the accounting for uncertainties in income taxes. This guidance addresses the determination of whether tax benefits
F-200 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
claimed or expected to be claimed on a tax return should be recorded in the financial statements. The tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Management evaluated the Companys tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment of the financial statements. The Company classifies interest, and, if applicable, penalties related to income tax liabilities as a component of income tax expense. During the eleven-month period ended December 28, 2013, the Company did not incur any interest and penalties. The Company is not subject to income tax examinations by the U.S. federal authorities for years prior to 2010 and state or local tax authorities for years prior to 2009.
The following is a summary of the significant components of the Companys net deferred tax asset and liability:
Eleven-Month
Period Ended December 28, 2013 |
Year Ended
January 26, 2013 |
|||||||
Current deferred taxes: |
||||||||
Assets (liabilities): |
||||||||
Accrued vacation |
$ | 2,173 | $ | 2,178 | ||||
Texas franchise tax |
342 | 941 | ||||||
Workers injury and general liability insurance |
723 | 795 | ||||||
Uniform capitalization adjustment |
585 | 672 | ||||||
Nonqualified deferred compensation plans |
1,006 | 641 | ||||||
Contribution carryover |
630 | 528 | ||||||
Other |
770 | 315 | ||||||
Volume discounts |
(971 | ) | (922 | ) | ||||
|
|
|
|
|||||
Net current deferred tax asset |
5,258 | 5,148 | ||||||
|
|
|
|
|||||
Noncurrent deferred taxes: |
||||||||
Assets (liabilities): |
||||||||
Capitalized leases |
509 | 790 | ||||||
Postretirement benefit plan |
1,658 | 4,364 | ||||||
Other |
(206 | ) | (275 | ) | ||||
Property and equipment |
(19,572 | ) | (20,073 | ) | ||||
|
|
|
|
|||||
Net noncurrent deferred tax liability |
(17,611 | ) | (15,194 | ) | ||||
|
|
|
|
|||||
Total net deferred tax liability |
$ | (12,353 | ) | $ | (10,046 | ) | ||
|
|
|
|
Note 8. Commitments and Contingencies
The Company is a party to various legal proceedings and complaints arising in the ordinary course of business, some of which are covered by insurance. Management believes that claims or contingencies that are not covered by insurance are not material to the financial position or operations of the Company. Additionally, under the terms of its workers injury and general liability insurance policies, the Company is liable for certain retrospective losses. The Companys liability for retrospective
F-201 | (Continued) |
UNITED SUPERMARKETS, L.L.C.
Notes to Financial Statements
(Dollars in thousands)
losses is limited to a maximum per claim and per policy year. The Companys liability for workers injury and general liability claims was approximately $2,135 and $2,342 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively. These liabilities were determined using historical data and are reflected in accrued payroll and team member benefits and accrued expenses and other liabilities in the accompanying balance sheets.
The Company is self-insured for medical, dental, and short-term disability claims. The Companys liability for self-insured losses is limited to a maximum per claim and to an aggregate amount for total self-insured losses in each year through the use of third-party stop-loss insurance coverage. The Companys liability for health insurance was approximately $754 and $796 for the eleven-month period ended December 28, 2013 and for the year ended January 26, 2013, respectively and was recorded in accrued payroll and team member benefits in the accompanying balance sheets.
F-202 | (Continued) |
Shares
Albertsons Companies, Inc.
Common Stock
PRELIMINARY PROSPECTUS
Goldman, Sachs & Co. | BofA Merrill Lynch | Citigroup | Morgan Stanley |
Lazard
, 2015
Until , 2015 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table shows the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. Except as otherwise noted, we will pay all of these amounts. All amounts except the SEC registration fee and the Financial Industry Regulatory Authority, Inc. (FINRA) fee are estimated. The missing amounts will be filed by amendment.
SEC Registration Fee |
$ | 11,620 | ||
NYSE Listing Fee |
||||
FINRA Filing Fee |
||||
Accounting Fees and Expenses |
||||
Legal Fees and Expenses |
||||
Printing Fees and Expenses |
||||
Blue Sky Fees and Expenses |
||||
Miscellaneous |
||||
|
|
|||
Total |
$ | |||
|
|
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the DGCL are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act.
As permitted by the DGCL, the Registrants certificate of incorporation that will be in effect at the closing of the offering contains provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director.
As permitted by the DGCL, the Registrants bylaws that will be in effect at the closing of the offering provide that:
| the Registrant is required to indemnify its directors and executive officers to the fullest extent permitted by the DGCL, subject to very limited exceptions; |
| the Registrant may indemnify its other employees and agents as set forth in the DGCL; |
| the Registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the DGCL, subject to very limited exceptions; and |
| the rights conferred in the bylaws are not exclusive. |
The Registrant has entered, and intends to continue to enter, into separate indemnification agreements with its directors and executive officers to provide these directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrants certificate of incorporation and bylaws and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director or executive officer of the
II-1
Registrant regarding which indemnification is sought. Reference is also made to the underwriting agreement to be filed as Exhibit 1.1 to this registration statement, which provides for the indemnification of executive officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provisions in the Registrants certificate of incorporation, bylaws and the indemnification agreements entered into or to be entered into between the Registrant and each of its directors and executive officers may be sufficiently broad to permit indemnification of the Registrants directors and executive officers for liabilities arising under the Securities Act. The Registrant currently carries liability insurance for its directors and officers.
Item 15. Recent Sales of Unregistered Securities.
Set forth below is information regarding all unregistered securities sold, issued or granted by us within the past three years.
In connection with our acquisition of NAI on March 21, 2013:
(1) We effected a unit split pursuant to which each Class A Unit outstanding was reclassified into 1 Class A ABS Unit and 1 Class A NAI Unit.
(2) We effected a unit split pursuant to which each Class B Unit outstanding was reclassified into 1 Class B ABS Unit and 1 Class B NAI Unit.
(3) We issued and sold Class A ABS Units for an aggregate purchase price of $150,000,000 as follows: 314.293 Class A ABS Units to Cerberus Iceberg LLC, 122.324 Class A ABS Units to KRS AB Acquisition, LLC, 122.324 Class A ABS Units to Jubilee Symphony ABS LLC, 122.324 Class A ABS Units to A-S Klaff Equity, LLC, 59.838 Class A ABS Units to ALB2 VI, LLC, 16.967 Class A ABS Units to ALB2 VI-A, LLC, 45.520 Class A ABS Units to ALB2 VI-B, LLC and a total of 18.076 Class A ABS Units to members of our management team and other officers and employees.
(4) We issued and sold 1701.666 Class A NAI Units to NAI Group Holdings Inc. for a purchase price of $100,000,000.
(5) We granted an aggregate of 103.186 Class C Units to certain of our executives under our Class C Plan. Class C Units were granted as profits interests which participate in distributions once a specified amount of distributions have been made to our equityholders.
In connection with our acquisition of Safeway Inc. and its subsidiaries on January 30, 2015:
(1) We effected a unit split pursuant to which 1701.666 Class A ABS Units and 106 Class B ABS Units were reclassified into an aggregate of 127,799,410 ABS Units.
(2) We effected a unit split pursuant to which 1701.666 Class A NAI Units and 106 Class B NAI Units were reclassified into an aggregate of 127,799,410 NAI Units.
(3) We effected a unit split pursuant to which 103.186 Class C Units were reclassified into an aggregate of 2,641,428 ABS Units and 2,641,428 NAI Units.
(4) We issued and sold 169,559,162 ABS Units, 169,559,162 NAI Units and 300,000,000 SWY Units for an aggregate purchase price of $1,304,796,135 plus the contribution to the company of NAI Units by certain equityholders as follows: 63,531,450 ABS Units to Cerberus Iceberg LLC, 24,726,729 ABS Units to Jubilee ABS Holding LLC, 24,726,729 ABS Units to Klaff Markets Holdings LLC, 24,726,729 ABS Units to Lubert-Adler SAN Aggregator, L.P., 24,726,729 ABS Units to ABS TRS Corp., 162,720,981 NAI Units to NAI Group Holdings Inc., 282,879,747 SWY Units to Safeway Group Holdings Inc. and a total of 7,120,883 ABS Units, 17,120,253 SWY Units and 1,244,486 NAI Units to members of our management team.
II-2
(5) We granted 3,350,083 Series 1 Incentive Units to Robert Edwards, our former president and chief executive officer, under our Incentive Unit Plan. Series 1 Incentive Units were granted as profits interests which participate in distributions once a specified amount of distributions have been made to our equityholders.
(6) We granted an aggregate of 14,907,871 Investor Incentive Units as follows: 10,050,251 Investor Incentive Units to Cerberus AB Incentive LLC, 376,884 Investor Incentive Units to ABS TRS Corp., 376,884 Investor Incentive Units to Jubilee ABS Holding LLC, 376,884 Investor Incentive Units to Klaff W LLC, 376,884 Investor Incentive Units to L-A Asset Management Services, LLC and 3,350,084 Investor Incentive Units to Robert G. Miller. Investor Incentive Units were granted as profits interests which participate in distributions once a specified amount of distributions have been made to our equityholders.
On March 5, 2015, we granted 14,590,083 Phantom Units to certain of our officers, executives, directors and consultants under our Phantom Unit Plan. Each Phantom Unit is subject to time- and performance-based vesting, and upon vesting, each Phantom Unit converts into one Series 1 Incentive Unit.
In connection with the IPO-Related Transactions, and immediately prior to the effectiveness of this registration statement, we issued shares of common stock to Albertsons Investor, shares of common stock to Management Holdco and shares of common stock to Kimco. For a description of the transactions pursuant to which the shares were issued, see the information under the heading IPO-Related Transactions and Organizational Structure.
Unless otherwise stated, the sales and/or granting of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act (or Regulation D promulgated thereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. We did not pay or give, directly or indirectly, any commission or other remuneration, including underwriting discounts or commissions, in connection with any of the issuances of securities listed above. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. All recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to information about us. The sales of these securities were made without any general solicitation or advertising.
II-3
Item 16. Exhibits and Financial Statement Schedules
Exhibit No. |
Exhibit Description |
|
1.1** | Form of Underwriting Agreement among Albertsons Companies, Inc. and the Underwriters | |
3.1* | Certificate of Incorporation of Albertsons Companies, Inc. | |
3.2** | Form of Bylaws of Albertsons Companies, Inc. | |
4.1** | Form of Stockholders Agreement by and among Albertsons Companies, Inc., Albertsons Investor Holdings LLC, KRS AB Acquisition, LLC, KRS ABS, LLC and Albertsons Management Holdco, LLC | |
4.2* | Indenture, dated September 10, 1997, between Safeway Inc., and the Bank of New York, as trustee | |
4.3* | Forms of Officers Certificates establishing the terms of Safeway Inc.s 3.40% Notes due 2016 and 4.75% Notes due 2021, including the forms of Notes | |
4.4* | Form of Officers Certificate establishing the terms of Safeway Inc.s 6.35% Notes due 2017, including the form of Notes | |
4.5* | Form of Officers Certificate establishing the terms of Safeway Inc.s 5.00% Notes due 2019, including the form of Notes | |
4.6* | Form of Officers Certificate establishing the terms of Safeway Inc.s 3.95% Notes due 2020, including the form of Notes | |
4.7* | Form of Officers Certificate establishing the terms of Safeway Inc.s 7.45% Senior Debentures due 2027, including the form of Notes | |
4.8* | Form of Officers Certificate establishing the terms of Safeway Inc.s 7.25% Debentures due 2031, including the form of Notes | |
4.9* | Supplemental Indenture dated as of October 6, 2014, between Safeway Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, under the Indenture, dated as of September 10, 1997, as amended, and supplemented, with respect to Safeway Inc.s 3.40% Notes due 2016 | |
4.10* | Supplemental Indenture dated as of October 8, 2014, between Safeway Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, under the Indenture, dated as of September 10, 1997, as amended, and supplemented, with respect to Safeway Inc.s 6.35% Notes due 2017 | |
4.11* | Indenture, dated October 23, 2014, by and among Albertsons Holdings LLC and Safeway Inc. (as successor by merger to Saturn Acquisition Merger Sub, Inc.) (collectively, the Issuers), certain subsidiaries of the Issuers, as guarantors and Wilmington Trust, National Association, as trustee and collateral agent | |
4.12* | Indenture, dated May 1, 1992, between New Albertsons, Inc. (as successor to Albertsons, Inc.) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York), as trustee (as supplemented by Supplemental Indenture No. 1, dated as of May 7, 2004; Supplemental Indenture No. 2, dated as of June 1, 2006; and Supplemental Indenture No. 3, dated as of December 29, 2008) | |
4.13* | Indenture, dated May 1, 1995, between American Stores Company, LLC and Wells Fargo Bank, National Association (as successor to The First National bank of Chicago), as trustee (as further supplemented) | |
5.1*** | Opinion of Schulte Roth & Zabel LLP |
II-4
Exhibit No. |
Exhibit Description |
|
10.1* | Second Amended and Restated Term Loan Agreement, dated August 25, 2014 and effective January 30, 2015, by and among Albertsons LLC, Safeway Inc. (as successor by merger to Saturn Acquisition Merger Sub, Inc.) and the other co-borrowers, as borrowers, Albertsonss Holdings LLC and the other guarantors from time to time thereto, as guarantors, the lenders from time to time thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent | |
10.2* | Amended and Restated Asset-Based Revolving Credit Agreement, dated January 30, 2015, by and among Albertsons LLC, Safeway Inc. (as successor by Merger to Saturn Acquisition Merger Sub, Inc.) and the other co-borrowers, as borrowers, Albertsons Holdings LLC and the other guarantors from time to time party thereto, as guarantors, the lenders from time to time party thereto and Bank of America N.A., as administrative and collateral agent | |
10.3* | Term Loan Agreement, dated June 27, 2014, by and among New Albertsons, Inc., NAI Holdings LLC, and the other guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative and collateral agent | |
10.4* | Amendment No. 2 to the Asset-Based Revolving Credit Agreement, dated January 24, 2014, by and among New Albertsons, Inc., NAI Holdings LLC, the other borrowers from time to time, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A., as administrative and collateral agent | |
10.5* | Amended and Restated Letter of Credit Facility Agreement, dated as of January 24, 2014, by and among New Albertsons, Inc. and Bank of America, N.A. | |
10.6* | Casa Ley Contingent Value Rights Agreement, dated January 30, 2015, by and among AB Acquisition LLC, Safeway Inc., the Shareholder Representative, as defined therein, and Computershare Inc. and Computershare Trust Company, N.A., as Rights Agent | |
10.7* | Transition Services Agreement, dated March 21, 2013 between SuperValu Inc. and Albertsons LLC | |
10.8* | Transition Services Agreement, dated March 21, 2013 between SuperValu Inc. and New Albertsons, Inc. | |
10.9* | Letter Agreement, dated April 16, 2015, to each of the Transition Services Agreements between SUPERVALU INC. and New Albertsons, Inc. dated March 21, 2013, and the Transition Services Agreement between SUPERVALU INC. and Albertsons LLC dated March 21, 2013 | |
10.10* | Decision and Order, dated January 27, 2015, between the Federal Trade Commission, Cerberus Institutional Partners V, L.P., AB Acquisition LLC and Safeway Inc. | |
10.11*** | Albertsons Companies, Inc. 2015 Equity and Incentive Award Plan | |
10.12*** |
Albertsons Companies, Inc. Executive Incentive Bonus Plan |
|
10.13*** | Albertsons Companies, Inc. Restricted Stock Unit Plan | |
10.14*** | Form of Restricted Stock Unit Award Agreement under the Albertsons Companies, Inc. Restricted Stock Unit Plan | |
10.15** | Form of Indemnification Agreement | |
10.16*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Robert Miller | |
10.17*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Robert Dimond |
II-5
Exhibit No. |
Exhibit Description |
|
10.18*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Justin Dye | |
10.19*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Shane Sampson | |
10.20*** | Letter Agreement dated , between Albertsons Companies, Inc. and Wayne A. Denningham | |
10.21*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Sharon Allen | |
10.22*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Steven A. Davis | |
10.23** |
Form of Limited Liability Company Agreement of Albertsons Investor Holdings LLC, made effective as of , 2015, by and among Cerberus Iceberg LLC, Cerberus Capital Management, L.P., Jubilee ABS Holding LLC, Klaff Markets Holdings LLC, Klaff-W LLC, Lubert-Adler SAN Aggregator, L.P., L-A Asset Management Services, LLC, Robert G. Miller, Robert Edwards, and the Persons listed on Schedule A thereto. |
|
21.1** | Schedule of Subsidiaries of Albertsons Companies, Inc. | |
23.1*** | Consent of Schulte Roth & Zabel LLP (included in Exhibit 5.1) | |
23.2** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.3** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.4** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.5** | Consent of KPMG LLP, Independent Public Accounting Firm | |
23.6** | Consent of McGladrey LLP, Independent Auditor | |
23.7** | Consent of Cushman & Wakefield, Inc. | |
24.1* | Powers of Attorney (included on signature pages of this Registration Statement) |
* | Previously filed on July 8, 2015 |
** | Filed herewith |
*** | To be filed by amendment |
| Confidential treatment has been requested for certain information contained in this exhibit. Such information has been omitted and filed separately with the SEC. |
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-6
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on August 26, 2015.
Albertsons Companies, Inc. | ||
By: |
/s/ Robert G. Miller |
|
Name: | Robert G. Miller | |
Title: |
Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Robert G. Miller Robert G. Miller |
Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | August 26, 2015 | ||
/s/ Robert B. Dimond Robert B. Dimond |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) | August 26, 2015 | ||
/s/ Robert B. Larson Robert B. Larson |
Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) | August 26, 2015 | ||
/s/ * Dean S. Adler |
Director | August 26, 2015 | ||
/s/ * Sharon L. Allen |
Director | August 26, 2015 | ||
/s/ * Steven A. Davis |
Director | August 26, 2015 |
II-7
Signature |
Title |
Date |
||
/s/ * Kim Fennebresque |
Director | August 26, 2015 | ||
/s/ * Lisa A. Gray |
Director | August 26, 2015 | ||
/s/ * Hersch Klaff |
Director | August 26, 2015 | ||
/s/ * Ronald Kravit |
Director |
August 26, 2015 | ||
/s/ * Alan Schumacher |
Director |
August 26, 2015 | ||
/s/ * Jay L. Schottenstein |
Director |
August 26, 2015 | ||
/s/ * Lenard B. Tessler |
Director |
August 26, 2015 | ||
/s/ * Scott Wille |
Director |
August 26, 2015 |
* By |
/s/ Robert B. Dimond |
|||||
Attorney-in-Fact |
II-8
Exhibit No. |
Exhibit Description |
|
1.1** | Form of Underwriting Agreement among Albertsons Companies, Inc. and the Underwriters | |
3.1* | Certificate of Incorporation of Albertsons Companies, Inc. | |
3.2** | Form of Bylaws of Albertsons Companies, Inc. | |
4.1** | Form of Stockholders Agreement by and among Albertsons Companies, Inc., Albertsons Investor Holdings LLC, KRS AB Acquisition, LLC, KRS ABS, LLC and Albertsons Management Holdco, LLC | |
4.2* | Indenture, dated September 10, 1997, between Safeway Inc., and the Bank of New York, as trustee | |
4.3* | Forms of Officers Certificates establishing the terms of Safeway Inc.s 3.40% Notes due 2016 and 4.75% Notes due 2021, including the forms of Notes | |
4.4* | Form of Officers Certificate establishing the terms of Safeway Inc.s 6.35% Notes due 2017, including the form of Notes | |
4.5* | Form of Officers Certificate establishing the terms of Safeway Inc.s 5.00% Notes due 2019, including the form of Notes | |
4.6* | Form of Officers Certificate establishing the terms of Safeway Inc.s 3.95% Notes due 2020, including the form of Notes | |
4.7* | Form of Officers Certificate establishing the terms of Safeway Inc.s 7.45% Senior Debentures due 2027, including the form of Notes | |
4.8* | Form of Officers Certificate establishing the terms of Safeway Inc.s 7.25% Debentures due 2031, including the form of Notes | |
4.9* | Supplemental Indenture dated as of October 6, 2014, between Safeway Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, under the Indenture, dated as of September 10, 1997, as amended, and supplemented, with respect to Safeway Inc.s 3.40% Notes due 2016 | |
4.10* | Supplemental Indenture dated as of October 8, 2014, between Safeway Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, under the Indenture, dated as of September 10, 1997, as amended, and supplemented, with respect to Safeway Inc.s 6.35% Notes due 2017 | |
4.11* | Indenture, dated October 23, 2014, by and among Albertsons Holdings LLC and Safeway Inc. (as successor by merger to Saturn Acquisition Merger Sub, Inc.) (collectively, the Issuers), certain subsidiaries of the Issuers, as guarantors and Wilmington Trust, National Association, as trustee and collateral agent | |
4.12* | Indenture, dated May 1, 1992, between New Albertsons, Inc. (as successor to Albertsons, Inc.) and U.S. Bank Trust National Association (as successor to Morgan Guaranty Trust Company of New York), as trustee (as supplemented by Supplemental Indenture No. 1, dated as of May 7, 2004; Supplemental Indenture No. 2, dated as of June 1, 2006; and Supplemental Indenture No. 3, dated as of December 29, 2008) | |
4.13* | Indenture, dated May 1, 1995, between American Stores Company, LLC and Wells Fargo Bank, National Association (as successor to The First National bank of Chicago), as trustee (as further supplemented) | |
5.1*** | Opinion of Schulte Roth & Zabel LLP |
II-9
Exhibit No. |
Exhibit Description |
|
10.1* | Second Amended and Restated Term Loan Agreement, dated August 25, 2014 and effective January 30, 2015, by and among Albertsons LLC, Safeway Inc. (as successor by merger to Saturn Acquisition Merger Sub, Inc.) and the other co-borrowers, as borrowers, Albertsonss Holdings LLC and the other guarantors from time to time thereto, as guarantors, the lenders from time to time thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent | |
10.2* | Amended and Restated Asset-Based Revolving Credit Agreement, dated January 30, 2015, by and among Albertsons LLC, Safeway Inc. (as successor by Merger to Saturn Acquisition Merger Sub, Inc.) and the other co-borrowers, as borrowers, Albertsons Holdings LLC and the other guarantors from time to time party thereto, as guarantors, the lenders from time to time party thereto and Bank of America N.A., as administrative and collateral agent | |
10.3* | Term Loan Agreement, dated June 27, 2014, by and among New Albertsons, Inc., NAI Holdings LLC, and the other guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative and collateral agent | |
10.4* | Amendment No. 2 to the Asset-Based Revolving Credit Agreement, dated January 24, 2014, by and among New Albertsons, Inc., NAI Holdings LLC, the other borrowers from time to time, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A., as administrative and collateral agent | |
10.5* | Amended and Restated Letter of Credit Facility Agreement, dated as of January 24, 2014, by and among New Albertsons, Inc. and Bank of America, N.A. | |
10.6* | Casa Ley Contingent Value Rights Agreement, dated January 30, 2015, by and among AB Acquisition LLC, Safeway Inc., the Shareholder Representative, as defined therein, and Computershare Inc. and Computershare Trust Company, N.A., as Rights Agent | |
10.7* | Transition Services Agreement, dated March 21, 2013 between SuperValu Inc. and Albertsons LLC | |
10.8* | Transition Services Agreement, dated March 21, 2013 between SuperValu Inc. and New Albertsons, Inc. | |
10.9* | Letter Agreement, dated April 16, 2015, to each of the Transition Services Agreements between SUPERVALU INC. and New Albertsons, Inc. dated March 21, 2013, and the Transition Services Agreement between SUPERVALU INC. and Albertsons LLC dated March 21, 2013 | |
10.10* | Decision and Order, dated January 27, 2015, between the Federal Trade Commission, Cerberus Institutional Partners V, L.P., AB Acquisition LLC and Safeway Inc. | |
10.11*** | Albertsons Companies, Inc. 2015 Equity and Incentive Award Plan | |
10.12*** |
Albertsons Companies, Inc. Executive Incentive Bonus Plan |
|
10.13*** | Albertsons Companies, Inc. Restricted Stock Unit Plan | |
10.14*** | Form of Restricted Stock Unit Award Agreement under the Albertsons Companies, Inc. Restricted Stock Unit Plan | |
10.15** | Form of Indemnification Agreement | |
10.16*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Robert Miller |
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Exhibit No. |
Exhibit Description |
|
10.17*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Robert Dimond | |
10.18*** | Employment Agreement, dated , between Albertsons Companies, Inc. and Justin Dye | |
10.19*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Shane Sampson | |
10.20*** | Letter Agreement dated , between Albertsons Companies, Inc. and Wayne A. Denningham | |
10.21*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Sharon Allen | |
10.22*** | Letter Agreement, dated , between Albertsons Companies, Inc. and Steven A. Davis | |
10.23** | Form of Limited Liability Company Agreement of Albertsons Investor Holdings LLC, made effective as of , 2015, by and among Cerberus Iceberg LLC, Cerberus Capital Management, L.P., Jubilee ABS Holding LLC, Klaff Markets Holdings LLC, Klaff-W LLC, Lubert-Adler SAN Aggregator, L.P., L-A Asset Management Services, LLC, Robert G. Miller, Robert Edwards, and the Persons listed on Schedule A thereto. | |
21.1** | Schedule of Subsidiaries of Albertsons Companies, Inc. | |
23.1*** | Consent of Schulte Roth & Zabel LLP (included in Exhibit 5.1) | |
23.2** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.3** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.4** | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
23.5** | Consent of KPMG LLP, Independent Public Accounting Firm | |
23.6** | Consent of McGladrey LLP, Independent Auditor | |
23.7** | Consent of Cushman & Wakefield, Inc. | |
24.1* | Powers of Attorney (included on signature pages of this Registration Statement) |
* | Previously filed on July 8, 2015 |
** | Filed herewith |
*** | To be filed by amendment |
| Confidential treatment has been requested for certain information contained in this exhibit. Such information has been omitted and filed separately with the SEC. |
II-11
EXHIBIT 1.1
Form of
Albertsons Companies, Inc.
Shares of Common Stock
Underwriting Agreement
[ ], 2015
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Citigroup Global Markets Inc.
Morgan Stanley & Co. LLC
As representatives of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
200 West Street
New York, New York 10282-2198
Ladies and Gentlemen:
Albertsons Companies, Inc., a Delaware corporation (the Company ), proposes, subject to the terms and conditions stated herein (this Agreement ), to issue and sell to the Underwriters named in Schedule I hereto (the Underwriters ) an aggregate of [ ] shares (the Firm Shares ) and, at the election of the Underwriters, up to [ ] additional shares (the Optional Shares ) of common stock, par value $[ ] per share ( Stock ), of the Company (the Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof being collectively called the Shares ).
On or after the date hereof, AB Acquisition LLC ( ABA ) will become the wholly-owned subsidiary of the Company, in accordance with the IPO-Related Transactions (as defined in the Registration Statement) as described in the Registration Statement.
1. The Company and ABA, jointly and severally, represent and warrant to, and agree with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-205546) (the Initial Registration Statement ) in respect of the Shares has been filed with the Securities and Exchange Commission (the Commission ); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, delivered to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a Rule 462(b) Registration Statement ), filed pursuant to Rule 462(b) under the Securities Act of 1933 (as amended, the Securities Act , which term, as used herein, includes the rules and regulations of the Commission promulgated thereunder), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, to ABAs or the Companys knowledge, threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Securities Act is hereinafter called a Preliminary Prospectus ; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Securities Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the Registration Statement ; the Preliminary Prospectus relating to the Shares that was included in the Registration Statement immediately prior to the Applicable Time (as defined in Section 1(c) hereof) is hereinafter called the Pricing Prospectus ; such final prospectus, in the form first filed pursuant to Rule 424(b) under the Securities Act, is hereinafter called the Prospectus ; and any issuer free writing prospectus as defined in Rule 433 under the Securities Act relating to the Shares is hereinafter called an Issuer Free Writing Prospectus ).
(b) No order preventing or suspending the use of any Preliminary Prospectus or any Issuer Free Writing Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Securities Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company and ABA by an Underwriter through the Representatives expressly for use therein.
(c) For the purposes of this Agreement, the Applicable Time is : m (Eastern time) on the date of this Agreement. The Pricing Prospectus, as supplemented by the information listed on Schedule II(b) hereto, taken together (collectively, the Pricing Disclosure Package ), as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Free Writing Prospectus listed on Schedule II(a) hereto does not conflict with the information contained in the Registration Statement, the Pricing Prospectus or the Prospectus and each such Issuer Free Writing Prospectus, as supplemented by and taken together with the Pricing Disclosure Package as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , that this representation and warranty shall not apply to statements or omissions made in an Issuer Free Writing Prospectus in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representatives expressly for use therein.
(d) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Securities Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to each part of the Registration Statement and as of the applicable filing date as to the Prospectus and any
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amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided , however , that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representatives expressly for use therein.
(e) The Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus.
(f) The statements set forth in the Pricing Prospectus and Prospectus under the caption Description of Capital Stock, insofar as they purport to constitute a summary of the terms of the Stock, under the caption Certain U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders, and under the caption Underwriting, insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair in all material respects.
(g) At the time of filing the Initial Registration Statement, the Company was not and is not an ineligible issuer, as defined under Rule 405 under the Securities Act.
(h) Except as otherwise disclosed in the Pricing Prospectus, subsequent to the respective dates as of which information is given in the Pricing Prospectus, (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations, prospects, assets, management or properties, whether or not arising from transactions in the ordinary course of business, of the Company, ABA and their respective subsidiaries, taken as a whole and after giving effect to the transactions herein contemplated (any such change is called a Material Adverse Change ); (ii) the Company, ABA and their respective subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company, ABA or their respective subsidiaries on any class of capital stock or repurchase or redemption by the Company, ABA or any of their respective subsidiaries of any class of capital stock.
(i) (A) Deloitte & Touche LLP ( Deloitte ), in its capacity as the independent auditor for the Company, ABA and their respective subsidiaries, has expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) for the Company, ABA and their respective subsidiaries included in the Pricing Prospectus, and is an independent auditor within the meaning of the Securities Act, the Securities Exchange Act of 1934 (as amended, the Exchange Act , which term, as used herein, includes the rules and regulations of the Commission promulgated thereunder) and the rules and regulations of the Commission, and any non-audit services provided by Deloitte to the Company, ABA or their respective subsidiaries have been approved by the Audit Committee of the Board of Directors of the Company or the managing board of ABA (or of their respective subsidiaries).
(B) Deloitte, in its capacity as the independent registered public accounting firm for Safeway Inc. ( Safeway ) and its subsidiaries, which expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) for Safeway and its subsidiaries included in the Pricing Prospectus, is an independent registered public accounting firm within the meaning of the Securities Act, the Exchange Act and the rules and regulations of the Commission.
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(C) McGladrey, LLP, in its capacity as the independent auditor for United Supermarkets, LLC, has expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) of United Supermarkets, LLC included in the Pricing Prospectus, and is an independent registered public accounting firm within the meaning of the Securities Act, the Exchange Act and the rules and regulations of the Commission.
(D) KPMG LLP, in its capacity as the auditor for the New Albertsons Business of SUPERVALU INC. and subsidiaries, has expressed its opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) of the New Albertsons Business of SUPERVALU INC. and subsidiaries included in the Pricing Prospectus, and is an independent registered public accounting firm within the meaning of the Securities Act, the Exchange Act and the rules and regulations of the Commission.
(j) The historical financial statements, together with the related schedules and notes, included in the Pricing Prospectus present fairly in all material respects the consolidated financial position of the entities to which they relate as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States ( GAAP ) applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto (for example, Adjusted EBITDA as used in Pricing Prospectus is a non-GAAP measure). The historical financial information set forth in the Pricing Prospectus under the captions SummarySummary Consolidated Historical and Pro Forma Financial and Other Data, Selected Historical Financial Information of AB Acquisition and Supplemental Selected Historical Financial Information of Safeway fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Pricing Prospectus, except as may be specified in the Pricing Prospectus. The pro forma condensed combined financial statements of ABA and its subsidiaries and the related notes thereto included under the caption SummarySummary Consolidated Historical and Pro Forma Financial and Other Data and Unaudited Pro Forma Condensed Combined Financial Information present fairly the information contained therein, have been prepared in accordance with the Commissions rules and guidelines with respect to pro forma financial statements and have been properly presented on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. The statistical and market-related data and forward-looking statements (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) included in the Pricing Prospectus are based on or derived from sources that the Company, ABA and their respective subsidiaries believe to be reliable and accurate in all material respects and represent their good faith estimates that are made on the basis of data derived from such sources.
(k) Each of the Company, ABA and their respective subsidiaries has been duly incorporated or formed, as applicable, and is validly existing as a corporation, limited partnership or limited liability company, as applicable, in good standing under the laws of the jurisdiction of its incorporation or formation, as applicable, and has corporate, partnership or limited liability company, as applicable, power and authority to own, lease and operate its properties and to conduct its business as described in the Pricing Prospectus and, in the case of the Company, ABA and their respective subsidiaries, to enter into and perform its obligations under each of the Transaction Documents to which it is a party. Each of the Company, ABA and their respective
-4-
subsidiaries is duly qualified as a foreign corporation, partnership or limited liability company, as applicable, to transact business and is in good standing or equivalent status in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock or other ownership interest of each subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company or ABA, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim, except as disclosed in or contemplated by the Pricing Prospectus. The Company and ABA do not own or control, directly or indirectly, any corporation, association or other entity that would constitute a significant subsidiary (as defined in Rule 1-02(w) of Regulation S-X), other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(l) At [ ], 2015, on a consolidated basis, after giving pro forma effect to the transactions contemplated herein, the Company would have a capitalization as set forth in the Pricing Prospectus under the caption Capitalization and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and conform to the description of the Stock contained in the Pricing Prospectus and Prospectus; and all of the issued shares of capital stock or equity interests of ABA and each subsidiary of the Company and ABA have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors qualifying shares) are owned directly or indirectly by the Company or ABA, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim, except as disclosed in the Pricing Prospectus.
(m) Neither the Company, ABA nor any of their respective subsidiaries is (i) in violation of its charter, bylaws, limited liability company agreement or other constitutive document or (ii) in default (or, with the giving of notice or lapse of time, would be in default) ( Default ) under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company, ABA or any of their respective subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company, ABA or any of their respective subsidiaries is subject (each, an Existing Instrument ), except, in the case of clause (ii) above, for such Defaults as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change. The issue and sale of the Shares and the compliance by the Company and ABA with this Agreement and the consummation of the transactions contemplated herein and by the Pricing Prospectus, including the IPO-Related Transactions: (x) will have been duly authorized by all necessary corporate, partnership or limited liability company action and will not result in any violation of the provisions of the charter, bylaws, limited liability company agreement or other constitutive document of the Company, ABA or any of their respective subsidiaries, as applicable; (y) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, ABA or any of their respective subsidiaries pursuant to, or require the consent of any other party to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change or as would not impair the ability of the Company, ABA or any of their respective subsidiaries to consummate the Transactions contemplated hereunder; and (z) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company, ABA or any of their respective subsidiaries, except for such violations as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change or as would not impair the ability of the Company, ABA or any of their respective subsidiaries to consummate the Transactions contemplated
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hereunder. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency is required for the issue and sale of the Shares or the consummation of the transactions contemplated herein and by the Pricing Prospectus, except such as have been obtained or made by the Company or ABA and are in full force and effect under the Securities Act, applicable securities laws of the several states of the United States or provinces of Canada.
(n) Except as otherwise disclosed in the Pricing Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the Companys, ABAs or any of their respective subsidiaries knowledge, threatened (i) against or affecting the Company, ABA or any of their respective subsidiaries or (ii) which has as the subject thereof any property owned or leased by, the Company, ABA or any of their respective subsidiaries and any such action, suit or proceeding, if determined adversely to the Company, ABA or any of their respective subsidiaries, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. Other than as set forth in the Pricing Prospectus, no material labor dispute with the employees of the Company, ABA or any of their respective subsidiaries exists or, to the Companys, ABAs or any of their respective subsidiaries knowledge, is threatened or imminent, in each case, which would reasonably be expected to result in a Material Adverse Change.
(o) The Company, ABA and their respective subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, Intellectual Property Rights ) reasonably necessary to conduct their businesses as now conducted except where the failure to own or possess such Intellectual Property Rights would not reasonably be expected to result in a Material Adverse Change or as disclosed in the Pricing Prospectus; and the expected expiration of any of such Intellectual Property Rights would not reasonably be expected to result in a Material Adverse Change. Neither the Company, ABA nor any of their respective subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would reasonably be expected to result in a Material Adverse Change.
(p) The Company, ABA and their respective subsidiaries possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to own, lease and operate their respective properties and to conduct their respective businesses, except where the failure to possess, make or obtain such certificates, authorizations or permits (by possession, declaration or filing) would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change; and neither the Company, ABA nor any of their respective subsidiaries has received any written notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Change.
(q) Each of the Company, ABA and their respective subsidiaries has good record and valid title in fee simple to or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except (i) as disclosed in the Pricing Prospectus and (ii) for such defects in title or failure to have such title or other interest as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change. Each of the Company, ABA and their respective subsidiaries has good and valid title to, valid leasehold interests in, or valid licenses or other rights to use all personal property and assets material to the ordinary conduct of its business, except as disclosed in the Pricing Prospectus, or as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change.
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(r) The Company, ABA and each of their respective subsidiaries have filed all necessary tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine, interest or penalty levied against any of them except as (i) are being contested in good faith and by appropriate proceedings diligently conducted and for which the Company, ABA and their respective subsidiaries maintain adequate reserves in accordance with GAAP or (ii) would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change. The Company and ABA have made adequate charges, accruals and reserves in accordance with GAAP in the applicable financial statements referred to in Section 1(j) hereof in respect of all taxes for all periods as to which the tax liability of the Company, ABA or any of their respective subsidiaries has not been finally determined.
(s) The Company is not, or after receipt of payment for the Shares will be, an investment company within the meaning of the Investment Company Act of 1940, as amended (the Investment Company Act , which term, as used herein, includes the rules and regulations of the Commission promulgated thereunder), and will conduct its business in a manner so that it will not become subject to the Investment Company Act.
(t) Except as set forth in the Pricing Prospectus, each of the Company, ABA and their respective subsidiaries is insured by recognized, and to the knowledge of the Company and ABA, financially sound, institutions with policies in such amounts and with such deductibles and covering such risks as are believed by the Company and ABA to be adequate and customary for their businesses including, without limitation, policies covering real and personal property owned or leased by the Company, ABA and their respective subsidiaries against theft, damage, destruction, acts of vandalism, flood and earthquakes. The Company and ABA have no reason to believe that they or any of their subsidiaries will not be able (i) to renew their respective existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct their businesses as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change. None of the Company, ABA or any of their respective subsidiaries has been denied any insurance coverage which it has sought or for which it has applied.
(u) None of the Company, ABA or any of their respective subsidiaries has taken or will take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares.
(v) There is and has been no failure on the part of Company, ABA and their respective subsidiaries and, to the knowledge of Company and ABA, any of their respective officers and directors, in their capacities as such, to comply in all material respects with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act , which term, as used herein, includes the rules and regulations of the Commission promulgated thereunder).
(w) The Company, ABA and their respective subsidiaries maintain a system of accounting controls that is sufficient to provide reasonable assurances that (i) transactions are executed in accordance with managements general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
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(x) The Company and ABA have established and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) that comply with the requirements of the Exchange Act; such disclosure controls and procedures are designed to ensure that material information relating to the Company, ABA and their respective subsidiaries is made known to management, including the chief executive officer and chief financial officer, as appropriate, of the Company and ABA, respectively, by others within the Company, ABA or any of their respective subsidiaries, and such disclosure controls and procedures are reasonably effective to perform the functions for which they were established subject to the limitations of any such control system; the Companys and ABAs auditors and the Board of Directors and the managing board of ABA have been advised of (i) any significant deficiencies or material weaknesses in the design or operation of internal controls which could adversely affect the Companys and ABAs abilities to record, process, summarize, and report financial data; and (ii) any fraud, whether or not material, that involves management or other employees who have a role in the Companys or ABAs internal controls; and since the date of the most recent evaluation of such disclosure controls and procedures, there have been no significant changes in internal controls or in other factors that could significantly and adversely affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
(y) Neither the Company nor any its subsidiaries nor any agent thereof acting on their behalf has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Securities to violate Regulation T, Regulation U or Regulation X of the Board Governors of the Federal Reserve System
(z) Except as disclosed in the Pricing Prospectus and except as would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change, (i) each of the Company, ABA and their respective subsidiaries and its operations and facilities are in compliance with, and not subject to any known liabilities under, applicable Environmental Laws, which compliance includes, without limitation, having obtained and being in compliance with any permits, licenses or other governmental authorizations or approvals, and having made all filings and provided all financial assurances and notices, in each case, required for the ownership and operation of the business, properties and facilities of the Company, ABA or their respective subsidiaries under applicable Environmental Laws, and compliance with the terms and conditions thereof; (ii) neither the Company, ABA nor any of their respective subsidiaries has received in the two years prior to the date of this Agreement any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company, ABA or any of their respective subsidiaries is in violation of any Environmental Law; (iii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company, ABA or their respective subsidiaries has received written notice, and no written notice by any governmental entity alleging actual or potential liability on the part of the Company, ABA or any of their respective subsidiaries based on or pursuant to any Environmental Law, in each case, pending or, to the knowledge of the Company, ABA and their respective subsidiaries, threatened against the Company, ABA or any of their respective subsidiaries or any person or entity whose liability under or pursuant to any Environmental Law the Company, ABA or any of their respective subsidiaries has retained or assumed either contractually or by operation of law; (iv) neither the Company, ABA nor any of their respective subsidiaries is conducting or paying for, in whole or in part, any investigation, response or other corrective action pursuant to any Environmental Law at any site or facility, nor are any of them subject or a party to any order, judgment, decree, contract or agreement which imposes any obligation or
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liability under any Environmental Law; (v) no lien, charge, encumbrance or restriction has been recorded pursuant to any Environmental Law with respect to any assets, facility or property owned, operated or leased by the Company, ABA or any of their respective subsidiaries; and (vi) to the knowledge of the Company, ABA and their respective subsidiaries, there are no past or present actions, activities, circumstances, conditions or occurrences, including, without limitation, the Release or threatened Release of any Material of Environmental Concern, that could reasonably be expected to result in a violation of or liability under any Environmental Law on the part of the Company, ABA or any of their respective subsidiaries, including without limitation, any such liability which the Company, ABA or any of their respective subsidiaries have retained or assumed either contractually or by operation of law.
For purposes of this Agreement, Environment means ambient air, indoor air, surface water, groundwater, drinking water, soil, surface and subsurface strata, and natural resources such as wetlands, flora and fauna. Environmental Laws means the common law and all federal, state, local and foreign laws or regulations, ordinances, codes, orders, decrees, judgments and injunctions issued, promulgated or entered thereunder, relating to pollution or protection of the Environment or human health, including without limitation, those relating to (i) the Release or threatened Release of Materials of Environmental Concern; and (ii) the manufacture, processing, distribution, use, generation, treatment, storage, transport, handling or recycling of Materials of Environmental Concern. Materials of Environmental Concern means any substance, material, pollutant, contaminant, chemical, waste, compound, or constituent, in any form, including without limitation, petroleum and petroleum products, subject to regulation or which can give rise to liability under any Environmental Law. Release means any release, spill, emission, discharge, deposit, disposal, leaking, pumping, pouring, dumping, emptying, injection or leaching into the Environment, or into, from or through any building, structure or facility.
(aa) In the ordinary course of their businesses, the Company and ABA conduct a periodic review of the effect of Environmental Laws on the businesses, operations and properties of the Company, ABA and their respective subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties).
(bb) The Company, ABA, their respective subsidiaries and any employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 (as amended, ERISA , which term, as used herein, includes the regulations and published interpretations thereunder)), other than a multiemployer plan (within the meaning of Section 3(37) of ERISA) that is or was, within the preceding six years of the date hereof, sponsored or maintained by the Company, ABA, their respective subsidiaries or their respective ERISA Affiliates (as defined below) (each, a Plan ) are in compliance with the applicable provisions of ERISA, except as the failure to be in compliance would not reasonably be expected to result in a Material Adverse Change. ERISA Affiliate means, with respect to the Company, ABA or any of their respective subsidiaries, any member of any group of organizations described in Section 414 of the Internal Revenue Code of 1986 (as amended, the Code , which term, as used herein, includes the regulations and published interpretations thereunder) of which the Company, ABA or such subsidiary is a member. No reportable event (as described in Section 4043(c) of ERISA) for which notice requirements have not been waived has occurred or is reasonably expected to occur with respect to any Plan sponsored or maintained by the Company, ABA, their respective subsidiaries or any of their respective ERISA Affiliates, except for such reportable events which would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse
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Change. Except as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change, neither the Company, ABA, their respective subsidiaries nor any of their respective ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any Plan or (ii) Sections 412, 4971, 4975 or 4980B of the Code or Section 4062(e) of ERISA with respect to any Plan. Except as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change, each employee benefit plan established or maintained by the Company, ABA, their respective subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401 of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.
(cc) Except as would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Change, (i) there is (A) no unfair labor practice complaint pending or, to the Companys or ABAs knowledge, threatened against the Company, ABA or any of their respective subsidiaries before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under collective bargaining agreements pending, or to the Companys or ABAs knowledge, imminently threatened, against the Company, ABA or any of their respective subsidiaries, (B) no strike, labor dispute, slowdown or stoppage pending or, to the Companys or ABAs knowledge, threatened against the Company, ABA or any of their respective subsidiaries and (C) no union representation question existing with respect to the employees of the Company, ABA or any of their respective subsidiaries and, to the Companys or ABAs knowledge, no union organizing activities taking place and (ii) to the Companys knowledge, the Company, ABA and their respective subsidiaries are, and have been, in compliance with all applicable federal, state and local laws relating to discrimination in hiring, promotion or pay of employees and all applicable wage and hours laws.
(dd) No relationship, direct or indirect, exists between or among any of the Company or ABA, on the one hand, and any director, officer, member, stockholder, customer or supplier of the Company, ABA or any affiliate of the Company or ABA, on the other hand, which is required by the Securities Act to be disclosed in a registration statement on Form S-1, and which is not disclosed in the Pricing Prospectus. There are no material outstanding loans, advances (except advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company, ABA or any affiliate of the Company or ABA to or for the benefit of any of the officers or directors of the Company, ABA or any affiliate of the Company or ABA or any of their family members.
(ee) Neither the Company, ABA nor any of their respective subsidiaries nor, to the knowledge of the Company or ABA, any director, officer, agent, employee or affiliate of the Company or ABA, or any of their respective subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the FCPA, including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any foreign official (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA, and the Company, ABA and their respective subsidiaries and, to the knowledge of the Company and ABA, their affiliates, have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
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FCPA means Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder.
(ff) The operations of the Company, ABA and their respective subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions where the Company, ABA and their respective subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any governmental agency having jurisdiction over the Company, ABA or any of their respective subsidiaries (collectively, the Money Laundering Laws ), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company, ABA or any of their respective subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or ABA, threatened.
(gg) Neither the Company, ABA nor any of their respective subsidiaries nor, to the knowledge of the Company or ABA, any director, officer, agent, employee, or affiliate of the Company, ABA or any of their respective subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department, the U.S. Department of Commerce or the U.S. Department of State (collectively, Sanctions ), nor is the Company, ABA or any of their respective subsidiaries located, organized or resident in a country or territory that is the subject of Sanctions. The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person, (i) to fund any activities of or business with any person that, at the time of such funding, is the subject of Sanctions, or is in Crimea, Cuba, Iran, Libya, North Korea, Sudan or in any other country or territory, that, at the time of such funding, is the subject of Sanctions, or (ii) in any other manner that will result in a violation by any person (including any person participating in the offering, whether as underwriter, advisor, investor or otherwise) of Sanctions.
2. Subject to the terms and conditions herein set forth, (a) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price per share of $[ ], the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction, the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at their election up to [ ] Optional Shares, at the purchase price per share set forth in the paragraph above, provided that the purchase price per Optional Share shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Firm Shares but not payable on the Optional Shares. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Company, given within a period of 30 calendar days after the date of this Agreement, setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Company otherwise agree in writing, earlier than two or later than ten business days after the date of such notice.
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3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as the Representatives may request upon at least forty-eight hours prior notice to the Company shall be delivered by or on behalf of the Company to the Representatives, through the facilities of the Depository Trust Company ( DTC ), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to the Representatives at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the Designated Office ). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on [ ], 2015 or such other time and date as the Representatives and the Company may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by the Representatives in the written notice given by the Representatives of the Underwriters election to purchase such Optional Shares, or such other time and date as the Representatives and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the First Time of Delivery , such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the Additional Time of Delivery , and each such time and date for delivery is herein called a Time of Delivery .
(b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 8 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 8(k) hereof (the Transaction Documents ), will be delivered at the offices of Schulte Roth & Zabel LLP (the Closing Location ), and the Shares will be delivered by book-entry delivery. Electronic copies of the documents to be delivered pursuant to the preceding sentence will be exchanged for review on the New York Business Day next preceding such Time of Delivery. For the purposes of this Section 4, New York Business Day shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York City are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commissions close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or the Prospectus prior to the last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof; to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any amendment or supplement to the Prospectus has been filed and to furnish you with copies thereof; to file promptly all material required to be filed by the Company and ABA with the Commission pursuant to Rule 433(d) under the Securities Act; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or other prospectus in respect of the Shares, of the
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suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or other prospectus or suspending any such qualification, to promptly use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with written and electronic copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Securities Act) is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Securities Act) is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus in order to comply with the Securities Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many written and electronic copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance; and in case any Underwriter is required to deliver a prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Securities Act) in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many written and electronic copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Securities Act;
(d) To make generally available to its securityholders as soon as practicable, but in any event not later than sixteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158);
(e) (1) During the period beginning from the date hereof and continuing to and including the date that is 180 days after the date of the Prospectus (the Lock-Up Period ), not to (i) offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any securities of the Company and ABA that are substantially similar to the Shares, including but not limited to any options or warrants to purchase shares of Stock or any securities that are convertible into or exchangeable for, or that represent the right to
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receive, Stock or any such substantially similar securities, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise (other than the Shares to be sold hereunder or pursuant to employee equity incentive plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent; provided , however , that if (1) during the last 17 days of the initial Lock-Up Period, the Company releases earnings results or announces material news or a material event or (2) prior to the expiration of the initial Lock-Up Period, the Company announces that it will release earnings results during the 15-day period following the last day of the initial Lock-Up Period, then in each case the Lock-Up Period will be automatically extended until the expiration of the 18-day period beginning on the date of release of the earnings results or the announcement of the material news or material event, as applicable, unless the Representatives waive, in writing, such extension; the Company will provide the Representatives and each stockholder subject to the Lock-Up Period pursuant to the lockup letters described in Section 8(i) with prior notice of any such announcement that gives rise to an extension of the Lock-up Period;
(2) If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in a lock-up letter described in Section 8(i) hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Annex II hereto through a major news service at least two business days before the effective date of the release or waiver;
(f) During a period of three years from the effective date of the Registration Statement, to furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail; provided that the Company may satisfy the requirements of this subsection (f) by electronically filing such reports, financial statements or information through the Commissions Electronic Data Gathering Analysis and Retrieval system or any successor system ( EDGAR );
(g) During a period of three years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders generally, and to deliver to you (i) promptly after they are publicly available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); provided that the Company may satisfy the requirements of this subsection (g) by electronically filing such reports, financial statements or information through EDGAR;
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(h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Pricing Prospectus under the caption Use of Proceeds;
(i) To use its best efforts to list, subject to notice of issuance, the Shares on the [ ] (the Exchange );
(j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Securities Act;
(k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Securities Act; and
(l) Upon request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter an electronic version of the Companys trademarks, servicemarks and corporate logo for use on the website, if any, operated by such Underwriter for the purpose of facilitating the on-line offering of the Shares (the License ); provided , however , that the License shall be used solely for the purpose described above, is granted without any fee and may not be assigned or transferred.
6. (a) Each of the Company and ABA represents and agrees that, without the prior consent of the Representatives, it has not made and will not make any offer relating to the Shares that would constitute a free writing prospectus as defined in Rule 405 under the Securities Act; each Underwriter represents and agrees that, without the prior consent of the Company and the Representatives, it has not made and will not make any offer relating to the Shares that would constitute a free writing prospectus; any such free writing prospectus the use of which has been consented to by the Company and the Representatives is listed on Schedule II(a) hereto.
(b) Each of the Company and ABA has complied and will comply with the requirements of Rule 433 under the Securities Act applicable to any Issuer Free Writing Prospectus, including timely filing with the Commission or retention where required and legending; and each of the Company and ABA represents that it has satisfied and agrees that it will satisfy the conditions under Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show.
(c) The Company agrees that, if at any time following issuance of an Issuer Free Writing Prospectus through the completion of the public offer and sale of the Shares, any event that occurred or occurs as a result of which such Issuer Free Writing Prospectus would conflict with the information in the Registration Statement, the Pricing Prospectus or the Prospectus or would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then prevailing, not misleading, the Company and ABA will give prompt notice thereof to the Representatives and, if requested by the Representatives, will prepare and furnish without charge to each Underwriter an Issuer Free Writing Prospectus or other document which will correct such conflict, statement or omission; provided , however , that this representation and warranty shall not apply to any statements or omissions in an Issuer Free Writing Prospectus made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representatives expressly for use therein.
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7. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Companys counsel and accountants in connection with the registration of the Shares under the Securities Act and all other expenses in connection with the preparation, printing, reproduction and filing of the Registration Statement, any Preliminary Prospectus, any Issuer Free Writing Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers (but not any legal fees of counsel to the Underwriters in connection therewith, except as explicitly provided for herein); (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares (but not any legal fees of counsel to the Underwriters in connection therewith, except as explicitly provided for herein); (iii) all reasonable expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey (such fees and disbursements of counsel not to exceed $15,000); (iv) all fees and expenses in connection with listing the Shares on the Exchange; (v) the filing fees incident to, and the reasonable fees and disbursements of counsel for the Underwriters in connection with, any required review by the Financial Industry Regulatory Authority of the terms of the sale of the Shares (such fees and disbursements of counsel not to exceed $35,000); (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; (viii) all reasonable and customary expenses incurred by the Company in connection with any road show for the offering of the Shares, including the cost of any chartered airplane or other transportation; and (ix) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 7. It is understood, however, that, except as provided in this Section 7, and Sections 9 and 12 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company herein are, at and as of such Time of Delivery, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Securities Act within the applicable time period prescribed for such filing by the rules and regulations under the Securities Act and in accordance with Section 5(a) hereof; all material required to be filed by the Company pursuant to Rule 433(d) under the Securities Act shall have been filed with the Commission within the applicable time period prescribed for such filing by Rule 433; if the Company has elected to rely upon Rule 462(b) under the Securities Act, the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; no stop order suspending or preventing the use of the Prospectus or any Issuer Free Writing Prospectus shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction;
(b) Cahill Gordon & Reindel LLP, counsel for the Underwriters, shall have furnished to you such written opinion or opinions and negative assurance statement, dated such Time of Delivery, in form and substance satisfactory to you, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters;
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(c) Schulte Roth & Zabel LLP, counsel for the Company and ABA, shall have furnished to you their written opinion and negative assurance statement (substantially in the form attached as Annex I hereto), dated such Time of Delivery, in form and substance satisfactory to you;
(d) (i) On the date of the Prospectus at a time prior to the execution of this Agreement, the Underwriters shall have received from (A) Deloitte, the auditor for the Company, ABA and their respective subsidiaries, a comfort letter dated the date hereof and addressed to the Underwriters, in form and substance satisfactory to the Representatives, covering the financial information in the Pricing Disclosure Package and other customary matters, (B) Deloitte, the independent registered public accounting firm for Safeway and its subsidiaries, a comfort letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, covering the financial information in the Pricing Disclosure Package and other customary matters, (C) McGladrey, LLP, the independent registered public accounting firm for United Supermarkets LLC, a comfort letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, covering the financial information in the Pricing Disclosure Package and other customary matters, and (D) KPMG LLP, the independent registered public accounting firm for the New Albertsons Business of SUPERVALU INC. and subsidiaries, a comfort letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, covering the financial information in the Pricing Disclosure Package and other customary matters and (ii) additionally, on each effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and additionally, at each Time of Delivery, the Underwriters shall have received (A) from Deloitte a bring-down comfort letter addressed to the Underwriters, in form and substance satisfactory to the Representatives, in the form of the comfort letter delivered on the date hereof pursuant to 9(d)(i)(A) above, except that (I) it shall cover the equivalent financial information in the Prospectus and any amendment or supplement thereto and (II) procedures shall be brought down to a date no more than 3 days prior to the date of execution of such bring-down comfort letter, (B) from Deloitte a bring-down comfort letter addressed to the Underwriters, in form and substance satisfactory to the Representatives, in the form of the comfort letter delivered on the date hereof pursuant to 9(d)(i)(B) above, except that (I) it shall cover the equivalent financial information in the Prospectus and any amendment or supplement thereto and (II) procedures shall be brought down to a date no more than 3 days prior to the date of execution of such bring-down comfort letter, (C) from McGladrey, LLP a bring-down comfort letter addressed to the Underwriters, in form and substance satisfactory to the Representatives, in the form of the comfort letter delivered on the date hereof pursuant to 9(d)(i)(C) above, except that it shall cover the equivalent financial information in the Prospectus and any amendment or supplement thereto and (D) from KPMG LLP a bring-down comfort letter addressed to the Underwriters, in form and substance satisfactory to the Representatives, in the form of the comfort letter delivered on the date hereof pursuant to 9(d)(i)(D) above, except that it shall cover the equivalent financial information in the Prospectus and any amendment or supplement thereto.
(e) (i) Neither the Company, ABA nor any of their respective subsidiaries shall have sustained since the date of the latest audited financial statements included in the Pricing Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Pricing Prospectus, and (ii) since the respective dates as of which information is given in the Pricing Prospectus there shall not have been
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any change in the capital stock or long-term debt of the Company, ABA or any of their respective subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders equity or results of operations of the Company, ABA and their respective subsidiaries, otherwise than as set forth or contemplated in the Pricing Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(f) On or after the Applicable Time, (i) no downgrading shall have occurred in the rating accorded the debt securities or preferred stock of the Company or ABA by any nationally recognized statistical rating organization, as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Companys or ABAs debt securities or preferred stock;
(g) On or after the Applicable Time there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the Exchange or the Nasdaq Stock Market; (ii) a suspension or material limitation in trading in the Companys securities on the Exchange; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war; or (v) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly listed, subject to notice of issuance, on the Exchange;
(i) The Company shall have obtained and delivered to the Underwriters executed copies of an agreement from the Sponsors (as such term is defined in the Pricing Prospectus) and the officers, directors and stockholders of the Company set forth on Schedule III substantially to the effect set forth in Section 5(e) hereof in form and substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement;
(k) The Company shall have furnished or caused to be furnished to you at such Time of Delivery certificates of officers of the Company satisfactory to you as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (e) of this Section and as to such other matters as you may reasonably request; and
(l) The IPO-Related Transactions shall have been consummated.
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9. (a) The Company and ABA will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, any Issuer Free Writing Prospectus, any road show as defined in Rule 433(h) under the Securities Act, and any issuer information filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided , however , that the Company and ABA shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, in reliance upon and in conformity with written information furnished to the Company or ABA by any Underwriter through the Representatives expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company and ABA against any losses, claims, damages or liabilities to which the Company or ABA may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, or any Issuer Free Writing Prospectus, in reliance upon and in conformity with written information furnished to the Company or ABA by such Underwriter through the Representatives expressly for use therein; and will reimburse the Company and ABA for any legal or other expenses reasonably incurred by the Company or ABA in connection with investigating or defending any such action or claim as such expenses are incurred. The Underwriters obligations in this subsection (b) to indemnify are several in proportion to their respective underwriting obligations and not joint.
(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from (i) any liability which it may have to any indemnified party under such subsection unless and to the extent it has been materially prejudiced through the forfeiture by the indemnifying party of substantive rights and defenses or (ii) any liability which it may have to any indemnified party otherwise than under such subsection.
(A) In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party). After notice from the indemnifying party to such indemnified
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party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof (other than reasonable costs of investigation) unless (i) such indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the indemnifying party, (ii) the indemnifying party has failed within a reasonable period of time to retain counsel to the indemnified party, or (iii) the named parties in any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them. It is understood and agreed that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all indemnified parties, and that all such fees and expenses shall be paid or reimbursed as they are incurred.
(B) The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, which will not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify each indemnified party from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested that an indemnifying party reimburse the indemnified party for fees and expenses of counsel as contemplated by this Section 9, the indemnifying party shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by the indemnifying party of such request and (ii) the indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement, unless such failure to reimburse the Indemnified Person is based on a dispute with a good faith basis as to either the obligation of the Indemnifying Person arising under this Section 9 to indemnify the Indemnified Person or the amount of such obligation and the Indemnifying Party shall have notified the Indemnified Party of such good faith dispute prior to the date of such settlement. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (x) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (y) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 9 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the
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one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company and ABA under this Section 9 shall be in addition to any liability which the Company or ABA may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Securities Act; and the obligations of the Underwriters under this Section 9 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company or ABA and to each person, if any, who controls the Company or ABA within the meaning of the Securities Act.
10. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company that you have so arranged for the purchase of such Shares, or the Company notifies you that it has so arranged for the purchase of such Shares, you or the Company shall have the right to postpone such Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments or supplements to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term Underwriter as used in this Agreement shall include any person substituted under this Section 10 with like effect as if such person had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate
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number of all the Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to any Additional Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 7 hereof and the indemnity and contribution agreements in Section 9 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default.
11. The respective indemnities, agreements, representations, warranties and other statements of the Company, ABA and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, ABA, or any officer or director or controlling person of the Company or ABA, and shall survive delivery of and payment for the Shares.
12. If this Agreement shall be terminated pursuant to Section 10 hereof, neither the Company nor ABA shall then be under any liability to any Underwriter except as provided in Sections 7 and 9 hereof; but, if for any other reason (other than those set forth in Section 8(g)(i) or Sections 8(g)(iii)-(v) hereof), any Shares are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter except as provided in Sections 7 and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by any Representative on behalf of you as the Representatives.
All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail or facsimile transmission to you as the Representatives in care of Goldman, Sachs & Co., 200 West Street, New York, New York 10282-2198, Attention: Registration Department; if to the Company shall be delivered or sent by mail or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: General Counsel; and if to ABA shall be delivered or sent by mail or facsimile transmission to 250 Parkcenter Boulevard, Boise, Idaho 83706, Attention: General Counsel; provided , however , that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail or facsimile transmission to such Underwriter at its address set forth in its Underwriters Questionnaire, which address will be supplied to the Company and ABA by you upon request; provided , however , that notices under Section 5(e) shall be in writing, and if to
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the Underwriters shall be delivered or sent by mail or facsimile transmission to you as the Representatives at (i) Goldman, Sachs & Co., 200 West Street, New York, New York 10282-2198, Attention: Control Room, (ii) Merrill Lynch, Pierce, Fenner & Smith Incorporated, at One Bryant Park, New York, New York 10036, Attention: Syndicate Department, with a copy to ECM Legal, (iii) Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013 Attention: General Counsel, facsimile number (646) 291-1469 and (iv) Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk, with a copy to the Legal Department. Any such statements, requests, notices or agreements shall take effect upon receipt thereof.
In accordance with the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)), the Underwriters are required to obtain, verify and record information that identifies their respective clients, including the Company, which information may include the name and address of their respective clients, as well as other information that will allow the Underwriters to properly identify their respective clients.
14. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company, ABA and, to the extent provided in Sections 9 and 11 hereof, the officers and directors of the Company, ABA and each person who controls the Company, ABA or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase.
15. Time shall be of the essence of this Agreement. As used herein, the term business day shall mean any day when the Commissions office in Washington, D.C. is open for business.
16. The Company acknowledges and agrees that (i) the purchase and sale of the Shares pursuant to this Agreement is an arms-length commercial transaction between the Company, on the one hand, and the several Underwriters, on the other, (ii) in connection therewith and with the process leading to such transaction each Underwriter is acting solely as a principal and not the agent or fiduciary of the Company, (iii) no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company on other matters) or any other obligation to the Company except the obligations expressly set forth in this Agreement and (iv) the Company has consulted its own legal and financial advisors to the extent it deemed appropriate. The Company agrees that it will not claim that the Underwriters, or any of them, has rendered advisory services of any nature or respect, or owes a fiduciary or similar duty to the Company, in connection with such transaction or the process leading thereto.
17. This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company, ABA and the Underwriters, or any of them, with respect to the subject matter hereof.
18. THIS AGREEMENT AND ANY MATTERS RELATED TO THIS TRANSACTION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS THAT WOULD RESULT IN THE APPLICATION OF ANY LAW OTHER THAN THE LAWS OF THE STATE OF NEW YORK. Any suit or proceeding arising in respect of this agreement or our engagement will be tried exclusively in the U.S. District Court for the Southern District of New York or, if that court does not have subject matter jurisdiction, in any state court located in The City and County of New York. Each party hereto agrees to submit to the jurisdiction of, and to venue in, such courts.
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19. The Company, ABA and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
20. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
21. Notwithstanding anything herein to the contrary, the Company and ABA are authorized to disclose to any persons the U.S. federal and state income tax treatment and tax structure of the potential transaction and all materials of any kind (including tax opinions and other tax analyses) provided to the Company or ABA relating to that treatment and structure, without the Underwriters imposing any limitation of any kind. However, any information relating to the tax treatment and tax structure shall remain confidential (and the foregoing sentence shall not apply) to the extent necessary to enable any person to comply with securities laws. For this purpose, tax structure is limited to any facts that may be relevant to that treatment.
[signature page follow]
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If the foregoing is in accordance with your understanding, please sign and return to us one for the Company, ABA and each of the Representatives plus one for each counsel counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement between each of the Underwriters, the Company and ABA. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company and ABA for examination upon request, but without warranty on your part as to the authority of the signers thereof.
Very truly yours,
Albertsons Companies, Inc. |
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By: | ||
Name: Title: |
AB Acquisition LLC | ||
By: | ||
Name: Title: |
Accepted as of the date hereof:
Goldman, Sachs & Co. | ||
By: | ||
Authorized Signatory |
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Merrill Lynch, Pierce, Fenner & Smith Incorporated |
||
By: | ||
Name: Title: |
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Citigroup Global Markets Inc. | ||
By: | ||
Name: Title: |
-4-
Morgan Stanley & Co. LLC | ||
By: | ||
Name: Title: |
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SCHEDULE I
Underwriter |
Total Number
|
Number of
|
||
Goldman, Sachs & Co. |
||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
||||
Morgan Stanley & Co. LLC |
||||
Citigroup Global Markets Inc. |
||||
Lazard Frères & Co. LLC. |
||||
Total |
|
|
||
|
|
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SCHEDULE II
(a) Issuer Free Writing Prospectuses not included in the Pricing Disclosure Package:
(b) Information other than the Pricing Prospectus that comprise the Pricing Disclosure Package:
SCHEDULE III
Sponsors, Directors, Officers and Stockholders Subject to Lock-up
ANNEX I
Form of Opinion of Counsel for the Company
[To be Attached]
I-1
ANNEX II
[Form of Press Release]
Albertsons Companies, Inc.
[Date]
Albertsons Companies, Inc. announced today that Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, the lead book-running managers in the Companys recent public sale of shares of common stock, is [waiving] [releasing] a lock-up restriction with respect to shares of the Companys common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on [ ], 20[ ], and the shares may be sold on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
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ANNEX III
[Form of Lock-up Agreement]
III-1
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Citigroup Global Markets Inc.
Morgan Stanley & Co. LLC
c/o Goldman, Sachs & Co.
200 West Street
New York, NY 10282-2198
Re: | Albertsons Companies, Inc. - Lock-Up Agreement |
Ladies and Gentlemen:
The undersigned understands that you, as representatives (the Representatives ), propose to enter into an Underwriting Agreement on behalf of the several Underwriters named in Schedule I to such agreement (collectively, the Underwriters ), with Albertsons Companies, Inc., a Delaware corporation (the Company ), providing for a public offering of the Common Stock of the Company (the Shares ) pursuant to a Registration Statement on Form S-1 to be filed with the Securities and Exchange Commission (the SEC ).
In consideration of the agreement by the Underwriters to offer and sell the Shares, and of other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the undersigned agrees that, during the period specified in the following paragraph (the Lock-Up Period ), the undersigned will not offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of Common Stock of the Company, or any options or warrants to purchase any shares of Common Stock of the Company, or any securities convertible into, exchangeable for or that represent the right to receive shares of Common Stock of the Company, whether now owned or hereinafter acquired, owned directly by the undersigned (including holding as a custodian) or with respect to which the undersigned has beneficial ownership within the rules and regulations of the SEC (collectively the Undersigneds Shares ). The foregoing restriction is expressly agreed to preclude the undersigned from engaging in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Undersigneds Shares even if such Shares would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Undersigneds Shares or with respect to any security that includes, relates to, or derives any significant part of its value from such Shares. In addition, the undersigned agrees that, without the prior written consent of the Representatives, it will not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock of the Company or any security convertible into or exercisable or exchangeable for Common Stock of the Company. If the undersigned is an officer or director of the issuer, the undersigned further agrees that the foregoing provisions shall be equally applicable to any issuer-directed Shares the undersigned may purchase in the offering.
The initial Lock-Up Period will commence on the date of this Lock-Up Agreement and continue for 180 days after the public offering date set forth on the final prospectus used to sell the Shares (the Public Offering Date ) pursuant to the Underwriting Agreement; provided , however , that if (1) during the last 17 days of the initial Lock-Up Period, the Company releases earnings results or announces material news or a material event or (2) prior to the expiration of the initial Lock-Up Period, the Company announces that it will release earnings results during the 15-day period following the last day of the initial Lock-Up Period, then in each case the Lock-Up Period will be automatically extended until the expiration of the 18-day period beginning on the date of release of the earnings results or the announcement of the material news or material event, as applicable, unless the Representatives waive, in writing, such extension.
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If the undersigned is an officer or director of the Company, (i) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, the Representatives will notify the Company of the impending release or waiver, and (ii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.
The undersigned hereby acknowledges that the Company has agreed in the Underwriting Agreement to provide written notice of any event that would result in an extension of the Lock-Up Period, as described above, to the undersigned (in accordance with Section 13 of the Underwriting Agreement) and agrees that any such notice properly delivered will be deemed to have been given to, and received by, the undersigned. The undersigned hereby further agrees that, prior to engaging in any transaction or taking any other action that is subject to the terms of this Lock-Up Agreement during the period from the date of this Lock-Up Agreement to and including the 34th day following the expiration of the initial Lock-Up Period, it will give notice thereof to the Company and will not consummate such transaction or take any such action unless it has received written confirmation from the Company that the Lock-Up Period (as such may have been extended as described above) has expired.
Notwithstanding the foregoing, the undersigned may transfer the Undersigneds Shares (i) as a bona fide gift or gifts, provided that the donee or donees thereof agree to be bound in writing by the restrictions set forth herein, (ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, (iii) as part of a distribution to direct or indirect members or partners of the undersigned, provided that (a) the distributee agrees to be bound in writing by the restrictions set forth herein (b) such transfers are not required to be reported in any public report or filing with the SEC and (c) the undersigned does not otherwise voluntarily effect any public filing or report regarding such transfers, (iv) to any corporation, partnership or other business entity with whom the undersigned shares in common an investment manager or advisor which has investment discretionary authority with respect to the undersigneds and the entitys investments pursuant to an investment advisory or similar agreement, provided that (a) such person agrees to be bound in writing by the restrictions set forth herein, (b) such transfers are not required to be reported in any public report or filing with the SEC and (c) the undersigned does not otherwise voluntarily effect any public filing or report regarding such transfers, (v) pursuant to the Underwriting Agreement, or (vi) with the prior written consent of the Representatives on behalf of the Underwriters. For purposes of this Lock-Up Agreement, immediate family shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. In addition, notwithstanding the foregoing, if the undersigned is a corporation, the corporation may transfer the capital stock of the Company to any wholly-owned subsidiary of such corporation; provided , however , that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding such capital stock subject to the provisions of this Agreement and there shall be no further transfer of such capital stock except in accordance with this Agreement; and provided further that any such transfer shall not involve a disposition for value. The undersigned now has, and, except as contemplated by clauses
III-3
(i)-(vi) above, for the duration of this Lock-Up Agreement will have, good and marketable title to the Undersigneds Shares, free and clear of all liens, encumbrances, and claims whatsoever. The undersigned also agrees and consents to the entry of stop transfer instructions with the Companys transfer agent and registrar against the transfer of the Undersigneds Shares except in compliance with the foregoing restrictions.
In the event that any holder of Shares other than the undersigned is permitted by the Representatives to sell or otherwise transfer or dispose of any Shares for value (whether in one or multiple releases), then the same percentage of Shares held by the undersigned (the Pro-Rata Release ) shall be immediately and fully released on the same terms from any remaining lock-up restrictions set forth herein; provided that such Pro-Rata Release shall not apply in the event of any underwritten public offering, whether or not such offering or sale is wholly or partially a secondary offering of the Companys Common Stock during the Lock-Up Period; provided , however , that the undersigned, to the extent the undersigned has a contractual right to demand or require the registration of the Undersigneds Shares or otherwise piggyback on a registration statement filed by the Company for the offer and sale of its Common Stock, is offered the opportunity to participate on a basis consistent with such contractual rights in such underwritten sale.
This Lock-Up Agreement shall automatically terminate and be of no further force and effect if (i) the Registration Statement is withdrawn from the SEC, (ii) the Representatives advise the Company, or the Company advises the Representatives, in writing, prior to the execution of the Underwriting Agreement, that the Representatives or the Company, as applicable, have determined not to proceed with the Public Offering, or (iii) the Underwriting Agreement is terminated pursuant to its terms.
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The undersigned understands that the Company and the Underwriters are relying upon this Lock-Up Agreement in proceeding toward consummation of the offering. The undersigned further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the undersigneds heirs, legal representatives, successors, and assigns.
III-5
EXHIBIT 3.2
FORM OF
BYLAWS
OF
ALBERTSONS COMPANIES, INC.
ARTICLE I
DEFINITIONS
As used in these Bylaws of the Corporation, the terms set forth below shall have the meanings indicated, as follows:
35% Trigger Date shall mean the date upon which the ABS Control Group ceases to own, in the aggregate, at least 35% of the then-outstanding shares of Common Stock.
50% Trigger Date shall mean the date upon which the ABS Control Group ceases to own, in the aggregate, at least 50% of the then-outstanding shares of Common Stock.
ABS Control Group shall mean Albertsons Investor Holdings LLC, a Delaware limited liability company, KRS ABS, LLC, a Delaware limited liability company, KRS AB Acquisition, LLC, a Delaware limited liability company, Albertsons Management Holdco, LLC, a Delaware limited liability company, and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of their respective rights under the Certificate of Incorporation (and such assignees or designees respective Affiliates).
Board of Directors or Board shall mean the board of directors of the Corporation.
Bylaws shall mean these Bylaws of the Corporation, as the same may be amended and/or restated from time to time.
Certificate of Incorporation shall mean the Certificate of Incorporation of the Corporation, as the same may be amended and/or restated from time to time.
Common Stock shall mean the common stock, par value $0.01 per share, of the Corporation.
Corporation shall mean Albertsons Companies, Inc., a Delaware corporation.
Delaware Court shall mean the Court of Chancery of the State of Delaware.
Designated Controlling Stockholder shall mean, of the entities in the ABS Control Group, the entity that is the beneficial owner of the largest number of shares of the Common Stock.
DGCL shall mean the General Corporation Law of the State of Delaware, as amended from time to time.
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Electronic Transmission shall mean any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced on paper form by such a recipient through an automatic process.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
Proposing Stockholder shall mean any stockholder of record other than, prior to the 35% Trigger Date, the Designated Controlling Stockholder, provided that, on or after the 35% Trigger Date, the Designated Controlling Stockholder shall be included as a Proposing Stockholder.
Secretary of State shall mean the Secretary of State of the State of Delaware.
Stockholders Agreement shall mean that certain Stockholders Agreement, dated as of [], by and among the Corporation and the holders of stock of the Corporation signatory thereto, as the same may be amended and/or restated from time to time.
ARTICLE II
OFFICES
Section 2.01 Offices . The address of the registered office of the Corporation in the State of Delaware shall be as set forth in the Certificate of Incorporation.
The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE III
MEETINGS OF STOCKHOLDERS
Section 3.01 Place of Meeting . Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the DGCL. In the absence of any such designation, stockholders meetings shall be held at the principal executive office of the Corporation.
Section 3.02 Annual Meeting .
(a) The annual meeting of stockholders for the election of directors and for the transaction of such other business as shall have been properly brought before the meeting shall be held on such date and at such time and place, if any, as may be fixed by the Board of Directors and stated in the notice of the meeting. The Board of Directors may postpone, reschedule or cancel any previously scheduled annual meeting of stockholders. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business (other than the nomination of a person for election of a director, which is governed by Section 4.01 of
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these Bylaws) must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, including any committee thereof, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, including any committee thereof, or, prior to the 35% Trigger Date, the Designated Controlling Stockholder, or (iii) otherwise properly brought before the meeting by a Proposing Stockholder who (A) was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such business is proposed, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at the time of giving the notice provided for in this Section 3.02 and at the time of the meeting, (B) is entitled to vote at the meeting and (C) complied with all of the notice procedures set forth in this Section 3.02 as to such business. Except for proposals made in accordance with Rule 14a-8 under the Exchange Act, and included in the notice of meeting given by or at the direction of the Board of Directors, the foregoing clause (iii) shall be the exclusive means for a Proposing Stockholder to propose business (other than the nomination of a person for election of a director, which is governed by Section 4.01 of these Bylaws) to be brought before an annual meeting of the stockholders. Proposing Stockholders seeking to nominate persons for election to the Board of Directors must comply with the notice procedures set forth in Section 4.01 of these Bylaws, and this Section 3.02 shall not be applicable to nominations except as expressly provided in Section 4.01 of these Bylaws.
(b) Without qualification, for business to be properly brought before an annual meeting by a Proposing Stockholder, such proposed business must constitute a proper matter for stockholder action and the Proposing Stockholder must (i) provide Timely Notice (as defined below) thereof in writing and in proper form to the Secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 3.02. To be timely, a Proposing Stockholders notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the first anniversary of the preceding years annual meeting (which date shall, for purposes of the Corporations first annual meeting of stockholders after its shares of Common Stock are first publicly traded, be deemed to have occurred on [], 2015); provided, however , that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the Proposing Stockholder to be timely must be so delivered not earlier than the 120 th day prior to such annual meeting and not later than the 90 th day prior to such annual meeting or, if later, the 10 th day following the day on which public disclosure of the date of such annual meeting was made (such notice within such time periods, Timely Notice ). In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of Timely Notice as described above.
(c) To be in proper form for purposes of this Section 3.02, a Proposing Stockholders notice to the Secretary pursuant to this Section 3.02 shall be required to set forth:
(i) As to the Proposing Stockholder providing the notice and each other Proposing Person (as defined below), (A) the name and address of the Proposing Stockholder providing the notice, as they appear on the Corporations books, and each other Proposing Person and (B) the class or series and number of shares of the Corporation that are, directly or indirectly, owned of record or beneficially owned (as defined in Rule 13d-3 under the Exchange Act) by the Proposing Stockholder providing the notice and/or any other Proposing
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Persons, except that such Proposing Stockholder and/or such other Proposing Persons shall be deemed to beneficially own any shares of any class or series of the Corporation as to which such Proposing Stockholder and/or such other Proposing Person(s) has a right to acquire beneficial ownership at any time in the future;
(ii) As to the Proposing Stockholder providing the notice (or, if different, the beneficial owner on whose behalf such business is proposed) and each other Proposing Person, (A) any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Proposing Stockholder or beneficial owner, as applicable, and/or any other Proposing Person, the purpose or effect of which is to give such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person economic risk similar to ownership of shares of any class or series of the Corporation, including due to the fact that the value of such derivative, swap or other transaction is determined by reference to the price, value or volatility of any shares of any class or series of the Corporation, or which derivative, swap or other transaction provides, directly or indirectly, the opportunity to profit from any increase in the price or value of shares of any class or series of the Corporation ( Synthetic Equity Interests ), which such Synthetic Equity Interests shall be disclosed without regard to whether (x) such derivative, swap or other transaction conveys any voting rights in such shares to such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person, (y) the derivative, swap or other transaction is required to be, or is capable of being, settled through delivery of such shares or (z) such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person may have entered into other transactions that hedge or mitigate the economic effect of such derivative, swap or other transaction, (B) any proxy (other than a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the Exchange Act), agreement, arrangement, understanding or relationship pursuant to which such Proposing Stockholder or beneficial owner, as applicable, and/or any other Proposing Person has or shares a right to vote any shares of any class or series of the Corporation, (C) any agreement, arrangement, understanding or relationship, including any repurchase or similar so-called stock borrowing agreement or arrangement, engaged in, directly or indirectly, by such Proposing Stockholder or beneficial owner, as applicable, and/or any other Proposing Person, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person with respect to the shares of any class or series of the Corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of the shares of any class or series of the Corporation ( Short Interests ), (D)(x) if such Proposing Stockholder or beneficial owner, as applicable, and/or any other Proposing Person is not a natural person, the identity of the natural person or persons associated with such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person responsible for the formulation of and decision to propose the business to be brought before the meeting (such person or persons, the Responsible Person ), the manner in which such Responsible Person was selected, any fiduciary duties owed by such Responsible Person to the equity holders or other beneficiaries of such Proposing Stockholder and/or beneficial owner, as applicable, and/or such other Proposing Person, the qualifications and background of such Responsible Person and any material interests or relationships of such Responsible Person that are not shared generally by the other stockholders of the Corporation and that reasonably could
4
have influenced the decision of such Proposing Stockholder and/or beneficial owner, as applicable, and/or such other Proposing Person to propose such business to be brought before the meeting, and (y) if such Proposing Stockholder or beneficial owner, as applicable, and/or any other Proposing Person is a natural person, the qualifications and background of such natural person and any material interests or relationships of such natural person that are not shared generally by the other stockholders of the Corporation and that reasonably could have influenced the decision of such Proposing Stockholder and/or beneficial owner, as applicable, and/or such other Proposing Person to propose such business to be brought before the meeting, (E) any significant equity interests or any Synthetic Equity Interests or Short Interests in any principal competitor of the Corporation held by such Proposing Stockholder and/or beneficial owner, as applicable, and/or any other Proposing Persons, (F) any direct or indirect interest of such Proposing Stockholder and/or beneficial owner, as applicable, and/or any other Proposing Person in any contract with the Corporation, any affiliate of the Corporation (including any employment agreement, collective bargaining agreement or consulting agreement), or any principal competitor of the Corporation, (G) any pending or threatened litigation in which such Proposing Stockholder and/or beneficial owner, as applicable, and/or any other Proposing Person is a party or material participant involving the Corporation or any of its officers or directors, or any affiliate of the Corporation, (H) any material transaction occurring during the prior 12 months between such Proposing Stockholder and/or beneficial owner, as applicable, and/or any other Proposing Person, on the one hand, and the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation, on the other hand, (I) any other information relating to such Proposing Stockholder and/or beneficial owner, as applicable, and/or any other Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies by such Proposing Stockholder or beneficial owner, as applicable, and/or such other Proposing Person in support of the business proposed to be brought before the meeting pursuant to Section 14 of the Exchange Act and the rules and regulations thereunder, (J) a representation that the Proposing Stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business and (K) a representation whether the Proposing Stockholder and/or beneficial owner, if any, and/or any other Proposing Person intends or is part of a group that intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to approve or adopt the proposal and/or (b) otherwise to solicit proxies from stockholders in support of such proposal (the disclosures to be made pursuant to the foregoing clauses (A) through (K) are referred to as Disclosable Interests ); and
(iii) As to each matter the Proposing Stockholder proposes to bring before the annual meeting, (A) a brief description of the business desired to be brought before the annual meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend these Bylaws, the language of the proposed amendment), the reasons for conducting such business at the annual meeting and any material interest in such business of the Proposing Stockholder providing the notice and/or any other Proposing Person and (B) a reasonably detailed description of all agreements, arrangements and understandings between or among the Proposing Stockholder providing the notice, any other Proposing Person and/or any other persons or entities (including their names) in connection with the proposal of such business by such Proposing Stockholder.
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For purposes of this Section 3.02, the term Proposing Person shall mean (i) the Proposing Stockholder providing the notice of business proposed to be brought before an annual meeting, (ii) the beneficial owner or owners, if different, on whose behalf the business proposed to be brought before the annual meeting is made, (iii) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Exchange Act) of such beneficial owner and (iv) any other person with whom such Proposing Stockholder or beneficial owner (or any of their respective affiliates or associates) is Acting in Concert (as defined below).
A person shall be deemed to be Acting in Concert with another person for purposes of these Bylaws if such person knowingly acts (whether or not pursuant to an express agreement, arrangement or understanding) in concert with, or towards a common goal relating to the management, governance or control of the Corporation in parallel with, such other person where (A) each person is conscious of the other persons conduct or intent and this awareness is an element in their decision-making processes and (B) at least one additional factor suggests that such persons intend to act in concert or in parallel, which such additional factors may include, without limitation, exchanging information (whether publicly or privately), attending meetings, conducting discussions or making or soliciting invitations to act in concert or in parallel; provided , that a person shall not be deemed to be Acting in Concert with any other person solely as a result of the solicitation or receipt of revocable proxies from such other person in connection with a public proxy solicitation pursuant to, and in accordance with, the Exchange Act. A person which is Acting in Concert with another person shall be deemed to be Acting in Concert with any third party who is also acting in concert with such other person.
(d) A Proposing Stockholder providing notice of business proposed to be brought before an annual meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 3.02 shall be true and correct as of the record date for notice of the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for notice of the meeting (in the case of the update and supplement required to be made as of the record date for notice of the meeting), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof).
(e) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 3.02 (including the requirement in the case of business to be brought before the meeting by a Proposing Stockholder that such Proposing Stockholder update and supplement the notice of proposed business set forth in clause (d) above). The person presiding over the annual meeting shall, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this Section 3.02, and if he or she should so determine, he or she shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 3.02, unless otherwise required by law, if the Proposing Stockholder (or a qualified representative of the Proposing Stockholder) does not appear at the annual meeting of
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stockholders of the Corporation to present the proposed business, such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 3.02, to be considered a qualified representative of the Proposing Stockholder, a person must be a duly authorized officer, manager or partner of such Proposing Stockholder or must be authorized by a writing executed by such Proposing Stockholder or an Electronic Transmission delivered by such Proposing Stockholder to act for such Proposing Stockholder as proxy at the meeting of stockholders and such person must produce such writing or Electronic Transmission, or a reliable reproduction of the writing or Electronic Transmission, at the meeting of stockholders.
(f) In addition to the requirements of this Section 3.02 with respect to any business proposed to be brought before an annual meeting, each Proposing Person shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to any such business. This Section 3.02 shall not be deemed to affect the rights of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act.
(g) For purposes of these Bylaws, public disclosure shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act and the rules and regulations thereunder.
Section 3.03 Quorum; Adjournments . A majority in voting power of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at the meeting of stockholders, the holders of which are present in person, present by means of remote communication in a manner, if any, authorized by the Board of Directors in its sole discretion or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the person presiding at the meeting or, if directed to be voted on by the person presiding at the meeting, the stockholders present or represented by proxy at the meeting and entitled to vote thereon, although less than a quorum, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of stockholders entitled to vote is required for the adjourned meeting, the Board of Directors shall fix the record date for determining stockholders entitled to notice of such adjourned meeting, and a notice of the adjourned meeting shall be given to each stockholder of record as of the record date so fixed for notice of such adjourned meeting.
Section 3.04 Voting . Except as otherwise provided by the Certificate of Incorporation or applicable law, each stockholder shall have one vote for each share of stock having voting power, registered in such stockholders name on the books of the Corporation on the record date set by the Board of Directors for determining the stockholders entitled to vote at a
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meeting of stockholders as provided in Section 7.04 hereof. When a quorum is present at any meeting, a majority of the votes cast by the shares present or represented by proxy at the meeting and entitled to vote on the subject matter shall decide any questions brought before such meeting, unless the question is one upon which by express provisions of applicable law, regulation applicable to the Corporation or its securities, the rules or regulations of any stock exchange applicable to the Corporation or the Certificate of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Except as otherwise provided by these Bylaws, at any meeting for the election of directors at which a quorum is present, each director of the Corporation shall be elected by the vote of a majority of the votes cast with respect to that directors election by the shares present or represented by proxy at the meeting and entitled to vote on the election of directors. Notwithstanding the foregoing sentence, if, as of the tenth (10th) day preceding the date the Corporation first mails its notice of meeting for such meeting of stockholders, the number of nominees exceeds the number of directors to be elected (a Contested Election ), the directors shall be elected by the vote of a plurality of the votes cast. In a Contested Election, stockholders shall be given the choice to cast for or withhold votes for the election of directors, and shall not have the ability to cast any other vote with respect to such election of directors. For purposes of this Section, a majority of the votes cast means that the number of votes cast for a proposal or a candidate for director must exceed the number of votes cast against that proposal or candidate for director (with abstentions and broker non-votes (i.e., shares held by a bank, broker or other nominee which are present or represented by proxy at the meeting, but with respect to which such bank, broker or nominee is not empowered to vote) not counted as votes cast either for or against such proposal or candidate for director).
Section 3.05 Proxies . Each stockholder having the right to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy in a manner permitted by applicable law. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.
Section 3.06 Special Meetings . Unless otherwise provided by the Certificate of Incorporation, special meetings of the stockholders, for any purpose or purposes, (i) may be called at any time by the Board of Directors, and (ii) shall be called by the Secretary upon the written request of stockholders owning at least 25% in amount of the entire capital stock of the Corporation issued and outstanding, and entitled to vote at the special meeting. Such request shall set forth (i) if the purpose of the meeting relates to business other than the election or appointment of directors, all information as is required to be included in a notice delivered to the Corporation pursuant to Section 3.02(c) hereof (and, in such circumstance, the requirements of Section 3.02(d) hereof shall also apply) and (ii) if the purpose of the meeting includes the appointment or election of one or more members of the Board of Directors, all information as would be required to be included in a notice delivered to the Corporation pursuant to Section 4.01(d) hereof (and, in such circumstance, the requirements of Section 4.01(e) hereof shall also apply). The Board of Directors or, prior to the 35% Trigger Date, the Designated Controlling Stockholder, may bring business before a special meeting of stockholders called by the Secretary upon the request of the Stockholders. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. The Board of Directors may postpone, reschedule or cancel any previously scheduled special meeting of stockholders, whether called by them or otherwise.
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Section 3.07 Notice to Stockholders .
(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Except as otherwise provided by law, such written notice of any meeting shall be given to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting, not less than ten nor more than 60 days before the date of the meeting. If mailed, notice is deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the Corporation.
(b) Except as otherwise prohibited by the DGCL and without limiting the foregoing, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation or these Bylaws shall be effective if given by a form of Electronic Transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by Electronic Transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent of the Corporation, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Any such notice shall be deemed given (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of Electronic Transmission, when directed to the stockholder.
(c) Except as otherwise prohibited under the DGCL and without limiting the manner by which notice otherwise may be given to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation or these Bylaws may be given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if a stockholder fails to object in writing to the Corporation within 60 days of having been given written notice by the Corporation of its intention to send the single notice as set forth in this Section 3.07(c). Any such consent shall be revocable by the stockholders by written notice to the Corporation.
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Section 3.08 List of Stockholders . The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting, (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of business of the Corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, such list shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 3.08 or to vote in person or by proxy at any meeting of the stockholders. The Corporation shall not be required to include electronic mail addresses or other electronic contact information on such list.
Section 3.09 Written Consent of Stockholders in Lieu of Meeting . Unless otherwise provided in the Certificate of Incorporation, at any time prior to the 50% Trigger Date, any action required or permitted by the DGCL to be taken at a stockholders meeting may be taken without a meeting and without prior notice in the manner provided in the Certificate of Incorporation and the DGCL.
Section 3.10 Conduct of Meetings .
(a) Meetings of stockholders shall be presided over by the Chairperson of the Board of Directors, if any, or in the Chairpersons absence by the Chief Executive Officer, or in the Chief Executive Officers absence, by the President, or in the Presidents absence by a Vice President, or in the absence of all of the foregoing persons by a person designated by the Board of Directors. The Secretary shall act as secretary of the meeting, but in the Secretarys absence the person presiding over the meeting may appoint any person to act as secretary of the meeting.
(b) The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the Corporation as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the presence and participation by means of remote communication of stockholders and proxy holders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Directors, the person presiding over any meeting of stockholders shall have the right and authority to convene and (for any or no reason) to recess and/or adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such person, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures,
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whether adopted by the Board of Directors or prescribed by the person presiding over the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as shall be determined; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the person presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
(c) The person presiding over the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted.
(d) In advance of any meeting of stockholders, the Board of Directors, the Chairperson of the Board, the Chief Executive Officer or the President shall appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is present, ready and willing to act at a meeting of stockholders, the person presiding over the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the Corporation. Each inspector, before entering upon the discharge of such inspectors duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspectors ability. The inspector shall have the duties prescribed by law and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law. Every vote taken by ballots shall be counted by a duly appointed inspector or duly appointed inspectors.
ARTICLE IV
DIRECTORS
Section 4.01 Election of Directors .
(a) The total number of directors constituting the Board of Directors shall be as fixed in, or be determined in the manner provided by, the Certificate of Incorporation. At each annual meeting of stockholders of the Corporation, all directors shall be elected for a one (1) year term and shall hold office until the next annual meeting of stockholders and until their successors shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Election of directors need not be by written ballot. The directors need not be stockholders.
With respect to nominations by Proposing Stockholders, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors at an annual meeting or at a special meeting (but only if the Board, or pursuant to Section 3.06 of these Bylaws, the stockholders,
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have first determined that directors are to be elected at such special meeting) may be made at such meeting (i) specified in the notice of meeting given by or at the direction of the Board of Directors, including any committee thereof, (ii) brought before the meeting by or at the direction of the Board of Directors, including any committee thereof or the Designated Controlling Stockholder, prior to the 35% Trigger Date, or (iii) by any Proposing Stockholder who (A) was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such nomination is proposed to be made, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at the time of giving the notice provided for in this Section 4.01 and at the time of the meeting, (B) is entitled to vote at the meeting and (C) complied with the notice procedures set forth in this Section 4.01 as to such nomination. This Section 4.01 shall be the exclusive means for a Proposing Stockholder to propose any nomination of a person or persons for election to the Board to be considered by the stockholders at an annual meeting or special meeting.
Without qualification, for nominations to be made at an annual meeting by a Proposing Stockholder, the Proposing Stockholder must (i) provide Timely Notice (as defined in Section 3.02 of these Bylaws) thereof in writing and in proper form to the Secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 4.01. Without qualification, if the Board has first determined that directors are to be elected at such special meeting (or if a special meeting is called pursuant to Section 3.06 hereof and relates to the election or appointment of directors), then for nominations to be made at a special meeting by a Proposing Stockholder, the Proposing Stockholder must (i) provide timely notice thereof in writing and in proper form to the Secretary of the Corporation at the principal executive offices of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 4.01. To be timely, a Proposing Stockholders notice for nominations to be made at a special meeting by a Proposing Stockholder must be delivered to or mailed and received at the principal executive offices of the Corporation not earlier than the 120 th day prior to such special meeting and not later than the 90 th day prior to such special meeting or, if later, the 10 th day following the day on which public disclosure (as defined in Section 3.02 of these Bylaws) of the date of such special meeting was first made. In no event shall any adjournment or postponement of an annual meeting or special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholders notice as described above.
To be in proper form for purposes of this Section 4.01, a Proposing Stockholders notice to the Secretary pursuant to this Section 4.01 shall be required to set forth:
(i) As to the Proposing Stockholder providing the notice and each other Proposing Person (as defined below), (A) the name and address of the Proposing Stockholder providing the notice, as they appear on the Corporations books, and of the other Proposing Persons, (B) a representation that the Proposing Stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination, (C) a representation whether the Proposing Stockholder or the beneficial owner, if any, and/or any other Proposing Person intends or is part of a group that intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such nomination, and (D)
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any Disclosable Interests (as defined in Section 3.02 of these Bylaws) of the Proposing Stockholder providing the notice (or, if different, the beneficial owner on whose behalf such notice is given) and/or each other Proposing Person;
(ii) As to each person whom the Proposing Stockholder proposes to nominate for election as a director, (A) all information with respect to such proposed nominee that would be required to be set forth in a Proposing Stockholders notice pursuant to this Section 4.01 if such proposed nominee were a Proposing Person, (B) all information relating to such proposed nominee that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 under the Exchange Act and the rules and regulations thereunder (including such proposed nominees written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (C) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the Proposing Stockholder providing the notice (or, if different, the beneficial owner on whose behalf such notice is given) and/or any Proposing Person, on the one hand, and each proposed nominee, his or her respective affiliates and associates and any other persons with whom such proposed nominee (or any of his or her respective affiliates and associates) is Acting in Concert (as defined in Section 3.02 of these Bylaws), on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if such Proposing Stockholder or beneficial owner, as applicable, and/or such Proposing Person were the registrant for purposes of such rule and the proposed nominee were a director or executive officer of such registrant; and
(iii) The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholders understanding of the independence or lack of independence of such proposed nominee.
For purposes of this Section 4.01, the term Proposing Person shall mean (i) the Proposing Stockholder providing the notice of the nomination proposed to be made at the annual or special meeting, (ii) the beneficial owner or owners, if different, on whose behalf the nomination proposed to be made at the annual or special meeting is made, (iii) any affiliate or associate of such beneficial owner (as such terms are defined in Rule 12b-2 under the Exchange Act) and (iv) any other person with whom such Proposing Stockholder or such beneficial owner (or any of their respective affiliates or associates) is Acting in Concert.
A Proposing Stockholder providing notice of any nomination proposed to be made at an annual or special meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 4.01 shall be true and correct as of the record date for the annual or special meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the
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record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof).
Notwithstanding anything in these Bylaws to the contrary, no person nominated by a Proposing Stockholder shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 4.01. The person presiding over the annual or special meeting shall, if the facts warrant, determine that a nomination was not properly made in accordance with the provisions of this Section 4.01 (including the requirement to update and supplement a Proposing Stockholders notice of any nomination set forth in clause (e) above), and if he or she should so determine, he or she shall so declare such determination to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 4.01, unless otherwise required by law, if the Proposing Stockholder (or a qualified representative of the Proposing Stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination, such nomination shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 4.01, to be considered a qualified representative of the Proposing Stockholder, a person must be a duly authorized officer, manager or partner of such Proposing Stockholder or must be authorized by a writing executed by such Proposing Stockholder or an Electronic Transmission delivered by such Proposing Stockholder to act for such Proposing Stockholder as proxy at the meeting of stockholders and such person must produce such writing or Electronic Transmission, or a reliable reproduction of the writing or Electronic Transmission, at the meeting of stockholders.
This Section 4.01 is expressly intended to apply to any nomination by a Proposing Stockholder proposed to be brought before an annual or special meeting. In addition to the requirements of this Section 4.01 with respect to any nomination by a Proposing Stockholder proposed to be made at an annual or special meeting, each Proposing Person shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to any such nominations. Nothing in this Section 4.01 shall be deemed to affect any rights of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation or the rights of the Designated Controlling Stockholder as agreed with the Corporation.
Section 4.02 Vacancies . Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors, shall be filled as provided in the Certificate of Incorporation. A director elected to fill a vacancy or a newly created directorship shall hold office until the next annual meeting of stockholders and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
Section 4.03 Removal . Any director or the entire Board of Directors may be removed from office in the manner provided in the Certificate of Incorporation.
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Section 4.04 General Powers . Except as otherwise provided by law or the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors.
Section 4.05 Place of Meeting . The Board may hold its meetings at such place or places within or without the State of Delaware as it may from time to time determine.
Section 4.06 Regular Meetings . Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board.
Section 4.07 Special Meetings . Special meetings of the Board of Directors may be called by the Chairperson of the Board of Directors. Special meetings also shall be called by the Secretary on the written request of any two directors unless the Board consists of only one director, in which case special meetings shall be called by the Secretary on the written request of the sole director. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling or requesting the meeting to all directors at least four days before the meeting if the notice is mailed, or at least 24 hours before the meeting if such notice is given by telephone, hand delivery, overnight express courier, facsimile, electronic mail or other Electronic Transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting, provided that notice of the special meeting shall state the purpose or purposes of the special meeting. The notice shall be deemed given:
(i) in the case of hand delivery or notice by telephone, when received by the director to whom notice is to be given or by any person accepting such notice on behalf of such director,
(ii) in the case of delivery by mail, upon deposit in the United States mail, postage prepaid, directed to the director to whom notice is being given at such directors address as it appears on the records of the Corporation,
(iii) in the case of delivery by overnight express courier, on the first business day after such notice is dispatched, and
(iv) in the case of delivery via facsimile, electronic mail or other Electronic Transmission, when sent to the director to whom notice is to be given at such directors facsimile number or electronic mail address, as the case may be, as shown on the Corporations records.
Section 4.08 Quorum; Adjournments . At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum.
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Section 4.09 Unanimous Action in Lieu of a Meeting . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, or by Electronic Transmission, and the writing or writings or Electronic Transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 4.10 Conference Call Meetings . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.
Section 4.11 Committees . The Board of Directors may designate one or more committees, each such committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval or adopting, amending or repealing these Bylaws.
Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
Section 4.12 Compensation . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors, including the granting of equity interests (which may include profits interests and Synthetic Equity Interests) of the Corporation to the directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings or a stated salary as a committee member. The terms of any compensation (including the granting of equity interests of the Corporation) paid to directors shall be as determined by the Board of Directors.
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ARTICLE V
OFFICERS
Section 5.01 Generally . The Board of Directors shall from time to time elect or appoint such officers as it shall deem necessary or appropriate to the management and operation of the Corporation, including, without limitation, a President (which may be the Chief Executive Officer ( CEO ), a Secretary and a Treasurer (which may be the Chief Financial Officer). The Board of Directors or the CEO shall have the power and authority to appoint as officers one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, a Chief Operating Officer, a Chief Administrative Officer and a Chief Marketing Officer. The officers of the Corporation shall exercise such powers and perform such duties as are specified in these Bylaws, in a resolution of the Board of Directors or, in the case of an officer appointed by the CEO, as specified by the CEO. Any person may hold two or more offices simultaneously, and no officer need be a stockholder of the Corporation.
In addition to the authority of the CEO to appoint officers as set forth above, if so provided by resolution of the Board, any officer may be delegated the authority to appoint one or more officers or assistant officers, which appointed officers or assistant officers shall have the duties and powers specified in the resolution of the Board or as determined by such officer.
Section 5.02 Compensation . The officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors or any duly authorized committee thereof. In fixing the salaries, compensation and reimbursement of the officers of the Company other than the CEO, the Board of Directors may, among other things, take into account the recommendation of the CEO.
Section 5.03 Term; Removal . Each officer shall hold office until such officers successor is elected or appointed and qualified or until such officers earlier resignation or removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. Any officer appointed by the CEO may be removed at any time by the CEO. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors or by the CEO.
Section 5.04 Duties .
(a) Chairperson of the Board . The Chairperson of the Board shall, if present, preside at all meetings of the stockholders and of the Board. The Chairperson of the Board shall also perform such other duties and may exercise such other powers as may be assigned by these Bylaws or prescribed by the Board from time to time. If there is no President, the Chairperson of the Board shall in addition be the CEO and shall have the powers and duties prescribed in paragraph (c) of this Section 5.04.
(b) President, Chief Executive Officer . The President shall be the CEO of the Corporation. The CEO shall be the principal executive officer of the Corporation and shall have such other title or titles designated by the Board. Subject to the control of the Board, the CEO shall in general manage, supervise and control all of the business and affairs of the Corporation. He or she shall have authority to conduct all ordinary business on behalf of the Corporation and
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may execute and deliver on behalf of the Corporation any contract, conveyance or similar document; and in general shall perform all duties incident to the office of the CEO of a corporation and such other duties as may be prescribed by the Board or these Bylaws from time to time. The President shall perform such other duties and shall have such other powers as the Board or the CEO (if the President is not the CEO) may from time to time prescribe.
(c) Treasurer . The Treasurer (who shall have any other title or titles designated by the Board or the CEO, including without limitation, in the Boards or the CEOs discretion, Chief Financial Officer ) shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board. He or she shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board, he or she shall give the Corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board, for the faithful performance of the duties of his or her office and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. The Treasurer in general shall perform all duties incident to the office of the Treasurer of a corporation and such other duties as may be prescribed by the Board, the CEO or these Bylaws from time to time.
(d) Secretary . The Secretary shall: (1) attend and keep the minutes of the stockholders meetings and of the Boards meetings in one or more books provided for that purpose, and perform like duties for the standing committees of the Board when required by the Board; (2) see that all notices are duly given in accordance with the provisions of these Bylaws or as otherwise required by law or the provisions of the Certificate of Incorporation; (3) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; (4) maintain, or cause an agent designated by the Board to maintain, a record of the Corporations stockholders in a form that permits the preparation of a list of the names and addresses of all stockholders in alphabetical order by class of shares, showing the number and class of shares held by each; (5) have general charge of the stock transfer books of the Corporation or responsibility for supervision, on behalf of the Corporation, of any agent to which stock transfer responsibility has been delegated by the Board; (6) have responsibility for the custody, maintenance and preservation of those corporate records which the Corporation is required by the DGCL or otherwise to create, maintain or preserve; and (7) in general perform all duties incident to the office of Secretary of a corporation and such other duties as may be assigned by the Board, the CEO or these Bylaws from time to time.
(e) Deputy Officers . The Board may create one or more deputy officers whose duties shall be, among any other designated thereto by the Board, to perform the duties of the officer to which such office has been deputized in the event of the unavailability, death or inability or refusal of such officer to act. Deputy officers may hold such titles as designated therefor by the Board; however, any office designated with the prefix Vice or Deputy shall
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be, unless otherwise specified by resolution of the Board, automatically a deputy officer to the office with the title of which the prefix term is conjoined. Deputy officers shall have such other duties as prescribed by the Board or the CEO from time to time.
(f) Assistant Officers . The Board may appoint one or more officers who shall be assistants to principal officers of the Corporation, or their deputies, and who shall have such duties as shall be delegated to such assistant officers by the Board or such principal officers, including the authority to perform such functions of those principal officers in the place of and with full authority of such principal officers as shall be designated by the Board or (if so authorized) by such principal officers. The Board may by resolution authorize appointment of assistant officers by those principal officers to which such appointed officers will serve as assistants.
ARTICLE VI
INDEMNIFICATION
Section 6.01 Indemnification .
(a) The Corporation shall indemnify and hold harmless to the full extent permitted by law (as now or hereafter in effect) any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or, while serving as a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation, any other corporation, partnership, joint venture, trust or other enterprise in any capacity, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Notwithstanding this Section 6.01(a) or the provisions of Section 6.01(b) hereof, except as otherwise provided in Section 6.01(f) hereof, the Corporation shall be required to indemnify a covered person in connection with a proceeding (or part thereof) commenced by such covered person only if the commencement of such proceeding (or part thereof) by the covered person was authorized in the specific case by the Board of Directors of the Corporation.
(b) The Corporation shall indemnify and hold harmless to the full extent permitted by law (as now or hereafter in effect) any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or, while serving as a director, officer, employee or agent
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of the Corporation, is or was serving at the request of the Corporation another corporation, partnership, joint venture, trust or other enterprise in any capacity against expenses (including attorneys fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Delaware Court or such other court shall deem proper.
(c) To the extent that a present or former director, officer, employee or agent of the Corporation shall be successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by him or her in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made, with respect to a person who is a director, officer, employee or agent at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation to the fullest extent permitted by law in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Section 6.01. Such expenses incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 4.13 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The provisions of this Section 6.01 shall not be deemed to preclude the indemnification of (or advancement of expenses to) any person who is not specified in Section 6.01(a) or Section 6.01(b) but whom the Corporation has the power or obligation to indemnity under the provisions of the DGCL, or otherwise.
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(g) If a claim for indemnification (following the final disposition of a proceeding) or advancement of expenses under this Section 6.01 is not paid in full within 90 days after a written claim therefor has been received by the Corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim to the fullest extent permitted by law. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or advancement of expenses under applicable law.
(g) The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the Corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation another corporation, partnership, joint venture, trust or other enterprise in any capacity against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Section 6.01.
(h) The Board of Directors may authorize the Corporation to enter into a contract with any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than those provided in Section 6.01.
(i) For the purposes of this Section 6.01, references to the Corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 6.01 with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.
(j) For purposes of this Section 6.01, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to serving at the request of the Corporation shall include service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interest of the Corporation as referred to in this section.
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(k) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 6.01 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
(l) The Corporations obligation, if any, to indemnify or to advance expenses to any person who was or is serving at its request another corporation, partnership, joint venture, trust or other enterprise in any capacity shall be reduced by any amount such person may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust or other enterprise.
(m) Any repeal or modification of the foregoing provisions of this Section 6.01 shall not adversely affect any right or protection hereunder of any person in respect of any proceeding (regardless of when such proceeding is first threatened, commenced or completed) arising out of, or related to, any act or omission occurring prior to the time of such repeal or modification.
ARTICLE VII
CERTIFICATES OF STOCK
Section 7.01 Certificates . The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporations stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairperson of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer of the Corporation, representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue.
Section 7.02 Transfer . The issue, transfer, conversion and registration of stock certificates or uncertificated shares shall be governed by such other regulations as the Board of Directors may establish.
Section 7.03 Lost, Stolen or Destroyed Certificates . The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
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Section 7.04 Fixing the Record Date .
(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than sixty (60) days prior to such action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
(c) In order that the Corporation may determine the stockholders entitled to express consent to corporate action in writing without a meeting at any time prior to the 50% Trigger Date, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date for determining stockholders entitled to express consent to corporate action in writing without a meeting is fixed by the Board of Directors, (i) when no prior action of the Board of Directors is required by law, the record date for such purpose shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, and (ii) if prior action by the Board of Directors is required by law, the record date for such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
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Section 7.05 Registered Stockholders . The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01 Dividends . Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.
Before payment of any dividend there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interests of the Corporation, and the directors may abolish any such reserve.
Section 8.02 Checks . All checks or demands for money and notes of the Corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate.
Section 8.03 Fiscal Year . The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 8.04 Seal . The Board of Directors may provide for a corporate seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 8.05 Waiver of Notice . Whenever any notice is required to be given under applicable law or the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, or a waiver by Electronic Transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice or any waiver by Electronic Transmission, unless so required by the Certificate of Incorporation. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
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ARTICLE IX
AMENDMENTS
Section 9.01 Amendments . These Bylaws may be amended or repealed, in whole or in part, or new Bylaws may be adopted by the Board or by the stockholders as expressly provided in the Certificate of Incorporation.
ARTICLE X
EXCLUSIVE FORUM
Section 10.01 Exclusive Forum . Unless the Corporation consents in writing to the selection of an alternative forum, the Delaware Court shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the Corporation to the Corporation or the Corporations stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or these Bylaws or the Certificate of Incorporation or (iv) any action governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 10.01.
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EXHIBIT 4.1
FORM OF
STOCKHOLDERS AGREEMENT
BY AND AMONG
ALBERTSONS COMPANIES, INC.
AND
HOLDERS OF STOCK OF ALBERTSONS COMPANIES, INC. SIGNATORY HERETO
Dated as of [●]
TABLE OF CONTENTS
Page | ||||||
ARTICLE I DEFINITIONS |
1 | |||||
Section 1.01. |
Defined Terms | 1 | ||||
Section 1.02. |
Other Interpretive Provisions | 7 | ||||
ARTICLE II HOLDERS RIGHTS |
8 | |||||
Section 2.01. |
Board Representation | 8 | ||||
Section 2.02. |
Voting | 10 | ||||
Section 2.03. |
Sell-Downs; Distributions of Company Shares | 11 | ||||
ARTICLE III REGISTRATION RIGHTS |
13 | |||||
Section 3.01. |
Demand Registration | 13 | ||||
Section 3.02. |
Shelf Registration | 15 | ||||
Section 3.03. |
Piggyback Registration | 18 | ||||
Section 3.04. |
Black-out Periods | 20 | ||||
Section 3.05. |
Registration Procedures | 22 | ||||
Section 3.06. |
Underwritten Offerings | 27 | ||||
Section 3.07. |
No Inconsistent Agreements; Additional Rights | 29 | ||||
Section 3.08. |
Registration Expenses | 29 | ||||
Section 3.09. |
Indemnification | 30 | ||||
Section 3.10. |
Rules 144 and 144A and Regulation S | 33 | ||||
Section 3.11. |
Limitation on Registrations and Underwritten Offerings | 34 | ||||
Section 3.12. |
Clear Market | 34 | ||||
Section 3.13. |
In-Kind Distributions | 34 | ||||
ARTICLE IV MISCELLANEOUS |
34 | |||||
Section 4.01. |
Term | 34 | ||||
Section 4.02. |
Injunctive Relief | 35 | ||||
Section 4.03. |
Attorneys Fees | 35 | ||||
Section 4.04. |
Notices | 35 | ||||
Section 4.05. |
Publicity and Confidentiality | 36 | ||||
Section 4.06. |
Amendment | 36 | ||||
Section 4.07. |
Taxable REIT Subsidiary Election | 36 | ||||
Section 4.08. |
Successors, Assigns and Transferees | 36 | ||||
Section 4.09. |
Binding Effect | 37 | ||||
Section 4.10. |
Third Party Beneficiaries | 37 | ||||
Section 4.11. |
Governing Law; Jurisdiction | 38 | ||||
Section 4.12. |
Waiver of Jury Trial | 38 | ||||
Section 4.13. |
Severability | 38 | ||||
Section 4.14. |
Counterparts | 38 | ||||
Section 4.15. |
Headings | 38 | ||||
Section 4.16. |
Joinder | 38 | ||||
Section 4.17. |
Other Activities | 39 |
i
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (the Agreement ) is made, entered into and effective as of [], 2015, by and between Albertsons Investor Holdings, LLC, a Delaware limited liability company ( Investor Holdco ), Albertsons Management Holdco, LLC, a Delaware limited liability company ( Management Holdco ), KRS ABS, LLC, a Delaware limited liability company ( KRS ), KRS AB Acquisition, LLC, Delaware limited liability company (together with KRS, Kimco , and collectively with Investor Holdco and Management Holdco, the ABS Control Group ) and Albertsons Companies, Inc., a Delaware corporation (including any of its successors by merger, acquisition, reorganization, conversion or otherwise) (the Company ).
WITNESSETH
WHEREAS, as of the date hereof, each of the members of the ABS Control Group owns Registrable Securities of the Company; and
WHEREAS, the parties desire to set forth certain rights of members of the ABS Control Group with respect to the Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises, covenants and agreements of the parties hereto, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
DEFINITIONS
Section 1.01. Defined Terms . As used in this Agreement, the following terms shall have the following meanings:
5% Demanding Holder has the meaning set forth in Section 3.01(a).
ABS Control Group has the meaning set forth in the preamble.
Adverse Disclosure means public disclosure of material non-public information that, in the Board of Directors good faith judgment, after consultation with independent outside counsel to the Company, would be required to be made in any Registration Statement filed with the SEC by the Company so that such Registration Statement would not be materially misleading and would not be required to be made at such time but for the filing of such Registration Statement, but which information the Company has a bona fide business purpose for not disclosing publicly.
Affiliate shall mean any Person or entity, directly or indirectly controlling, controlled by or under common control with such Person or entity, including (i) a general partner, limited partner, or retired partner affiliated with such Person or entity, (ii) a fund, partnership, limited liability company or other entity affiliated with such Person or entity, (iii) a director, officer, stockholder, partner or member (or retired partner or member) affiliated with such Person or entity, or (iv) or the estate of any such partner or member (or retired partner or member) affiliated with such Person or entity; provided that neither the Company nor any of its subsidiaries shall be deemed to be an Affiliate of the Holders.
Agreement has the meaning set forth in the preamble.
Board of Directors means the board of directors of the Company.
Business Day means any day other than a Saturday, Sunday or a day on which commercial banks located in New York, New York are required or authorized by law or executive order to be closed.
Change of Control means the occurrence of any of the following: (i) the sale, lease or transfer, in a single transaction or in a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any one Person or (ii) the acquisition by any Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) (other than the Equity Investors), including any group acting for the purpose of acquiring, holding or disposing of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act, or any successor provision), in a single transaction or in a series of related transactions, by way of merger, consolidation or other business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of 50% or more of the total voting power of the Company or any of its direct or indirect parent companies holding directly or indirectly 100% of the total voting power of the Company.
Company has the meaning set forth in the preamble.
Company Public Sale has the meaning set forth in Section 3.03(a).
Company Share Equivalent means securities exercisable or exchangeable for, or convertible, into Company Shares.
Company Shares means the shares of common stock, par value $0.01 per share, of the Company, any Equity Securities into which such shares of common stock shall have been changed, or any Equity Securities resulting from any reclassification, recapitalization, reorganization, merger, consolidation, conversion, stock or other equity split or dividend or similar transactions with respect to such shares of common stock or such other Equity Securities.
Conversion Event has the meaning set forth in Section 4.08(b).
Conversion Securities has the meaning set forth in Section 4.08(b).
Conversion Securities Issuer has the meaning set forth in Section 4.08(b).
Demand Company Notice has the meaning set forth in Section 3.01(c).
Demand Notice has the meaning set forth in Section 3.01(a).
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Demand Party has the meaning set forth in Section 3.01(a).
Demand Registration has the meaning set forth in Section 3.01(a).
Demand Registration Statement has the meaning set forth in Section 3.01(a).
Demand Suspension has the meaning set forth in Section 3.01(d).
Director Requirements means with respect to an individual, that such individual must be qualified and suitable to serve as a member of the Board of Directors under all applicable corporate governance policies and guidelines of the Company and the Board of Directors and subject to any employment agreement or other agreement with an employee, and all applicable legal, regulatory and stock exchange requirements (other than any requirements under Section 303A of the New York Stock Exchange Listed Company Manual regarding director independence).
Eligibility Notice has the meaning set forth in Section 3.02(a).
Equity Investors means (i) the Sponsors, and any other funds or managed accounts advised or managed by any Sponsor or one of a Sponsors Affiliates, (ii) any person that has no material assets other than the capital stock of the Company or a direct or indirect parent of the Company, and of which no other Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), other than any Equity Investor specified in clause (i) above, holds more than 50% of the total voting power of the Voting Stock thereof, and (iii) any group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision) the members of which include any Equity Investor specified in clause (i) above and that, directly or indirectly, hold or acquire beneficial ownership of the Voting Stock of the Company (a Permitted Group ), so long as (1) each member of the Permitted Group has voting rights proportional to the percentage of ownership interests held or acquired by such member and (2) no Person or other group (other than an Equity Investor specified in clause (i) above) beneficially owns more than 50% on a fully diluted basis of the Voting Stock held by the Permitted Group.
Equity Securities means, as applicable, (i) any capital stock, membership interests or other equity interest of any Person; (ii) any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other equity interest of any Person; or (iii) any rights or options directly or indirectly to subscribe for or to purchase any capital stock, membership interests or other equity interest of any Person or to subscribe for or to purchase any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other equity interest of any Person.
Exchange Act means the Securities Exchange Act of 1934, as amended, and any successor thereto, and any rules and regulations promulgated thereunder, all as the same shall be in effect from time to time.
Excluded Company Shares has the meaning set forth in Section 2.03(b).
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Family Member means, with respect to any specified natural person, (i) any parent, child, descendant or sibling of such natural person or of such natural persons spouse (including relationships resulting from adoption) or (ii) the spouse of such natural person or of any person covered by clause (i).
FINRA means the Financial Industry Regulatory Authority.
Form S-1 means a registration statement on Form S-1 under the Securities Act, or any comparable or successor form or forms thereto.
Form S-3 means a registration statement on Form S-3 under the Securities Act, or any comparable or successor form or forms thereto.
Governmental Entity means any federal, state, local or foreign governmental, administrative, judicial or regulatory agency, commission, court, body, entity or authority.
Holder means any holder of Registrable Securities that is a party hereto and/or any Permitted Assignee that succeeds to rights hereunder pursuant to Section 4.08.
Initial S-3 Holder has the meaning set forth in Section 3.02(a).
Initiating Shelf Take-Down Holder has the meaning set forth in Section 3.02(e)(i).
Investor Holdco has the meaning set forth in the preamble.
IPO means the first underwritten public offering and sale of Company Shares for cash pursuant to an effective registration statement (other than on Form S-4, S-8 or a comparable form) under the Securities Act.
Issuer Free Writing Prospectus means an issuer free writing prospectus, as defined in Rule 433 under the Securities Act, relating to an offer of Registrable Securities.
Kimco has the meaning set forth in the preamble.
Law means foreign or domestic law, statute, code, ordinance, rule, regulation, order, judgment, writ, stipulation, award, injunction, decree or arbitration award or finding of any Governmental Entity.
Loan Agreement means that certain Term (Committed Loan) Loan Agreement, dated as of July 2, 2015, by and between Goldman Sachs Bank USA, as Lender, and Management Holdco, as Borrower, as such agreement (and loan pursuant thereto) may be amended, modified or refinanced from time to time.
Lockup Period means the period beginning on the date hereof until the date that is 180 days from the date of the final Prospectus filed in connection with the IPO.
Long-Form Registration has the meaning set forth in Section 3.01(a).
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Loss or Losses has the meaning set forth in Section 3.09(a).
Majority Holders means the Holders of a majority of the Registrable Securities as determined from time to time.
Management Holdco has the meaning set forth in the preamble.
Marketed Underwritten Offering means any Underwritten Offering (including a Marketed Underwritten Shelf Take-Down, but, for the avoidance of doubt, not including any Shelf Take-Down that is not a Marketed Underwritten Shelf Take-Down) that involves a customary road show (including an electronic road show) or other substantial marketing effort by the Company and the underwriters over a period of at least 48 hours.
Marketed Underwritten Shelf Take-Down has the meaning set forth in Section 3.02(e)(iii).
Marketed Underwritten Shelf Take-Down Notice has the meaning set forth in Section 3.02(e)(iii).
Non-Participating Holder has the meaning set forth in Section 2.03(b).
Observer has the meaning set forth in Section 2.01(h).
Other Selling Holders has the meaning set forth in Section 2.03(b).
Participating Holder means, with respect to any Registration, any Holder of Registrable Securities covered by the applicable Registration Statement.
Participating Majority has the meaning set forth in Section 3.04(b).
Permitted Assignee has the meaning set forth in Section 4.08.
Permitted Group has the meaning set forth in the definition of Equity Investors.
Person means any individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof or any other entity.
Piggyback Registration has the meaning set forth in Section 3.03(a).
Pro Rata Percentage means, as of any date, with respect to a Holder, a number of Registrable Securities equal to (i) the number of Registrable Securities held by such Holder as of such date divided by (ii) the number of Registrable Securities held by all Holders requesting to include Registrable Securities in a Registration Statement.
Prospectus means the prospectus included in any Registration Statement, all amendments and supplements to such prospectus, including pre- and post-effective amendments to such Registration Statement, and all other material incorporated by reference in such prospectus.
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Registrable Securities means any Company Shares now owned or hereafter acquired by a Holder; provided , however , that any such Company Shares shall cease to be Registrable Securities to the extent (i) a Registration Statement with respect to the sale of such Company Shares has been declared effective under the Securities Act and such Company Shares have been disposed of in accordance with the plan of distribution set forth in such Registration Statement, (ii) such Company Shares have been sold to the public through a broker, dealer or market maker in compliance with Rule 144 or Rule 145 of the Securities Act (or any successor rule), or (iii) such Company Shares cease to be outstanding. For the avoidance of doubt, it is understood that, with respect to any Registrable Securities for which a Holder holds vested but unexercised options or other Company Share Equivalents at such time exercisable for, convertible into or exchangeable for Company Shares, to the extent that such Registrable Securities are to be sold pursuant to this Agreement, such Holder must exercise the relevant option or exercise, convert or exchange such other relevant Company Share Equivalent and transfer the underlying Registrable Securities (in each case, net of any amounts required to be withheld by the Company in connection with such exercise).
Registration means a registration with the SEC of the Companys securities for offer and sale to the public under a Registration Statement. The terms Register and Registered shall have correlative meanings.
Registration Expenses has the meaning set forth in Section 3.08.
Registration Statement means any registration statement of the Company that covers Registrable Securities pursuant to the provisions of this Agreement filed with, or to be filed with, the SEC under the rules and regulations promulgated under the Securities Act, including the related Prospectus, amendments and supplements to such registration statement, including pre- and post-effective amendments, and all exhibits and all material incorporated by reference in such registration statement.
Representatives means, with respect to any Person, any of such Persons officers, directors, employees, agents, attorneys, accountants, actuaries, consultants, equity financing partners or financial advisors or other Person associated with, or acting on behalf of, such Person.
Rule 144 means Rule 144 (or any successor provisions) under the Securities Act.
S-3 Eligibility Date has the meaning set forth in Section 3.02(a).
S-3 Shelf Notice has the meaning set forth in Section 3.02(a).
SEC means the Securities and Exchange Commission.
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Securities Act means the Securities Act of 1933, as amended, and any successor thereto, and any rules and regulations promulgated thereunder, all as the same shall be in effect from time to time.
Sell-Down has the meaning set forth in Section 2.03(b).
Sell-Down Notice has the meaning set forth in Section 2.03(b).
Shelf Holder has the meaning set forth in Section 3.02(c).
Shelf Notice has the meaning set forth in Section 3.02(c).
Shelf Period has the meaning set forth in Section 3.02(b).
Shelf Registration means a Registration effected pursuant to Section 3.02.
Shelf Registration Statement means a Registration Statement of the Company filed with the SEC on either (i) Form S-3 or (ii) if the Company is not permitted to file a Registration Statement on Form S-3, an evergreen Registration Statement on Form S-1, in each case for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act (or any successor provision) covering all or any portion of the Registrable Securities, as applicable.
Shelf Suspension has the meaning set forth in Section 3.02(d).
Shelf Take-Down has the meaning set forth in Section 3.02(e)(i).
Short-Form Registration has the meaning set forth in Section 3.01(a).
Special Registration has the meaning set forth in Section 3.12.
Sponsor means individually and collectively, (a) Cerberus Capital Management, L.P., (b) Lubert-Adler Real Estate Fund V, L.P., (c) Klaff Realty, LP, (d) Schottenstein Stores Corporation, and (e) Kimco Realty Corporation.
Transaction Transfer Restrictions has the meaning set forth in Section 2.03(a).
Underwritten Offering means a Registration in which securities of the Company are sold to an underwriter or underwriters on a firm commitment basis for reoffering to the public.
Underwritten Shelf Take-Down Notice has the meaning set forth in Section 3.02(e)(ii).
Voting Stock of any Person as of any date means the capital stock of such Person that is at the time entitled to vote in the election of the board of directors of such Person.
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Section 1.02. Other Interpretive Provisions .
(a) In this Agreement, except as otherwise provided:
(i) A reference to an Article, Section, Schedule or Exhibit is a reference to an Article or Section of, or Schedule or Exhibit to, this Agreement, and references to this Agreement include any recital in or Schedule or Exhibit to this Agreement.
(ii) The Schedules form an integral part of and are hereby incorporated by reference into this Agreement.
(iii) Headings and the Table of Contents are inserted for convenience only and shall not affect the construction or interpretation of this Agreement.
(iv) Unless the context otherwise requires, words importing the singular include the plural and vice versa, words importing the masculine include the feminine and vice versa, and words importing persons include corporations, associations, partnerships, joint ventures and limited liability companies and vice versa.
(v) Unless the context otherwise requires, the words hereof and herein, and words of similar meaning refer to this Agreement as a whole and not to any particular Article, Section or clause. The words include, includes and including shall be deemed to be followed by the words without limitation.
(vi) A reference to any legislation or to any provision of any legislation shall include any amendment, modification or re-enactment thereof and any legislative provision substituted therefor.
(vii) All determinations to be made by any Holder hereunder may be made by such Holder in its sole discretion, and such Holder may determine, in its sole discretion, whether or not to take actions that are permitted, but not required, by this Agreement to be taken by such Holder, including the giving of consents required hereunder.
(b) The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intention or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.
HOLDERS RIGHTS
Section 2.01. Board Representation .
(a) For so long as the ABS Control Group collectively has beneficial ownership of less than 50% but at least 35% of the aggregate number of Company Shares then outstanding, Investor Holdco shall have the right to designate to the Board of Directors a number of individuals who satisfy the Director Requirements equal to one director fewer than 50% of the size of the Board of Directors at any time (rounded up to the next whole number).
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(b) For so long as any Holder has beneficial ownership of less than 35% but at least 20% of the aggregate number of Company Shares then outstanding, such Holder shall have the right to designate to the Board of Directors a number of individuals who satisfy the Director Requirements equal to the greater of (A) three or (B) 25% of the size of the Board of Directors at any time (rounded up to the next whole number).
(c) For so long as any Holder has beneficial ownership of less than 20% but at least 15% of the aggregate number of Company Shares then outstanding, such Holder shall have the right to designate to the Board of Directors a number of individuals who satisfy the Director Requirements equal to the greater of (A) two or (B) 15% of the size of the Board of Directors at any time (rounded up to the next whole number).
(d) For so long as any Holder has beneficial ownership of less than 15% but at least 10% of the aggregate number of Company Shares then outstanding, such Holder shall have the right to designate to the Board of Directors one individual who satisfies the Director Requirements.
(e) For so long as a Holder is entitled to designate any individuals to the Board of Directors pursuant to this Section 2.01, the Company shall take all action reasonably available to it to cause such individual(s) (or any replacement designated by such Holder) to be included in the slate of nominees recommended by the Board of Directors to the Companys stockholders for election as directors at each annual meeting of the stockholders of the Company (and/or in connection with any election by written consent) and the Company shall use the same efforts to cause the election of such nominee(s) as it uses to cause other nominees recommended by the Board of Directors to be elected, including soliciting proxies in favor of the election of such nominee(s).
(f) Until immediately prior to the time at which the ABS Control Group ceases to collectively have beneficial ownership of at least 50% of the aggregate number of Company Shares then outstanding, the ABS Control Group shall vote its Company Shares to set the size of the Board of Directors at 13 individuals. For so long as the ABS Control Group collectively has beneficial ownership of less than 50% but at least 35% of the aggregate number of Company Shares then outstanding, Investor Holdco shall, unless otherwise determined by the management board of Investor Holdco in accordance with the operating agreement of Investor Holdco, cause its individuals designated to the Board of Directors to vote in favor of maintaining the size of the Board of Directors at 13 individuals.
(g) In the event that a vacancy is created at any time by the death, disability, retirement, resignation or removal (with or without cause) of a director nominated or designated pursuant to this Section 2.01, or in the event of the failure of any such nominee to be elected, the Holder who nominated or designated such director shall have the right to designate a replacement who satisfies the Director Requirements to fill such vacancy. The Company shall take all action reasonably available to it to cause such vacancy to be filled by the replacement so designated, and, to the extent permitted under the Certificate of Incorporation and By-Laws of the Company then in effect, the Board of Directors shall promptly elect such designee to the Board of Directors.
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(h) For so long as a Sponsor indirectly beneficially owns at least 10% of the aggregate number of Company Shares then outstanding but does not have (pursuant to a designation made by Investor Holdco or otherwise) a representative of such Sponsor on the Board of Directors, such Sponsor shall have the right to designate an observer to the Board of Directors (each such observer, an Observer ). A Sponsor shall have the right to designate a replacement for any Observer previously designated by such Sponsor at any time and from time to time for so long as such Sponsor has a right to designate an Observer.
(i) An Observer may attend any meeting of the Board of Directors, provided , that no Observer shall have the right to vote or otherwise participate in the Board of Directors meeting in any way other than to observe any applicable meeting of the Board of Directors. Observers shall be provided advance notice of each meeting of the Board of Directors in the same manner and at the same time as the other members of the Board of Directors and shall be given copies of all documents, materials and other information as and when given to other members of the Board of Directors, provided that the Observer shall have executed a non-disclosure and confidentiality agreement and such other acknowledgments and agreements reasonably satisfactory to the Board of Directors. Notwithstanding the foregoing, the Observer shall be excluded from attending any meeting of the Board of Directors or receiving any materials to the extent necessary to preserve attorney-client privilege, to safeguard highly proprietary or classified information, in the case of any conflict of interest involving such Observer or as otherwise deemed necessary or advisable by the Board of Directors. Each Observer shall be a natural person.
(j) Notwithstanding the foregoing provisions of this Section 2.01, Kimco shall not have any right to designate individuals to the Board of Directors or as an Observer regardless of Kimcos beneficial ownership of Company Shares.
Section 2.02. Voting .
(a) Prior to the distribution by Investor Holdco of all (but not less than all) of its Registrable Securities to its members, each other member of the ABS Control Group and their respective Permitted Assignees (including recipients of Registrable Securities from Investor Holdco, Kimco and Management Holdco pursuant to the provisions of Section 2.03) agrees, with respect to all of such Persons Company Shares held by any of such members as of the date hereof, to vote such Persons Company Shares as instructed by Investor Holdco. Each member of the ABS Control Group (other than Investor Holdco) and each of their respective Permitted Assignees, shall take all other necessary or desirable actions within such Persons control (including, without limitation, attending meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings) to effect the voting of such Persons Company Shares in accordance with this provision.
(b) To secure each member of the ABS Control Groups obligations to vote their respective Company Shares in accordance with Section 2.02(a) of this Agreement, each such Person hereby appoints an officer of Investor Holdco designated by the management board of Investor Holdco, as such Persons true and lawful proxy and attorney, with the power to act alone and with full power of substitution, to vote all of such Persons Company Shares as set forth in this Agreement and to execute all appropriate instruments consistent with this
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Agreement on behalf of such Person if, and only if, such Person fails to vote all of such Persons Company Shares or execute such other instruments in accordance with the provisions of this Agreement within five days of Investor Holdcos written request for such Persons written consent or signature. The proxy and power granted by each Person pursuant to this Section 2.02(b) are coupled with an interest and are given to secure the performance of such Persons duties under this Agreement, provided, that the proxy and power set forth in this Section 2.02(b) shall not be used to affect an Other Selling Holders (as defined in Section 2.03(b)) election to not participate in a Sell Down (as defined in Section 2.03(b)). Each such member of the ABS Control Group agrees to execute an irrevocable proxy in favor the designated individual as and when identified, if requested by Investor Holdco. Each such proxy and power will be irrevocable for the term hereof. The proxy and power, so long as any such Person is an individual, will survive the death, incompetency and disability of such party or any other individual holder of any Persons Company Shares, as the case may be, and, so long as such Person is an entity, will survive the merger or reorganization of such party or any other entity holding any of a Persons Company Shares.
Section 2.03. Sell-Downs; Distributions of Company Shares . Neither Kimco nor Management Holdco shall transfer, assign, distribute, or otherwise dispose of all or any portion of the Company Shares then held by such Person except pursuant to, and in accordance with, this Section 2.03 or Article III.
(b) In the event Investor Holdco proposes to effect a private block sale or resale or to demand or participate in a registered offering of Company Shares held by the ABS Control Group (which such sale shall be proportionate among members of the ABS Control Group) (a Sell-Down ), Investor Holdco shall promptly provide written notice to Kimco, Management Holdco (or their respective Permitted Assignees) and each equityholder of Investor Holdco (collectively, the Other Selling Holders ), specifying the number and percentage of Company Shares then held by the ABS Control Group to be sold in such Sell-Down, the number of Company Shares each Other Selling Holder shall be obligated to sell in such Sell Down (calculated on a pro rata basis based on such Other Selling Holders beneficial ownership of Company Shares) and all other material terms and conditions of the Sell-Down (the Sell-Down Notice ). Each Other Seller Holding shall be obligated to participate in such Sell-Down, unless such Other Selling Holder delivers a written notice to Investor Holdco by the close of business on the date which is 10 Business Days after the Sell-Down Notice is delivered to such Other Selling Holder, which such notice shall include the number of Company Shares such Other Selling Holder elects to exclude from such Sell-Down (the Excluded Company Shares , and such notifying Other Selling Holder, the Non-Participating Holder ). Any Other Selling Holder that does not deliver such notice shall be obligated to participate in the Sell Down with respect to the number of Company Shares set forth in the Sell-Down Notice. If any Other Selling Holder does not participate in such Sell-Down, Investor Holdco (or Kimco or Management Holdco, as applicable) shall, unless prohibited by applicable Law, promptly distribute the Excluded Company Shares to the Non-Participating Holder, provided , that (i) the Non-Participating Holder complies with the provisions of Section 2.03(d) and (ii) the Excluded Company Shares shall be subject to the same restrictions on transfer, market stand-off and lock-up provisions to which the Company Shares of Investor Holdco to be sold in the Sell-Down are subject in this Agreement and/or with respect to such Sell-Down (the Transaction Transfer Restrictions ). Subject to
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compliance with applicable Law, the Excluded Company Shares may be sold or otherwise disposed of by a Non-Participating Holder so long as no Transaction Transfer Restriction period is in effect. Investor Holdco shall provide further notice to such Non-Participating Holder or its representatives of its intention to effect a Sell-Down not more than 30 calendar days prior to the intended date for the completion of such Sell-Down, in which event the Non-Participating Holder, after receiving notice of such Sell-Down, shall (notwithstanding its earlier election in respect of Excluded Company Shares) have the right to participate in such Sell-Down with Investor Holdco on the same terms and conditions as Investor Holdco pro rata based on the Non-Participating Holders beneficial ownership of Company Shares, and, if not participating in such Sell-Down, shall not sell or otherwise dispose of the Excluded Company Shares (or other Company Shares beneficially owned by such holder) during such 30 calendar day period following delivery of such notice and such longer transfer, market stand-off or lock up provision that Investor Holdco shall become subject to in connection with such Sell-Down.
(c) Management Holdco shall have the right to distribute Company Shares to an equityholder of Management Holdco following termination of the security interests granted in connection with the Loan Agreement in the Company Shares allocable to such equityholder if such Company Shares are so distributed, provided that such member of Management Holdco complies with the provisions of the first sentence of Section 2.03(d). An equityholder of Investor Holdco who is also an equityholder of Management Holdco may require Investor Holdco to distribute to such equityholder for immediate contribution to Management Holdco Company Shares allocable to such equityholder solely to the extent necessary to permit such equityholder to satisfy margin requirements in accordance with the Loan Agreement.
(d) Any Person who receives a distribution of Company Shares shall, to the extent not already a party hereto, execute and deliver a joinder agreement, in form and substance reasonably acceptable to the Company, agreeing to be bound by the terms and conditions of this Agreement as if such Person were a party hereto, whereupon such Person will be treated as a Holder for all purposes of this Agreement, with the same benefits and obligations hereunder as the distributing Holder with respect to the distributed Registrable Securities. Subject to compliance with applicable securities laws and rules and for so long as no Transaction Transfer Restriction period or Company black-out period (including, but not limited to, periods during which Company insiders are restricted from trading under an insider trading policy adopted by the Company or other special black-out periods) is then in effect with respect to such Holder, a Holder may make a subsequent distribution of Excluded Company Shares to an equityholder of such Holder (A) free of any obligations set forth in this Agreement and (B) free of any restrictive legend other than restrictions relating to applicable securities rules and laws.
(e) Except as otherwise set forth in this Section 2.03, neither Kimco nor Management Holdco shall distribute Company Shares to its equityholders unless and until Investor Holdco has distributed all of its Company Shares to its equityholders or otherwise disposed of all of its Common Shares, provided , that if Investor Holdco makes a pro rata distribution of Company Shares to its equityholders of less than all of its Company Shares, then Kimco and Management Holdco shall have the right to make a distribution of Company Shares to its equityholders in the same proportion of Company Shares distributed by Investor Holdco to its equityholders.
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REGISTRATION RIGHTS
Section 3.01. Demand Registration .
(a) Demand Rights . At any time after the expiration of the Lockup Period, Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then any Holder that beneficially owns more than 5% of the Companys then outstanding Company Shares, (each such Holder, a 5% Demanding Holder , and together with Investor Holdco, the Demand Party ), may, subject to Section 3.11, make a written request (a Demand Notice ) to the Company for Registration of all or part of the Registrable Securities held by the Demand Party (i) on Form S-1 (a Long-Form Registration ) or (ii) on Form S-3 (a Short-Form Registration ) if the Company qualifies to use such short form (any such requested Long-Form Registration or Short-Form Registration, a Demand Registration ). Each Demand Notice shall specify the aggregate amount of Registrable Securities held by the Demand Party to be registered and the intended methods of disposition thereof, provided that in the case of a Demand Notice from Investor Holdco, the aggregate amount of Registrable Securities shall include Registrable Securities from each member of the ABS Control Group on a pro rata basis based on each such members beneficial ownership of Registrable Securities, unless such member otherwise directs Investor Holdco to include less than its pro rata share of Registrable Securities in accordance with Section 2.03. Subject to Section 3.11, after delivery of such Demand Notice, the Company (x) shall file promptly (and, in any event, within (i) ninety (90) days in the case of a request for a Long-Form Registration or (ii) thirty (30) days in the case of a request for a Short-Form Registration, in each case, following delivery of such Demand Notice) with the SEC a Registration Statement relating to such Demand Registration (a Demand Registration Statement ), and (y) shall use its reasonable best efforts to cause such Demand Registration Statement to promptly be declared effective under (x) the Securities Act and (y) the Blue Sky laws of such jurisdictions as any Participating Holder or any underwriter, if any, reasonably requests.
(b) Demand Withdrawal . The Demand Party may withdraw its Registrable Securities from a Demand Registration at any time prior to the effectiveness of the applicable Demand Registration Statement. Upon delivery of a notice by the Demand Party to such effect, the Company shall cease all efforts to secure effectiveness of the applicable Demand Registration Statement and promptly notify each other Participating Holder of such withdrawal.
(c) Demand Company Notice . Subject to Section 3.11, promptly upon delivery of any Demand Notice (but in no event more than five (5) Business Days thereafter), the Company shall deliver a written notice (a Demand Company Notice ) of any such Registration request to all Holders (other than the Demand Party), and the Company shall include in such Demand Registration all such Registrable Securities of such Holders which the Company has received written requests for inclusion therein within ten (10) Business Days after the date that such Demand Company Notice has been delivered except for such Registrable Securities that are withdrawn from such Demand Registration by written notice of the Holder thereof at any time prior to the effectiveness of the applicable Demand Registration Statement. All requests made pursuant to this Section 3.01(c) shall specify the aggregate amount of Registrable Securities of such Holder to be registered.
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(d) Delay in Filing; Suspension of Registration . If the Company shall furnish to the Participating Holders a certificate signed by the Chief Executive Officer or equivalent senior executive officer of the Company stating that the filing, effectiveness or continued use of a Demand Registration Statement would require the Company to make an Adverse Disclosure, then the Company may delay the filing (but not the preparation of) or initial effectiveness of, or suspend use of, the Demand Registration Statement (a Demand Suspension ); provided , however , that the Company, unless otherwise approved in writing by the Holders of a majority of the Company Shares that elected to participate in the registration in respect of any Demand Suspension, shall not be permitted to exercise aggregate Demand Suspensions and Shelf Suspensions more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period; provided , further , that in the event of a Demand Suspension, such Demand Suspension shall terminate at such earlier time as the Company would no longer be required to make any Adverse Disclosure. Each Participating Holder shall keep confidential the fact that a Demand Suspension is in effect, the certificate referred to above and its contents unless and until otherwise notified by the Company, except (A) for disclosure to such Participating Holders employees, agents and professional advisers who reasonably need to know such information for purposes of assisting the Participating Holder with respect to its investment in the Company Shares and agree to keep it confidential, (B) for disclosures to the extent required in order to comply with reporting obligations to its limited partners or other direct or indirect investors who have agreed to keep such information confidential, (C) if and to the extent such matters are publicly disclosed by the Company or any of its Subsidiaries or any other Person that, to the actual knowledge of such Participating Holder, was not subject to an obligation or duty of confidentiality to the Company and its Subsidiaries and (D) as required by law, rule or regulation. In the case of a Demand Suspension, the Participating Holders agree to suspend use of the applicable Prospectus and any Issuer Free Writing Prospectus in connection with any sale or purchase of, or offer to sell or purchase, Registrable Securities, upon delivery of the notice referred to above. The Company shall immediately notify the Participating Holders upon the termination of any Demand Suspension, amend or supplement the Prospectus and any Issuer Free Writing Prospectus, if necessary, so it does not contain any untrue statement or omission and furnish to the Participating Holders such numbers of copies of the Prospectus and any Issuer Free Writing Prospectus as so amended or supplemented as any Participating Holder may reasonably request. The Company agrees, if necessary, to supplement or make amendments to the Demand Registration Statement if required by the registration form used by the Company for the applicable Registration or by the instructions applicable to such registration form or by the Securities Act or the rules or regulations promulgated thereunder, or as may reasonably be requested by the Demand Party.
(e) Underwritten Offering . If the Demand Party so requests, an offering of Registrable Securities pursuant to a Demand Registration shall be in the form of an Underwritten Offering, and the Demand Party shall have the right to select the managing underwriter or underwriters to administer the offering. If the Demand Party intends to sell the Registrable Securities covered by its demand by means of an Underwritten Offering, the Demand Party shall so advise the Company as part of its Demand Notice, and the Company shall include such information in the Demand Company Notice.
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(f) Priority of Securities Registered Pursuant to Demand Registrations . If the managing underwriter or underwriters of a proposed Underwritten Offering of the Registrable Securities included in a Demand Registration advise the Board of Directors in writing that, in its or their opinion, the number of securities requested to be included in such Demand Registration exceeds the number which can be sold in such offering without being likely to have a significant adverse effect on the price, timing or distribution of the securities offered or the market for the securities offered, the securities to be included in such Demand Registration (i) first , shall be allocated pro rata among the Holders that have requested to participate in such Demand Registration based on each Holders Pro Rata Percentage ( provided that any securities thereby allocated to a Holder that exceed such Holders request shall be reallocated among the remaining requesting Holders in like manner), (ii) second , and only if all the securities referred to in clause (i) have been included in such Registration, the number of securities that the Company proposes to include in such Registration that, in the opinion of the managing underwriter or underwriters, can be sold without having such adverse effect and (iii) third , and only if all of the securities referred to in clause (ii) have been included in such Registration, any other securities eligible for inclusion in such Registration that, in the opinion of the managing underwriter or underwriters, can be sold without having such adverse effect.
Section 3.02. Shelf Registration .
(a) Filing . Following the IPO, the Company shall use its reasonable best efforts to qualify for Registration on Form S-3 for secondary sales. Promptly following the date on which the Company becomes eligible to Register on Form S-3 (the S-3 Eligibility Date ), the Company shall notify, in writing, Investor Holdco, or if Investor Holdco is no longer a Holder of Registrable Securities, then the Holders, of such eligibility and its intention to file and maintain a Shelf Registration Statement on Form S-3 covering the Registrable Securities held by Investor Holdco, or if Investor Holdco is no longer a Holder of Registrable Securities, then the Holders, (the Eligibility Notice ). Promptly following receipt of such Eligibility Notice (but in no event more than ten (10) days after receipt of such Eligibility Notice), Investor Holdco, or if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, shall deliver a written notice to the Company, which notice shall specify the aggregate amount of Registrable Securities held by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, to be covered by such Shelf Registration Statement and the intended methods of distribution thereof (the S-3 Shelf Notice , and Investor Holdco or the Majority Holders, as applicable, in such capacity, the Initial S-3 Holder ). An S-3 Shelf Notice delivered by Investor Holdco shall include Registrable Securities pro rata from each member of the ABS Control Group based on each such members beneficial ownership of Registrable Securities, unless such member otherwise directs Investor Holdco to include less than its pro rata share of Registrable Securities in accordance with Section 2.03 . Following delivery of the S-3 Shelf Notices, the Company (x) shall file promptly (and, in any event, within the earlier of (i) thirty (30) days of receipt of the S-3 Shelf Notices and (ii) forty (40) days after delivery of the Eligibility Notice) with the SEC such Shelf Registration Statement (which shall be an automatic Shelf Registration Statement if the Company qualifies at such time to file such a Shelf Registration Statement) relating to the offer and sale of all Registrable Securities requested for inclusion therein by the Initial S-3 Holder and, to the extent requested under Section 3.02(c), the other Holders from time to time in accordance with the methods of distribution elected by such Holders (to the extent permitted in this Section 3.02) and set forth in the Shelf Registration
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Statement and (y) shall use its reasonable best efforts to cause such Shelf Registration Statement to be promptly declared effective under the Securities Act (including upon the filing thereof if the Company qualifies to file an automatic Shelf Registration Statement); provided , however , that if Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, reasonably believes that the Company will become S-3 eligible and delivers a S-3 Shelf Notice following the IPO but prior to the S-3 Eligibility Date, the Company shall not be obligated to file (but shall be obligated to prepare) such Shelf Registration Statement on Form S-3.
(b) Continued Effectiveness . The Company shall use its reasonable best efforts to keep any Shelf Registration Statement filed pursuant to Section 3.02(a) continuously effective under the Securities Act in order to permit the Prospectus forming a part thereof to be usable by Shelf Holders until the earliest of (i) the date as of which all Registrable Securities have been sold pursuant to the Shelf Registration Statement or another Registration Statement filed under the Securities Act (but in no event prior to the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder), (ii) the date as of which each of the Shelf Holders is permitted to sell its Registrable Securities without Registration pursuant to Rule 144 without volume limitation or other restrictions on transfer thereunder, (iii) such shorter period as Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then Shelf Holders holding a majority of the Registrable Securities subject to the Shelf Registration Statement, shall agree in writing (such period of effectiveness, the Shelf Period ). Subject to Section 3.02(d), the Company shall not be deemed to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the Shelf Period if the Company voluntarily takes any action or omits to take any action that would result in Shelf Holders not being able to offer and sell any Registrable Securities pursuant to such Shelf Registration Statement during the Shelf Period, unless such action or omission is (x) a Shelf Suspension permitted pursuant to Section 3.02(d) or (y) required by applicable law, rule or regulation.
(c) Company Notices . Promptly upon delivery of any S-3 Shelf Notice pursuant to Section 3.02(a) (each, a Shelf Notice ) (but in no event more than five (5) Business Days thereafter), the Company shall deliver a written notice of such Shelf Notice to the Holders (other than the Initial S-3 Holder) and the Company shall include in such Shelf Registration all such Registrable Securities of such other Holders which the Company has received a written request for inclusion therein within five (5) Business Days after such written notice is delivered to such other Holders (each such Holder delivering such a request together with the Initial S-3 Holder, if applicable, a Shelf Holder ); provided , that , except in connection with an Underwritten Shelf Takedown the Company shall not include in such Shelf Registration Registrable Securities of any Holder in an amount in excess of such Holders Pro Rata Percentage. If the Company is permitted by applicable law, rule or regulation to add selling stockholders to a Shelf Registration Statement without filing a post-effective amendment, a Holder may request the inclusion of an amount of such Holders Registrable Securities not to exceed such Holders Pro Rata Percentage in such Shelf Registration Statement at any time or from time to time after the filing of a Shelf Registration Statement, and the Company shall add such Registrable Securities to the Shelf Registration Statement as promptly as reasonably practicable, and such Holder shall be deemed a Shelf Holder.
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(d) Suspension of Registration . If the Company shall furnish to the Shelf Holders a certificate signed by the Chief Executive Officer or equivalent senior executive officer of the Company stating that the continued use of a Shelf Registration Statement filed pursuant to Section 3.02(a) would require the Company to make an Adverse Disclosure, then the Company may suspend use of the Shelf Registration Statement (a Shelf Suspension ); provided , however , that the Company unless otherwise approved in writing the Holders of a majority of the Company Shares that demanded the registration, in respect of any Demand Suspension, shall not be permitted to exercise aggregate Demand Suspensions and Shelf Suspensions more than twice, or for more than an aggregate of 90 days, in each case, during any 12-month period; provided further that in the event of a Shelf Suspension, such Shelf Suspension shall terminate at such earlier time as the Company would no longer be required to make any Adverse Disclosure. Each Shelf Holder shall keep confidential the fact that a Shelf Suspension is in effect, the certificate referred to above and its contents unless and until otherwise notified by the Company, except (A) for disclosure to such Shelf Holders employees, agents and professional advisers who reasonably need to know such information for purposes of assisting the Holder with respect to its investment in the Company Shares and agree to keep it confidential, (B) for disclosures to the extent required in order to comply with reporting obligations to its limited partners or other direct or indirect investors who have agreed to keep such information confidential, (C) if and to the extent such matters are publicly disclosed by the Company or any of its Subsidiaries or any other Person that, to the actual knowledge of such Shelf Holder, was not subject to an obligation or duty of confidentiality to the Company and its Subsidiaries and (D) as required by law, rule or regulation. In the case of a Shelf Suspension, the Holders agree to suspend use of the applicable Prospectus and any Issuer Free Writing Prospectus in connection with any sale or purchase of, or offer to sell or purchase, Registrable Securities, upon delivery of the notice referred to above. The Company shall immediately notify the Shelf Holders upon the termination of any Shelf Suspension, amend or supplement the Prospectus and any Issuer Free Writing Prospectus, if necessary, so it does not contain any untrue statement or omission and furnish to the Shelf Holders such numbers of copies of the Prospectus and any Issuer Free Writing Prospectus as so amended or supplemented as any Shelf Holder may reasonably request. The Company agrees, if necessary, to supplement or make amendments to the Shelf Registration Statement if required by the registration form used by the Company for the applicable Registration or by the instructions applicable to such registration form or by the Securities Act or the rules or regulations promulgated thereunder, or as may reasonably be requested by the Initial S-3 Holder.
(e) Shelf Take-Downs .
(i) An offering or sale of Registrable Securities pursuant to a Shelf Registration Statement (each, a Shelf Take-Down ) may be initiated by Investor Holdco, or if Investor Holdco is no longer a Holder of Registrable Securities, by any Shelf Holder (in such capacity, the Initiating Shelf Take-Down Holder ) in respect of such Initiating Shelf Take-Down Holders Registrable Securities included in such Shelf Registration Statement. Except as set forth in Section 3.02(e)(iii) with respect to Marketed Underwritten Shelf Take-Downs, the Initiating Shelf Take-Down Holder shall not be required to permit the offer and sale of Registrable Securities by other Shelf Holders in connection with any such Shelf Take-Down initiated by such Initiating Shelf Take-Down Holder.
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(ii) Subject to Section 3.11, if the Holders of a majority of the Registrable Securities included in the Shelf Registration Statement elect by written request to the Company, a Shelf Take-Down shall be in the form of an Underwritten Offering (an Underwritten Shelf Take-Down Notice ) and the Company shall amend or supplement the Shelf Registration Statement for such purpose as soon as practicable. Such Holders shall have the right to select the managing underwriter or underwriters to administer such offering. The provisions of Section 3.01(f) shall apply to any Underwritten Offering pursuant to this Section 3.02(e).
(iii) If the plan of distribution set forth in any Underwritten Shelf Take-Down Notice includes a customary road show (including an electronic road show) or other substantial marketing effort by the Company and the underwriters over a period expected to exceed 48 hours (a Marketed Underwritten Shelf Take-Down ), promptly upon delivery of such Underwritten Shelf Take-Down Notice (but in no event more than three (3) Business Days thereafter), the Company shall deliver a written notice (a Marketed Underwritten Shelf Take-Down Notice ) of such Marketed Underwritten Shelf Take-Down to all Shelf Holders (other than the Initiating Shelf Take-Down Holder), and the Company shall include in such Marketed Underwritten Shelf Take-Down all such Registrable Securities of such Shelf Holders that are Registered on such Shelf Registration Statement for which the Company has received written requests, which requests must specify the aggregate amount of such Registrable Securities of such Holder to be offered and sold pursuant to such Marketed Underwritten Shelf Take-Down, for inclusion therein within three (3) Business Days after the date that such Marketed Underwritten Shelf Take-Down Notice has been delivered.
(iv) For so long as no black-out period as described in and subject to the terms of Section 3.04 with respect to a Marketed Underwritten Offering is then in effect, a Shelf Holder may initiate a Shelf Take-Down with respect to the Registrable Securities of such Shelf Holder so long as such Shelf Take-Down is not in the form of an Underwritten Offering.
Section 3.03. Piggyback Registration .
(a) Participation . If the Company at any time after the IPO proposes to file a Registration Statement with respect to any offering of Company Shares for its own account or for the account of any other Persons (other than (i) a Registration under Section 3.01 or Section 3.02, it being understood that this clause (i) does not limit the rights of Holders to make written requests pursuant to Section 3.01 or Section 3.02 or otherwise limit the applicability thereof, (ii) a Registration Statement on Form S-4 or S-8 (or such other similar successor forms then in effect under the Securities Act), (iii) a registration of securities solely relating to an offering and sale to employees, directors or consultants of the Company or its Subsidiaries pursuant to any employee stock plan or other employee benefit plan arrangement, (iv) a registration not otherwise covered by clause (iii) above pursuant to which the Company is offering to exchange its own securities for other securities or (v) a Registration Statement relating solely to dividend reinvestment or similar plans) (a Company Public Sale ), then, (A) as soon as practicable (but in no event less than 60 days prior to the proposed date of filing of such Registration Statement), the Company shall give written notice of such proposed filing to Investor Holdco, for so long as Investor Holdco is a Holder of Registrable Securities, and shall offer Investor Holdco the opportunity to Register under such Registration Statement such number of Registrable Securities as Investor Holdco may request on behalf of the ABS Control Group in writing (and such number of
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Registrable Securities shall be pro rata among members of the ABS Control Group based on the Registrable Securities beneficially owned by each such member of the ABS Control Group, unless such member of the ABS Control Group otherwise directs Investor Holdco to include less than its pro rata share of Registrable Securities in accordance with Section 2.03) delivered to the Company within ten (10) days of delivery of such written notice by the Company, and (B) subject to Section 3.03(c), as soon as practicable after the expiration of such 10-day period (but in no event less than fifteen (15) days prior to the proposed date of filing of such Registration Statement), the Company shall give written notice of such proposed filing to the Holders (other than members of the ABS Control Group), and such notice shall offer each such Holder the opportunity to Register under such Registration Statement such number of Registrable Securities as such Holder may request in writing within ten (10) days of delivery of such written notice by the Company. Subject to Section 3.03(b) and (c), the Company shall include in such Registration Statement all such Registrable Securities that are requested by Holders to be included therein in compliance with the immediately foregoing sentence (a Piggyback Registration ); provided that if at any time after giving written notice of its intention to Register any equity securities and prior to the effective date of the Registration Statement filed in connection with such Piggyback Registration, the Company shall determine for any reason not to Register or to delay Registration of the equity securities covered by such Piggyback Registration, the Company shall give written notice of such determination to each Holder that had requested to Register its, his or her Registrable Securities in such Registration Statement and, thereupon, (1) in the case of a determination not to Register, shall be relieved of its obligation to Register any Registrable Securities in connection with such Registration, without prejudice, however, to the rights of Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then a 5% Demanding Holder, to request that such Registration be effected as a Demand Registration under Section 3.01, and (2) in the case of a determination to delay Registering, in the absence of a request by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then a 5% Demanding Holder, that such Registration be effected as a Demand Registration under Section 3.01, shall be permitted to delay Registering any Registrable Securities, for the same period as the delay in Registering the other equity securities covered by such Piggyback Registration. If the offering pursuant to such Registration Statement is to be underwritten, the Company shall so advise the Holders as a part of the written notice given pursuant this Section 3.03(a), and each Holder making a request for a Piggyback Registration pursuant to this Section 3.03(a) must, and the Company shall make such arrangements with the managing underwriter or underwriters so that each such Holder may, participate in such Underwritten Offering, subject to the conditions of Section 3.03(b) and (c). If the offering pursuant to such Registration Statement is to be on any other basis, the Company shall so advise the Holders as part of the written notice given pursuant to this Section 3.03(a), and each Holder making a request for a Piggyback Registration pursuant to this Section 3.03(a) must, and the Company shall make such arrangements so that each such Holder may, participate in such offering on such basis, subject to the conditions of Section 3.03(b) and (c). Each Holder shall be permitted to withdraw all or part of its Registrable Securities from a Piggyback Registration at any time prior to the effectiveness of such Registration Statement.
(b) Priority of Piggyback Registration . If the managing underwriter or underwriters of any proposed Underwritten Offering of Registrable Securities included in a Piggyback Registration informs the Company and the Holders that have requested to participate in such Piggyback Registration in writing that, in its or their opinion, the number of securities
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which such Holders and any other Persons intend to include in such offering exceeds the number which can be sold in such offering without being likely to have a significant adverse effect on the price, timing or distribution of the securities offered or the market for the securities offered, then the securities to be included in such Registration shall be (i) first , the number of Registrable Securities that, in the opinion of such managing underwriter or underwriters, can be sold without having such adverse effect in such Registration, which such number shall be allocated pro rata among the Holders that have requested to participate in such Registration based on each Holders Pro Rata Percentage ( provided that any securities thereby allocated to a Holder that exceed such Holders request shall be reallocated among the remaining requesting Holders in like manner) and (ii) second , and only if all of the Registrable Securities referred to in clause (i) have been included in such Registration, any other securities eligible for inclusion in such Registration that, in the opinion of the managing underwriter or underwriters, can be sold without having such adverse effect in such Registration.
(c) Restrictions on Holders . Notwithstanding any provisions contained herein, prior to the distribution by Investor Holdco of all its Registrable Securities held as of the date hereof to its members, Holders other than Investor Holdco may not request Piggyback Registration of Registrable Securities with respect to any offering of Company Shares for the Companys account unless Investor Holdco requests such Piggyback Registration with respect to such offering.
(d) No Effect on Demand Registrations . No Registration of Registrable Securities effected pursuant to a request under this Section 3.03 shall be deemed to have been effected pursuant to Section 3.01 or Section 3.02 or shall relieve the Company of its obligations under Section 3.01 or Section 3.02.
Section 3.04. Black-out Periods .
(a) Black-out Periods for Holders . In the event of a Company Public Sale of the Companys equity securities in an Underwritten Offering, each of the Holders agrees, if requested by the managing underwriter or underwriters in such Underwritten Offering (and, with respect to a Company Public Sale other than the IPO, if and only if Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, agrees to such request), not to (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any Person at any time in the future of) any Company Shares (including Company Shares that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the SEC and Company Shares that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for Company Shares, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of Company Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Company Shares or other securities, in cash or otherwise, (3) make any demand for or exercise any right or cause to be filed a Registration Statement, including any amendments thereto, with respect to the registration of any Company Shares or securities convertible into or exercisable or exchangeable for Company Shares or any other securities of the Company or (4) publicly disclose the intention to do any of the foregoing, in each case, during the period beginning seven (7) days before and
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ending 180 days (in the event of the IPO) or 90 days (in the event of any other Company Public Sale) (or, in each case, such other period as may be reasonably requested by the Company or the managing underwriter or underwriters to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in the FINRA rules or any successor provisions or amendments thereto) after the date of the underwriting agreement entered into in connection with such Company Public Sale, to the extent timely notified in writing by the Company or the managing underwriter or underwriters; provided , that (i) no Holder shall be subject to any such black-out period of longer duration or other greater restriction than that applicable to (x) Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then any of the Majority Holders or (y) any director or executive officer who holds Registrable Securities and (ii) if any Holder is released from any such lockup restrictions, all other Holders shall also be released from such lockup restrictions to the same extent. If requested by the managing underwriter or underwriters of any such Company Public Sale (and, with respect to any such Company Public Sale other than the IPO, if and only if Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, agrees to such request), the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the Company Shares (or other securities) subject to the foregoing restriction until the end of the period referenced above.
(b) Black-out Period for the Company and Others . In the case of an offering of Registrable Securities pursuant to Section 3.01 or Section 3.02 that is a Marketed Underwritten Offering, the Company and each of the Holders agree, if requested by (x) Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then requested by Holders of a majority of the Registrable Securities participating in the Marketed Underwritten Offering (the Participating Majority ), or (y) the managing underwriter or underwriters with respect to such Marketed Underwritten Offering, not to (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or would reasonably be expected to, result in the disposition by any Person at any time in the future of) any Company Shares (including Company Shares that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the SEC and Company Shares that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for Company Shares, (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of Company Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Company Shares or other securities, in cash or otherwise, (3) make any demand for or exercise any right or cause to be filed a Registration Statement, including any amendments thereto, with respect to the registration of any Company Shares or securities convertible into or exercisable or exchangeable for Company Shares or any other securities of the Company or (4) publicly disclose the intention to do any of the foregoing, in each case, during the period beginning seven (7) days before, and ending 90 days (or such lesser period as may be agreed by (x) Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority, or, (y) if applicable, the managing underwriter or underwriters) (or such other period as may be reasonably requested by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority, or the managing underwriter or underwriters to accommodate regulatory restrictions on (i) the
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publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in the FINRA rules or any successor provisions or amendments thereto) after, the date of the underwriting agreement entered into in connection with such Marketed Underwritten Offering, to the extent timely notified in writing by (x) Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority, or (y) the managing underwriter or underwriters, as the case may be; provided that (i) no Holder shall be subject to any such black-out period of longer duration or other greater restriction than that applicable to Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then a Participating Majority, and (ii) if any Holder is released from any such lockup restrictions, all other Holders shall also be released from such lockup restrictions to the same extent. Notwithstanding the foregoing, the Company may effect a public sale or distribution of securities of the type described above and during the periods described above if such sale or distribution is made pursuant to Registrations on Form S-4 or S-8 or any successor form to such Forms or as part of any Registration of securities for offering and sale to employees, directors or consultants of the Company and its Subsidiaries pursuant to any employee stock plan or other employee benefit plan arrangement. The Company agrees to use its reasonable best efforts to obtain from each of its directors and officers and each other holder of restricted securities of the Company which securities are the same as or similar to the Registrable Securities being Registered, or any restricted securities convertible into or exchangeable or exercisable for any of such securities, an agreement not to effect any public sale or distribution of such securities during any such period referred to in this paragraph, except as part of any such Registration, if permitted. Without limiting the foregoing (but subject to Section 3.07), if after the date hereof the Company or any of its Subsidiaries grants any Person (other than a Holder) any rights to demand or participate in a Registration, the Company shall, and shall cause its Subsidiaries to, provide that the agreement with respect thereto shall include such Persons agreement to comply with any black-out period required by this Section as if it were a Holder hereunder. If requested by the managing underwriter or underwriters of any such Marketed Underwritten Offering (and if and only if Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then a Participating Majority, agrees to such request), the Holders shall execute a separate agreement to the foregoing effect. The Company may impose stop-transfer instructions with respect to the Company Shares (or other securities) subject to the foregoing restriction until the end of the period referenced above.
Section 3.05. Registration Procedures .
(a) In connection with the Companys Registration obligations under Section 3.01, Section 3.02 and Section 3.03 and subject to the applicable terms and conditions set forth therein, the Company shall use its reasonable best efforts to effect such Registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof as expeditiously as reasonably practicable (and to take all actions reasonably necessary to cure any suspension or stop order of such Registration as promptly as reasonably practicable), and in connection therewith the Company shall:
(i) prepare the required Registration Statement including all exhibits and financial statements required under the Securities Act to be filed therewith, and before filing a Registration Statement, Prospectus or any Issuer Free Writing Prospectus, or any amendments or
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supplements thereto, (x) furnish to the underwriters, if any, and the Participating Holders, if any, copies of all documents prepared to be filed, which documents shall be subject to the review of such underwriters and the Participating Holders and their respective counsel and (y) except in the case of a Registration under Section 3.03, not file any Registration Statement or Prospectus or amendments or supplements thereto to which any Participating Holder or the underwriters, if any, shall reasonably object;
(ii) as promptly as practicable file with the SEC a Registration Statement relating to the Registrable Securities including all exhibits and financial statements required by the SEC to be filed therewith, and use its reasonable best efforts to cause such Registration Statement to become effective under the Securities Act as soon as practicable;
(iii) prepare and file with the SEC such pre- and post-effective amendments to such Registration Statement, supplements to the Prospectus and such amendments or supplements to any Issuer Free Writing Prospectus as may be reasonably requested by any other Participating Holder necessary to keep such Registration effective for the period of time required by this Agreement, and comply with provisions of the applicable securities laws with respect to the sale or other disposition of all securities covered by such Registration Statement during such period in accordance with the intended method or methods of disposition by the sellers thereof set forth in such Registration Statement;
(iv) promptly notify the Participating Holders and the managing underwriter or underwriters, if any, and (if requested) confirm such advice in writing and provide copies of the relevant documents, as soon as reasonably practicable after notice thereof is received by the Company (A) when the applicable Registration Statement or any amendment thereto has been filed or becomes effective, and when the applicable Prospectus or Issuer Free Writing Prospectus or any amendment or supplement thereto has been filed, (B) of any written comments by the SEC or any request by the SEC or any other federal or state governmental authority for amendments or supplements to such Registration Statement, Prospectus or Issuer Free Writing Prospectus or for additional information, (C) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or any order by the SEC or any other regulatory authority preventing or suspending the use of any preliminary or final Prospectus or any Issuer Free Writing Prospectus or the initiation or threatening of any proceedings for such purposes, (D) if, at any time, the representations and warranties of the Company in any applicable underwriting agreement cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for offering or sale in any jurisdiction and (F) of the receipt by the Company of any notification with respect to the initiation or threatening of any proceeding for the suspension of the qualification of the Registrable Securities for offering or sale in any jurisdiction;
(v) promptly notify the Participating Holders and the managing underwriter or underwriters, if any, when the Company becomes aware of the happening of any event as a result of which the applicable Registration Statement, the Prospectus included in such Registration Statement (as then in effect) or any Issuer Free Writing Prospectus contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of such Prospectus, any preliminary Prospectus or any Issuer Free Writing Prospectus, in
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light of the circumstances under which they were made) not misleading, when any Issuer Free Writing Prospectus includes information that may conflict with the information contained in the Registration Statement, or, if for any other reason it shall be necessary during such time period to amend or supplement such Registration Statement, Prospectus or Issuer Free Writing Prospectus in order to comply with the Securities Act and, in either case as promptly as reasonably practicable thereafter, prepare and file with the SEC, and furnish without charge to the Participating Holders and the managing underwriter or underwriters, if any, an amendment or supplement to such Registration Statement, Prospectus or Issuer Free Writing Prospectus which shall correct such misstatement or omission or effect such compliance;
(vi) use its reasonable best efforts to prevent, or obtain the withdrawal of, any stop order or other order suspending the use of any preliminary or final Prospectus or any Issuer Free Writing Prospectus;
(vii) promptly incorporate in a Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment to the applicable Registration Statement such information as the managing underwriter or underwriters and the Holders of a majority of the Registrable Securities included in the applicable Registration Statement agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, and make all required filings of such Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment as soon as reasonably practicable after being notified of the matters to be incorporated in such Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment;
(viii) furnish to each Participating Holder and each underwriter, if any, without charge, as many conformed copies as such Participating Holder or underwriter may reasonably request of the applicable Registration Statement and any amendment or post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference);
(ix) deliver to each Participating Holder and each underwriter, if any, without charge, as many copies of the applicable Prospectus (including each preliminary Prospectus), any Issuer Free Writing Prospectus and any amendment or supplement thereto as such Participating Holder or underwriter may reasonably request (it being understood that the Company consents to the use of such Prospectus, any Issuer Free Writing Prospectus and any amendment or supplement thereto by such Participating Holder and the underwriters, if any, in connection with the offering and sale of the Registrable Securities thereby) and such other documents as such Participating Holder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by such Participating Holder or underwriter;
(x) on or prior to the date on which the applicable Registration Statement is declared effective, use its reasonable best efforts to register or qualify, and cooperate with the Participating Holders, the managing underwriter or underwriters, if any, and their respective counsel, in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of each state and other jurisdiction of the United States as any Participating Holder or managing underwriter or underwriters, if any, or their respective counsel reasonably request in writing and do any and all other acts or things
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reasonably necessary or advisable to keep such registration or qualification in effect for such period as required by Section 3.02(b), whichever is applicable, provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to taxation or general service of process in any such jurisdiction where it is not then so subject;
(xi) cooperate with the Participating Holders and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends, and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two (2) Business Days prior to any sale of Registrable Securities to the underwriters;
(xii) use its reasonable best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such Registrable Securities;
(xiii) not later than the effective date of the applicable Registration Statement, provide a CUSIP number for all Registrable Securities and provide the applicable transfer agent with printed certificates for the Registrable Securities which are in a form eligible for deposit with The Depository Trust Company;
(xiv) make such representations and warranties to the Participating Holders and the underwriters or agents, if any, in form, substance and scope as are customarily made by issuers in secondary underwritten public offerings;
(xv) enter into such customary agreements (including underwriting and indemnification agreements) and take all such other actions as the Holders of a majority of the then outstanding Registrable Securities or the managing underwriter or underwriters, if any, reasonably request in order to expedite or facilitate the registration and disposition of such Registrable Securities;
(xvi) obtain for delivery to the Participating Holders and to the underwriter or underwriters, if any, an opinion or opinions from counsel for the Company dated the effective date of the Registration Statement or, in the event of an Underwritten Offering, the date of the closing under the underwriting agreement, in customary form, scope and substance, which opinions shall be reasonably satisfactory to such Participating Holders or underwriters, as the case may be, and their respective counsel;
(xvii) in the case of an Underwritten Offering, obtain for delivery to the Company and the managing underwriter or underwriters, with copies to the Participating Holders, a cold comfort letter from the Companys independent certified public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the managing underwriter or underwriters reasonably request, dated the date of execution of the underwriting agreement and brought down to the closing under the underwriting agreement;
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(xviii) cooperate with each Participating Holder and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the FINRA;
(xix) use its reasonable best efforts to comply with all applicable securities laws and make available to its security holders, as soon as reasonably practicable, an earnings statement satisfying the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder;
(xx) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by the applicable Registration Statement from and after a date not later than the effective date of such Registration Statement;
(xxi) use its reasonable best efforts to cause all Registrable Securities covered by the applicable Registration Statement to be listed on each securities exchange on which any of the Company Shares are then listed or quoted and on each inter-dealer quotation system on which any of the Company Shares are then quoted;
(xxii) make available upon reasonable notice at reasonable times and for reasonable periods for inspection by any Participating Holder, by any underwriter participating in any disposition to be effected pursuant to such Registration Statement and by any attorney, accountant or other agent retained by such Participating Holder(s) or any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause all of the Companys officers, directors and employees and the independent public accountants who have certified its financial statements to make themselves available to discuss the business of the Company and to supply all information reasonably requested by any such Person in connection with such Registration Statement as shall be necessary to enable them to exercise their due diligence responsibility; provided , that , any such Person gaining access to information regarding the Company pursuant to this Section 3.05(a)(xxii) shall agree to hold in strict confidence and shall not make any disclosure or use any information regarding the Company that the Company determines in good faith to be confidential, and of which determination such Person is notified, unless (w) the release of such information is requested or required by law or by deposition, interrogatory, requests for information or documents by a governmental entity, subpoena or similar process, (x) such information is or becomes publicly known other than through a breach of this or any other agreement of which such Person has actual knowledge, (y) such information is or becomes available to such Person on a non-confidential basis from a source other than the Company or (z) such information is independently developed by such Person; and
(xxiii) in the case of an Underwritten Offering, cause the senior executive officers of the Company to participate in the customary road show presentations that may be reasonably requested by the managing underwriter or underwriters in any such Underwritten Offering and otherwise to facilitate, cooperate with, and participate in each proposed offering contemplated herein and customary selling efforts related thereto.
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(b) The Company may require each Participating Holder to furnish to the Company such information regarding the distribution of such securities and such other information relating to such Participating Holder and its ownership of Registrable Securities as the Company may from time to time reasonably request in writing. Each Participating Holder agrees to furnish such information to the Company and to cooperate with the Company, in each case as reasonably necessary to enable the Company to comply with the provisions of this Agreement.
(c) Each Participating Holder agrees that, upon delivery of any notice by the Company of the happening of any event of the kind described in Section 3.05(a)(iv)(C), (D), or (E) or Section 3.05(a)(v), such Participating Holder will forthwith discontinue disposition of Registrable Securities pursuant to such Registration Statement until (i) such Participating Holders receipt of the copies of the supplemented or amended Prospectus or Issuer Free Writing Prospectus contemplated by Section 3.05(a)(v), (ii) such Participating Holder is advised in writing by the Company that the use of the Prospectus or Issuer Free Writing Prospectus, as the case may be, may be resumed, (iii) such Participating Holder is advised in writing by the Company of the termination, expiration or cessation of such order or suspension referenced in Section 3.05(a)(iv)(C) or (E) or (iv) such Participating Holder is advised in writing by the Company that the representations and warranties of the Company in such applicable underwriting agreement are true and correct in all material respects. If so directed by the Company, such Participating Holder shall deliver to the Company (at the Companys expense) all copies, other than permanent file copies then in such Participating Holders possession, of the Prospectus or any Issuer Free Writing Prospectus covering such Registrable Securities current at the time of delivery of such notice. In the event the Company shall give any such notice, the period during which the applicable Registration Statement is required to be maintained effective shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either receives the copies of the supplemented or amended Prospectus or Issuer Free Writing Prospectus contemplated by Section 3.05(a)(v) or is advised in writing by the Company that the use of the Prospectus or Issuer Free Writing Prospectus may be resumed.
Section 3.06. Underwritten Offerings .
(a) Demand and Shelf Registrations . If requested by the underwriters for any Underwritten Offering requested by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority, the Company shall enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Participating Majority, and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including indemnities no less favorable to the recipient thereof than those provided in Section 3.09. Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Participating Majority, shall cooperate with the Company in the negotiation of such underwriting agreement and shall give consideration to the reasonable suggestions of the Company regarding the form thereof. The Participating Holders shall be parties to such underwriting agreement, which underwriting
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agreement shall (i) contain such representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such Participating Holders as are customarily made by issuers to selling stockholders in secondary underwritten public offerings and (ii) provide that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement also shall be conditions precedent to the obligations of such Participating Holders. Any such Participating Holder shall not be required to make any representations or warranties to or agreements with the Company or the underwriters in connection with such underwriting agreement other than representations, warranties or agreements regarding such Participating Holder, such Participating Holders title to the Registrable Securities, such Participating Holders authority to sell the Registrable Securities, such Participating Holders intended method of distribution, absence of liens with respect to the Registrable Securities of such Participating Holder, enforceability of the applicable underwriting agreement as against such Participating Holder, receipt of all consents and approvals with respect to the entry into such underwriting agreement and the sale of such Registrable Securities by such Participating Holder and any other representations required to be made by such Participating Holder under applicable law, rule or regulation, and the aggregate amount of the liability of such Participating Holder in connection with such underwriting agreement shall not exceed such Participating Holders net proceeds from such Underwritten Offering.
(b) Piggyback Registrations . If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 3.03 and such securities are to be distributed in an Underwritten Offering through one or more underwriters, the Company shall, if requested by any Holder pursuant to Section 3.03 and subject to the provisions of Section 3.03(b) and (c), arrange for such underwriters to include on the same terms and conditions that apply to the other sellers in such Registration all the Registrable Securities to be offered and sold by such Holder among the securities of the Company to be distributed by such underwriters in such Registration. The Participating Holders shall be parties to the underwriting agreement between the Company and such underwriters, which underwriting agreement shall (i) contain such representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such Participating Holders as are customarily made by issuers to selling stockholders in secondary underwritten public offerings and (ii) provide that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement also shall be conditions precedent to the obligations of such Participating Holders. Any such Participating Holder shall not be required to make any representations or warranties to, or agreements with the Company or the underwriters in connection with such underwriting agreement other than representations, warranties or agreements regarding such Participating Holder, such Participating Holders title to the Registrable Securities, such Participating Holders authority to sell the Registrable Securities, such Participating Holders intended method of distribution, absence of liens with respect to the Registrable Securities of such Participating Holder, enforceability of the applicable underwriting agreement as against such Participating Holder, receipt of all consents and approvals with respect to the entry into such underwriting agreement and the sale of such Registrable Securities by such Participating Holder or any other representations required to be made by such Participating Holder under applicable law, rule or regulation, and the aggregate amount of the liability of such Participating Holder in connection with such underwriting agreement shall not exceed such Participating Holders net proceeds from such Underwritten Offering.
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(c) Participation in Underwritten Registrations . Subject to the provisions of Section 3.06(a) and (b) above, no Person may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell such Persons securities on the basis provided in any underwriting arrangements approved by the Persons entitled to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.
(d) Price and Underwriting Discounts . In the case of an Underwritten Offering under Section 3.01 or Section 3.02, the price, underwriting discount and other financial terms for the Registrable Securities shall be determined by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority.
Section 3.07. No Inconsistent Agreements; Additional Rights . The Company is not currently a party to, and shall not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders by this Agreement, including allowing any other holder or prospective holder of any securities of the Company (a) registration rights in the nature or substantially in the nature of those set forth in Section 3.01, Section 3.02 or Section 3.03 that would have priority over the Registrable Securities with respect to the inclusion of such securities in any Registration (except to the extent such registration rights are solely related to registrations of the type contemplated by Section 3.03(a)(ii) through (iv)) or (b) demand registration rights in the nature or substantially in the nature of those set forth in Section 3.01 or Section 3.02 that are exercisable prior to such time as Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Participating Majority, can first exercise its rights under Section 3.01 or Section 3.02, in each case without the prior written consent of Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then of the Majority Holders.
Section 3.08. Registration Expenses . All expenses incident to the Companys performance of or compliance with this Agreement shall be paid by the Company, including (i) all registration and filing fees, and any other fees and expenses associated with filings required to be made with the SEC, FINRA and if applicable, the fees and expenses of any qualified independent underwriter, as such term is defined in Rule 5121 of FINRA. (or any successor provision), and of its counsel, (ii) all fees and expenses in connection with compliance with any securities or Blue Sky laws (including fees and disbursements of counsel for the underwriters in connection with Blue Sky qualifications of the Registrable Securities), (iii) all printing, duplicating, word processing, messenger, telephone, facsimile and delivery expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company and of printing Prospectuses and Issuer Free Writing Prospectuses), (iv) all fees and disbursements of counsel for the Company and of all independent certified public accountants of the Company (including the expenses of any special audit and cold comfort letters required by or incident to such performance), (v) Securities Act liability insurance or similar insurance if the Company so desires or the underwriters so require in accordance with then-customary underwriting practice, (vi) all fees and expenses incurred in connection with the listing of Registrable Securities on any securities exchange or quotation of the Registrable Securities on any inter-dealer quotation system, (vii) all applicable rating agency fees with respect to the Registrable Securities, (viii) all reasonable fees and disbursements of one legal counsel and one accounting firm as selected by the holders of a majority of the Registrable
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Securities included in such Registration, (ix) any underwriting discounts, commissions, fees and related expenses of underwriters, (x) all fees and expenses of any special experts or other Persons retained by the Company in connection with any Registration, (xi) all of the Companys internal expenses (including all salaries and expenses of its officers and employees performing legal or accounting duties), (xii) all expenses related to the road-show for any Underwritten Offering, including all travel, meals and lodging and (xiv) any other fees and disbursements customarily paid by the issuers of securities. All such expenses are referred to herein as Registration Expenses .
Section 3.09. Indemnification .
(a) Indemnification by the Company . The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each of the Holders, each of their respective direct or indirect partners, members or shareholders and each of such partners, members or shareholders partners, members or shareholders and, with respect to all of the foregoing Persons, each of their respective Affiliates, employees, directors, officers, trustees or agents and each Person who controls (within the meaning of the Securities Act or the Exchange Act) such Persons, each of their respective Representatives and, with respect to any Holder who is a natural person, the Family Members of such natural person, entities formed for estate or family planning purposes and/or one or more trusts for the sole benefit of the natural person and/or the Family Members of such natural Person, from and against any and all losses, penalties, judgments, suits, costs, claims, damages, liabilities and expenses, joint or several (including reasonable costs of investigation and legal expenses) (each, a Loss and collectively, Losses ) arising out of or based upon (i) any untrue or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Securities were Registered under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment or supplement thereto or any documents incorporated by reference therein), any Issuer Free Writing Prospectus or amendment or supplement thereto, or any other disclosure document produced by or on behalf of the Company or any of its Subsidiaries including reports and other documents filed under the Exchange Act, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus, preliminary Prospectus or Issuer Free Writing Prospectus, in light of the circumstances under which they were made) not misleading, (iii) any violation or alleged violation by the Company of any federal, state or common law rule or regulation applicable to the Company or any of its Subsidiaries in connection with any such registration, qualification, compliance or sale of Registrable Securities, (iv) any failure to register or qualify Registrable Securities in any state where the Company or its agents have affirmatively undertaken or agreed in writing that the Company (the undertaking of any underwriter being attributed to the Company) will undertake such registration or qualification on behalf of the Holders of such Registrable Securities ( provided , that , in such instance the Company shall not be so liable if it has undertaken its reasonable best efforts to so register or qualify such Registrable Securities) or (v) any actions or inactions or proceedings in respect of the foregoing whether or not such indemnified party is a party thereto, and the Company will reimburse, as incurred, each such Holder and each of their respective direct or indirect partners, members or shareholders and each of such partners, members or shareholders partners members or shareholders and, with respect to all of the foregoing Persons, each of their respective Affiliates, employees, directors, officers, trustees or agents and controlling Persons, each of their respective Representatives and, with
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respect to any Holder who is a natural person, the Family Members of such natural person, entities formed for estate or family planning purposes and/or one or more trusts for the sole benefit of such natural person and/or the Family Members of such natural Person, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; provided , that , the Company shall not be liable to any particular indemnified party to the extent that any such Loss arises out of or is based upon (A) an untrue statement or alleged untrue statement or omission or alleged omission made in any such Registration Statement or other document in reliance upon and in conformity with written information furnished to the Company by such indemnified party expressly for use in the preparation thereof or (B) an untrue statement or omission in a preliminary Prospectus relating to Registrable Securities, if a Prospectus (as then amended or supplemented) that would have cured the defect was furnished to the indemnified party from whom the Person asserting the claim giving rise to such Loss purchased Registrable Securities at least five (5) days prior to the written confirmation of the sale of the Registrable Securities to such Person and a copy of such Prospectus (as amended and supplemented) was not sent or given by or on behalf of such indemnified party to such Person at or prior to the written confirmation of the sale of the Registrable Securities to such Person. This indemnity shall be in addition to any liability the Company may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any indemnified party and shall survive the transfer of such securities by such Holder. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the indemnified parties.
(b) Indemnification by the Participating Holders . Each Participating Holder agrees (severally and not jointly) to indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act or the Exchange Act), and each other Holder, each of such other Holders respective direct or indirect partners, members or shareholders and each of such partners, members or shareholders partners, members or shareholders and, with respect to all of the foregoing Persons, each of their respective Affiliates, employees, directors, officers, trustees or agents and each Person who controls (within the meaning of the Securities Act or the Exchange Act) such Persons, each of their respective Representatives and, with respect to any Participating Holder who is a natural person, the Family Members of such natural person, entities formed for estate or family planning purposes and/or one or more trusts for the sole benefit of such natural person and/or the Family Members of such natural Person, from and against any Losses resulting from (i) any untrue statement of a material fact in any Registration Statement under which such Registrable Securities of such Participating Holder were Registered under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment or supplement thereto or any documents incorporated by reference therein) or any Issuer Free Writing Prospectus or amendment or supplement thereto, or (ii) any omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus, preliminary Prospectus or Issuer Free Writing Prospectus, in light of the circumstances under which they were made) not misleading, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is contained in any information furnished in writing by such Participating
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Holder to the Company specifically for inclusion in such Registration Statement, Prospectus, offering circular, Issuer Free Writing Prospectus or other document and has not been corrected in a subsequent writing prior to or concurrently with the sale of the Registrable Securities to the Person asserting the claim. In no event shall the liability of such Participating Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Participating Holder under the sale of Registrable Securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings . Any Person entitled to indemnification under this Section 3.09 shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification ( provided , that , any delay or failure to so notify the indemnifying party shall relieve the indemnifying party of its obligations hereunder only to the extent, if at all, that it is actually and materially prejudiced by reason of such delay or failure) and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided , that , any Person entitled to indemnification hereunder shall have the right to select and employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (A) the indemnifying party has agreed in writing to pay such fees or expenses, (B) the indemnifying party shall have failed to assume the defense of such claim within a reasonable time after delivery of notice of such claim from the Person entitled to indemnification hereunder and employ counsel reasonably satisfactory to such Person, (C) the indemnified party has reasonably concluded (based upon advice of its counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, or (D) in the reasonable judgment of any such Person (based upon advice of its counsel) a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If the indemnifying party assumes the defense, the indemnifying party shall not have the right to settle such action, consent to entry of any judgment or enter into any settlement, in each case without the prior written consent of the indemnified party, unless the entry of such judgment or settlement (i) includes as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of an unconditional release from all liability in respect to such claim or litigation and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of such indemnified party, and provided , that , any sums payable in connection with such settlement are paid in full by the indemnifying party. If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its prior written consent, but such consent may not be unreasonably withheld. It is understood that the indemnifying party or parties shall not, except as specifically set forth in this Section 3.09(c), in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements or other charges of more than one separate firm admitted to practice in such jurisdiction at any one time unless (x) the employment of more than one counsel has been authorized in writing by the indemnifying party or parties, (y) an indemnified party has reasonably concluded (based on the advice of counsel) that there may be legal defenses available to it that are different from or in addition to those available to the other indemnified parties, or (z) a conflict or potential conflict exists or may exist (based upon advice of counsel to an indemnified party) between such indemnified party and the other indemnified parties, in each of which cases the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel or counsels.
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(d) Contribution . If for any reason the indemnification provided for in paragraphs (a) and (b) of this Section 3.09 is unavailable to an indemnified party or insufficient in respect of any Losses referred to therein, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such Loss in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party or parties on the other hand in connection with the acts, statements or omissions that resulted in such losses, as well as any other relevant equitable considerations. In connection with any Registration Statement filed with the SEC by the Company, the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 3.09(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 3.09(d). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the Losses referred to in Section 3.09(a) and Section 3.09(b) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 3.09(d), in connection with any Registration Statement filed by the Company, a Participating Holder shall not be required to contribute any amount in excess of the dollar amount of the net proceeds received by such Holder under the sale of Registrable Securities giving rise to such contribution obligation less any amount paid by such Holders pursuant to Section 3.09(b). If indemnification is available under this Section 3.09, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Section 3.09(a) and Section 3.09(b) hereof without regard to the provisions of this Section 3.09(d).
(e) No Exclusivity . The remedies provided for in this Section 3.09 are not exclusive and shall not limit any rights or remedies which may be available to any indemnified party at law or in equity or pursuant to any other agreement.
(f) Survival . The indemnities provided in this Section 3.09 shall survive the transfer of any Registrable Securities by such Holder.
Section 3.10. Rules 144 and 144A and Regulation S . The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the reasonable request of any Holder, make publicly available such necessary information for so long as necessary to permit sales pursuant to Rules 144, 144A or Regulation S under the Securities Act), and it will take such further action as
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any Holder may reasonably request, all to the extent required from time to time to enable the Holders, following the IPO, to sell Registrable Securities without Registration under the Securities Act within the limitation of the exemptions provided by (i) Rules 144, 144A or Regulation S under the Securities Act, as such Rules may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the reasonable request of a Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements and, if not, the specifics thereof.
Section 3.11. Limitation on Registrations and Underwritten Offerings . Notwithstanding the rights and obligations set forth in Section 3.01 and Section 3.02, in no event shall the Company be obligated to take any action to (i) effect more than one Marketed Underwritten Offering in any consecutive 90-day period or (ii) effect any Underwritten Offering unless Holders propose to sell Registrable Securities in such Underwritten Offering having a reasonably anticipated gross aggregate price (before deduction of underwriter commissions and offering expenses) of at least $75,000,000.
Section 3.12. Clear Market . With respect to any Underwritten Offerings of Registrable Securities by Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then by a Participating Majority, the Company agrees not to effect (other than pursuant to the Registration applicable to such Underwritten Offering or pursuant to a Special Registration) any public sale or distribution, or to file any Registration Statement (other than pursuant to the Registration applicable to such Underwritten Offering or pursuant to a Special Registration) covering any of its equity securities or any securities convertible into or exchangeable or exercisable for such securities, during the period not to exceed ten (10) days prior and sixty (60) days following the effective date of such offering or such longer period up to ninety (90) days as may be requested by the managing underwriter for such Underwritten Offering. Special Registration means the registration of (A) equity securities and/or options or other rights in respect thereof solely registered on Form S-4 or Form S-8 (or successor form) or (B) shares of equity securities and/or options or other rights in respect thereof to be offered to directors, employees, consultants, customers, lenders or vendors of the Company or its Subsidiaries or in connection with dividend reinvestment plans.
Section 3.13. In-Kind Distributions . If any Holder seeks to effectuate an in-kind distribution of all or part of its Company Shares to its direct or indirect equityholders, the Company will reasonably cooperate with and assist such Holder, such equityholders and the Companys transfer agent to facilitate such in-kind distribution in the manner reasonably requested by such Holder (including the delivery of instruction letters by the Company or its counsel to the Companys transfer agent, the delivery of customary legal opinions by counsel to the Company and the delivery of Company Shares without restrictive legends, to the extent no longer applicable).
MISCELLANEOUS
Section 4.01. Term . Article III of this Agreement (other than the provisions of Section 3.09, Section 3.10 and Section 3.13) shall terminate with respect to any Holder (a)
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with the prior written consent of Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, in connection with the consummation of a Change of Control, (b) for those Holders that beneficially own less than five percent (5%) of the Companys outstanding Company Shares, if all of the Registrable Securities then owned by such Holder could be sold in any ninety (90)-day period pursuant to Rule 144 (assuming for this purpose that such Holder is an Affiliate of the Company), or (c) as to any Holder, if all of the Registrable Securities held by such Holder have been sold in a Registration pursuant to the Securities Act or pursuant to an exemption therefrom. Upon the written request of the Company, each Holder agrees to promptly deliver a certificate to the Company setting forth the number of Registrable Securities then beneficially owned by such Holder.
Section 4.02. Injunctive Relief . It is hereby agreed and acknowledged that it will be impossible to measure in money the damage that would be suffered if the parties fail to comply with any of the obligations herein imposed on them and that in the event of any such failure, an aggrieved Person will be irreparably damaged and will not have an adequate remedy at law. Any such Person shall, therefore, be entitled (in addition to any other remedy to which it may be entitled in law or in equity) to injunctive relief, including specific performance, to enforce such obligations, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law.
Section 4.03. Attorneys Fees . In any action or proceeding brought to enforce any provision of this Agreement or where any provision hereof is validly asserted as a defense, the successful party shall, to the extent permitted by applicable law, be entitled to recover reasonable attorneys fees in addition to any other available remedy.
Section 4.04. Notices . Unless otherwise specified herein, all notices, consents, approvals, reports, designations, requests, waivers, elections and other communications authorized or required to be given pursuant to this Agreement shall be in writing and shall be deemed to have been given (a) when personally delivered, (b) when transmitted via facsimile to the number set out below or on a Holders signature page hereto, as applicable, if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), (c) the day following the day (except if not a Business Day then the next Business Day) on which the same has been delivered prepaid to a reputable national overnight air courier service, (d) when transmitted via email (including via attached pdf document) to the email address set out below or on a Holders signature page hereto, as applicable, as applicable, if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid) or (e) the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties as applicable, at the address, facsimile number or email address set forth on a Holders signature page hereto, as applicable (or such other address, facsimile number or email address as such Holder may specify by notice to the Company in accordance with this Section 4.04), and the Company at the following address:
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Albertsons Companies, Inc.
250 Parkcenter Blvd.
Boise, ID 83706
Attention: Robert A. Gordon, Esq.
with copies (which shall not constitute notice) to:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attention: | Stuart D. Freedman, Esq. |
Michael Littenberg, Esq. |
Section 4.05. Publicity and Confidentiality . Each of the parties hereto shall keep confidential this Agreement and the transactions contemplated hereby, and any nonpublic information received pursuant hereto, and shall not disclose, issue any press release or otherwise make any public statement relating hereto or thereto without the prior written consent of the Company and Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders, unless so required by applicable law or any governmental authority; provided that no such written consent shall be required (and each party shall be free to release such information) for disclosures (a) to each partys partners, members, advisors, employees, agents, accountants, trustee, attorneys, Affiliates and investment vehicles managed or advised by such party or the partners, members, advisors, employees, agents, accountants, trustee or attorneys of such Affiliates or managed or advised investment vehicles, in each case so long as such Persons agree to keep such information confidential or (b) to the extent required by law, rule or regulation.
Section 4.06. Amendment . The terms and provisions of this Agreement may only be amended, modified or waived at any time and from time to time by a writing executed by the Company and Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, the Majority Holders; provided , that , any amendment, modification or waiver that would affect the rights, benefits or obligations of any Holder shall require the written consent of such Holder only if any of the following is applicable: (i) such amendment, modification or waiver would materially and adversely affect such rights, benefits or obligations of such Holder and (ii) such amendment, modification or waiver would affect such Holder in a materially worse manner than the manner in which such amendment or waiver affects the other Holders.
Section 4.07. Taxable REIT Subsidiary Election . The Company shall cooperate with any real estate investment trust that is a direct or indirect equityholder of Kimco in making any requested election to cause the Company to be a treated as a taxable REIT subsidiary with respect to such real estate investment trust.
Section 4.08. Successors, Assigns and Transferees .
(a) Subject to Section 2.03, the rights and obligations of each party hereto may not be assigned, in whole or in part, without the written consent of (i) the Company and (ii)
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Investor Holdco, or, if Investor Holdco is no longer a Holder of Registrable Securities, then the Majority Holders; provided , that, notwithstanding the foregoing, the rights and obligations of any member of the ABS Control Group set forth herein may be assigned, in whole or in part, by such member of the ABS Control Group, to any transferee of Registrable Securities held by such member of the ABS Control Group (including the members of Investor Holdco and their Affiliates) and to any Affiliate of a member of the ABS Control Group that otherwise acquires Company Shares or Company Share Equivalents in accordance with this Agreement, including in accordance with Section 2.03 ) (each Person to whom the rights and obligations are assigned in compliance with this Section 4.08 is a Permitted Assignee and all such Persons, collectively, are Permitted Assignees ); provided further , that such transferee shall only be admitted as a party hereunder upon its, his or her execution and delivery of a joinder agreement, in form and substance reasonably acceptable to the Company, agreeing to be bound by the terms and conditions of this Agreement as if such Person were a party hereto (together with any other documents the Company reasonably determines are necessary to make such Person a party hereto), whereupon such Person will be treated as a Holder for all purposes of this Agreement, with the same rights, benefits and obligations hereunder as the transferring Holder with respect to the transferred Registrable Securities (except that if the transferee was a Holder prior to such transfer, such transferee shall have the same rights, benefits and obligations with respect to the such transferred Registrable Securities as were applicable to Registrable Securities held by such transferee prior to such transfer). Nothing herein shall operate to permit a transfer of Registrable Securities otherwise restricted by the Limited Liability Company Agreement of Investor Holdco, as amended from time to time, or any other agreement to which any Holder may be a party.
(b) If the Company is a party to any merger, amalgamation, consolidation, exchange or other similar transaction (a Conversion Event ) pursuant to which Registrable Securities are converted into or exchanged for securities or the right to receive Equity Securities of any other Person ( Conversion Securities ), the issuer of such Conversion Securities (a Conversion Security Issuer ) shall assume (in a writing delivered to the Company and the Investor Holders), with respect to such Conversion Securities, all rights and obligations of the Company hereunder (which assumption shall not relieve the Company of its obligations hereunder to the extent that any Registrable Securities issued by the Company continue to be outstanding and held by a Holder following a Conversion Event) and this Agreement shall apply with respect to such Conversion Securities, mutatis mutandis . The Company will not effect any Conversion Event unless the issuer of the Conversion Securities complies with this Section 4.08(b).
Section 4.09. Binding Effect . Except as otherwise provided in this Agreement, the terms and provisions of this Agreement shall be binding on and inure to the benefit of each of the parties hereto and their respective successors.
Section 4.10. Third Party Beneficiaries . Nothing in this Agreement, express or implied, is intended or shall be construed to confer upon any Person not a party hereto (other than those Persons entitled to indemnity or contribution under Section 3.09, each of whom shall be a third party beneficiary thereof) any right, remedy or claim under or by virtue of this Agreement.
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Section 4.11. Governing Law; Jurisdiction . THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE BROUGHT AND ENFORCED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR (TO THE EXTENT SUBJECT MATTER JURISDICTION EXISTS THEREFOR) THE U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN, AND THE PARTIES IRREVOCABLY SUBMIT TO THE JURISDICTION OF BOTH SUCH COURTS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING.
Section 4.12. Waiver of Jury Trial . EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 4.12 .
Section 4.13. Severability . If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
Section 4.14. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same agreement.
Section 4.15. Headings . The heading references herein and in the table of contents hereto are for convenience purposes only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
Section 4.16. Joinder . Any Person that holds Company Shares may, with the prior written consent of the holders of a majority of the outstanding Registrable Securities, be admitted as a party to this Agreement upon its execution and delivery of a joinder agreement, in form and substance acceptable to the holders of a majority of the outstanding Registrable Securities, agreeing to be bound by the terms and conditions of this Agreement as if such Person were a party hereto (together with any other documents the Company reasonably determines are necessary to make such Person a party hereto), whereupon such Person will be treated as a Holder for all purposes of this Agreement.
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Section 4.17. Other Activities . Notwithstanding anything in this Agreement to the contrary, none of the provisions of this Agreement shall in any way limit a Holder or any of its Affiliates from engaging in any brokerage, investment advisory, financial advisory, anti-raid advisory, principaling, merger advisory, financing, asset management, trading, market making, arbitrage, investment activity and other similar activities conducted in the ordinary course of their business.
[ Remainder of Page Intentionally Blank ]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
ALBERTSONS COMPANIES, INC. | ||||||
By: | ||||||
Name: | ||||||
Title: | ||||||
HOLDERS: | ||||||
ALBERTSONS INVESTOR HOLDINGS LLC | ||||||
By: | ||||||
Name: | ||||||
Title: | ||||||
ALBERTSONS MANAGEMENT HOLDCO, LLC | ||||||
By: | ||||||
Name: | ||||||
Title: |
[Signature Page to Stockholders Agreement]
KRS ABS LLC | ||||||
By: | ||||||
Name: | ||||||
Title: |
KRS AB ACQUISITION, LLC | ||||||
By: | ||||||
Name: | ||||||
Title: |
[Signature Page to Stockholders Agreement]
EXHIBIT 10.15
FORM OF INDEMNIFICATION AGREEMENT
This Indemnification Agreement ( Agreement ) is made as of [-], 2015 by and between Albertsons Companies, Inc., a Delaware corporation (the Corporation ), and [-] ( Indemnitee ).
RECITALS
WHEREAS, directors, officers and other persons in service to public corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation;
WHEREAS, the Bylaws (the Bylaws ) and the Certificate of Incorporation (the Certificate of Incorporation ) of the Corporation require indemnification of the officers and directors of the Corporation, Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the DGCL ), and the Bylaws, the Certificate of Incorporation and the DGCL expressly provide that contracts may be entered into between the Corporation, directors, officers and other persons with respect to indemnification;
WHEREAS, the Board of Directors of the Corporation (the Board ) deems it reasonable, prudent and necessary for the Corporation contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Corporation free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws, the Certificate of Incorporation and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder;
WHEREAS, Indemnitee does not regard the protection available under the Bylaws, the Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Corporation on the condition that he or she be so indemnified.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby covenant and agree as follows:
Section 1. Definitions . As used in this Agreement:
(a) ABS Control Group means Albertsons Investor Holdings LLC, a Delaware limited liability company, KRS ABS, LLC, a Delaware limited liability company, KRS AB Acquisition, LLC, a Delaware limited liability company, Albertsons Management Holdco, LLC, a Delaware limited liability company, and their respective Affiliates, or any person who is an express assignee or designee of their respective rights under the Certificate of Incorporation (and such assignees or designees Affiliates).
(b) Agent means any person who is or was a director, officer or employee of the Corporation or a subsidiary of the Corporation or other person authorized by the Corporation to act for the Corporation, to include such person serving in such capacity as a director, officer, employee, fiduciary or other official of another Enterprise at the request of, for the convenience of, or to represent the interests of the Corporation or any Enterprise.
(c) Affiliate has the meaning set forth in Rule 12b-2 of the Exchange Act, or any successor provision.
(d) Agreement means this Indemnification Agreement.
(e) Beneficial Ownership has the meaning set forth in Rule 13d-3 under the Exchange Act, or any successor provision.
(f) Board means the Board of Directors of the Corporation.
(g) Bylaws means the Bylaws of the Corporation.
(h) Certificate of Incorporation means the Certificate of Incorporation of the Corporation.
(i) Change in Control means the occurrence of any of the following:
i. Acquisition of Stock by Third Party. The acquisition by any Person or Group (other than the Sponsors and the ABS Control Group) of Beneficial Ownership, directly or indirectly, of thirty-five percent (35%) or more of the total voting power of the Corporation, unless the Sponsors and the ABS Control Group have Beneficial Ownership of the voting power of the Corporation exceeding that of such acquiring Person or Group;
ii. Change in Board of Directors. During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in Sections 1(i)(iii) or 1(i)(iv)) whose election by the Board or nomination for election by the Corporations stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Board;
iii. Corporate Transactions. The effective date of a merger or consolidation of the Corporation with any other entity, other than a merger or consolidation
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which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty-one percent (51%) of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;
iv. Liquidation. The approval by the stockholders of the Corporation of a complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporations assets; and
v. Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement.
(j) Corporate Status means the status of a person who is or was a director, trustee, partner, managing member, officer, employee, Agent or fiduciary of any Enterprise.
(k) Corporation means Albertsons Companies, Inc.
(l) Delaware Court means the Delaware Court of Chancery.
(m) DGCL means the General Corporation Law of the State of Delaware.
(n) Disinterested Director means a director of the Corporation who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(o) Enterprise means the Corporation and any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Corporation as a director, officer, trustee, partner, managing member, employee, Agent or fiduciary.
(p) Exchange Act means the Securities Exchange Act of 1934, as amended, and any successor thereto, and any rules and regulations promulgated thereunder, all as the same shall be in effect from time to time.
(q) Expenses shall include all reasonable attorneys fees, retainers, court costs, transcript costs, fees of experts and other professionals, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, fax transmission charges, secretarial services, any federal, state, local or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement, ERISA and employee benefit plan excise taxes and penalties, and all other disbursements, obligations or expenses of the types customarily incurred in connection with, or as a result of, prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a deponent or witness in, or otherwise participating in, a Proceeding. Expenses also shall include (i) expenses incurred in connection with any appeal resulting from any Proceeding, including without
3
limitation the premium, security for, and other costs relating to any cost bond, supersede as bond or other appeal bond or its equivalent, and (ii) expenses incurred in connection with recovery under any directors and officers liability insurance policies maintained by the Corporation, regardless of whether Indemnitee is ultimately determined to be entitled to such indemnification, advancement or expenses or insurance recovery, as the case may be, and (iii) for purposes of Section 15(d) only, expenses incurred by or on behalf of Indemnitee in connection with the interpretation, enforcement or defense of Indemnitees rights under this Agreement, by litigation or otherwise. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee. The parties agree that for the purposes of any advancement of Expenses for which Indemnitee has made written demand to the Corporation in accordance with this Agreement, all Expenses included in such demand that are certified by affidavit of Indemnitees counsel as being reasonable shall be presumed conclusively to be reasonable.
(r) Group has the meaning set forth in Sections 13(d)(3) or 14(d)(2) of the Exchange Act, or any successor provision.
(s) Indemnitee means the person indicated in the signature page of this Agreement.
(t) Independent Counsel shall mean a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitees rights under this Agreement. The Corporation agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(u) Losses means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other), amounts paid or payable in settlement, including any interest, assessments, and all other charges paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness or participate in, any Proceeding.
(v) Person has the meaning set forth in Sections 13(d) and 14(d) of the Exchange Act, or any successor provision.
(w) Proceeding means any threatened, pending or completed action, suit, claim, counterclaim, cross claim, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Corporation or otherwise and whether of a civil,
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criminal, administrative, regulatory, legislative or investigative (formal or informal) nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of Indemnitees Corporate Status, by reason of any action taken by Indemnitee (or a failure to take action by Indemnitee) or of any action (or failure to act) on Indemnitees part while acting pursuant to his or her Corporate Status, in each case whether or not serving in such capacity at the time any Loss is incurred for which indemnification, reimbursement or advancement of Expenses can be provided under this Agreement. If Indemnitee believes in good faith that a given situation may lead to or culminate in the institution of a Proceeding, this shall be considered a Proceeding under this paragraph.
(x) Sarbanes-Oxley Act means the Sarbanes-Oxley Act of 2002.
(y) Sponsor means individually and collectively, (i) Cerberus Capital Management, L.P., (ii) Lubert-Adler Partners, L.P., (iii) Klaff Realty, LP, (iv) Schottenstein Stores Corporation, and (v) Kimco Realty Corporation.
Section 2. Services to the Corporation . Indemnitee agrees to serve as a director, officer, employee or Agent of the Corporation, as applicable, or, at the request of the Corporation, as a director, officer, employee, Agent or fiduciary of another Enterprise, as applicable. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Corporation shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Corporation (or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that Indemnitees employment with the Corporation (or any Enterprise), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Corporation (or any Enterprise), other applicable formal severance policies duly adopted by the Board, or, with respect to service as a director or officer of the Corporation, by the Certificate of Incorporation, the Bylaws and the DGCL. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as a director, officer, employee or Agent of any Enterprise, as applicable, as provided in Section 17 hereof.
Section 3. Indemnity in Third-Party Proceedings . The Corporation shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Losses actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The parties hereto intend that this Agreement shall provide to the fullest extent permitted by law for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Certificate of Incorporation, the Bylaws, or the vote of its stockholders or Disinterested Directors.
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Section 4. Indemnity in Proceedings by or in the Right of the Corporation . The Corporation shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Corporation to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by him or her or on his or her behalf in connection with such Proceeding, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation. No indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be liable to the Corporation, unless and only to the extent that the Delaware Court or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification.
Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provisions of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or her in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or her or on his or her behalf in connection with or related to each successfully resolved claim, issue or matter to the fullest extent permitted by law. For purposes of this Section 5 and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 6. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is, by reason of his or her Corporate Status, a witness or otherwise asked to participate in any aspect of a Proceeding to which Indemnitee is not a party, he or she shall be indemnified against all Expenses actually and reasonably incurred by him or her on his or her behalf in connection therewith.
Section 7. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of Expenses, but not, however for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Section 8. Additional Indemnification . Notwithstanding any limitation in Sections 3, 4, 5 or 7, the Corporation shall indemnify Indemnitee to the fullest extent permitted by applicable law (as now in effect or as may from time to time hereafter be amended to increase the scope of such permitted indemnification) if Indemnitee is a party to or threatened to be made a party to or a participant in any Proceeding against all Losses actually and reasonably incurred by or on behalf of Indemnitee in connection with the Proceeding.
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Section 9. Sponsor and ABS Control Group Indemnification . If a Sponsor with which Indemnitee is affiliated or the ABS Control Group is, or is threatened to be made, a party to or a participant in any Proceeding relating to or arising by reason of the Sponsors or the ABS Control Groups position as a stockholder of the Corporation or appointment of, or affiliation with, Indemnitee or any other Agent, including without limitation, any alleged misappropriation of an asset or corporate opportunity of any Enterprise, any alleged misappropriation or infringement of intellectual property relating to any Enterprise, any alleged false or misleading statement or omission made by any Enterprise (or on its behalf) or its employees or Agents, or any allegation of inappropriate control or influence over the Corporation or its directors, officers, stockholders or debt holders; then the Sponsor and the ABS Control Group will be entitled to indemnification hereunder for Expenses to the same extent as Indemnitee, and the terms of this Agreement as they relate to procedures for indemnification of Indemnitee and advancement of Expenses shall apply to any such indemnification of the Sponsor or the ABS Control Group. The rights provided to such Sponsor or the ABS Control Group under this Section 9 shall be suspended during any period during which the Sponsor or the ABS Control Group, as applicable, does not have a representative on the Board; provided , however , that in the event of any such suspension, the Sponsors or the ABS Control Groups rights to indemnification will not be suspended with respect to any Proceeding based in whole or in part on facts and circumstances occurring at any time prior to such suspension regardless of whether the Proceeding arises before or after such suspension. The Corporation and Indemnitee agree that any such Sponsor and the ABS Control Group are express third-party beneficiaries of the terms of this Section 9.
Section 10. Exclusions . Notwithstanding any provision in this Agreement, the Corporation shall not be obligated under this Agreement to make any indemnification payment in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; provided that the foregoing shall not affect any rights of Indemnitee, the Sponsors or the ABS Control Group set forth in Section 16(c);
(b) for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Corporation within the meaning of Section 16(b) of the Exchange Act or similar provisions of state statutory law or common law, or (ii) any reimbursement of the Corporation by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Corporation, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Corporation pursuant to Section 304 of the Sarbanes-Oxley Act, or the payment to the Corporation of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act); or
(c) except as provided in Section 15(d) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Corporation or its directors, officers,
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employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation, (ii) such payment arises in connection with any mandatory counterclaim or cross-claim or affirmative defense brought or raised by Indemnitee in any Proceeding (or any part of any Proceeding), or (iii) the Corporation provides the indemnification, in its sole discretion, pursuant to the powers vested in the Corporation under applicable law.
Section 11. Advances of Expenses . Notwithstanding any provision of this Agreement to the contrary (other than Section 15(d)), the Corporation shall advance, to the extent not prohibited by law, the Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding (or any part of any Proceeding) not initiated by Indemnitee, and such advancement shall be made within thirty (30) days after the receipt by the Corporation of a statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be so included), whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitees ability to repay the Expenses and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement. In accordance with Section 15(d), advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Corporation to support the advances claimed. Indemnitee shall qualify for advances upon the execution and delivery to the Corporation of this Agreement, which shall constitute an undertaking by Indemnitee to repay the amounts advanced (without interest) to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Corporation. No other form of undertaking shall be required other than the execution of this Agreement. This Section 11 shall not apply to any claim made by Indemnitee for which indemnification is excluded pursuant to Section 10.
Section 12. Procedure for Notification and Defense of Claim .
(a) Indemnitee shall notify the Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof or Indemnitees becoming aware thereof. The written notification to the Corporation shall include a description of the nature of the Proceeding and the facts underlying the Proceeding, in each case to the extent known to Indemnitee. To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding. The failure by Indemnitee to notify the Corporation hereunder will not relieve the Corporation from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Corporation shall not constitute a waiver by Indemnitee of any rights under this Agreement, except to the extent (solely with respect to the indemnity hereunder) that such failure or delay materially prejudices the Corporation. The Secretary of the Corporation shall, promptly upon
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receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification.
(b) The Corporation will be entitled to participate in the Proceeding at its own expense.
(c) Settlement of Proceedings .
i. The Corporation shall not settle, compromise or consent to the entry of any judgment as to Indemnitee in any Proceeding (in whole or in part) without Indemnitees prior written consent, which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of Indemnitee and does not (A) require or impose any injunctive or other non-monetary remedy on Indemnitee, (B) require or impose an admission or consent as to any wrongdoing by Indemnitee or (C) otherwise result in a direct or indirect payment by or monetary cost to Indemnitee personally (as opposed to a payment to be made or cost to be paid by the Corporation on Indemnitees behalf).
ii. Indemnitee shall not settle, compromise or consent to the entry of any judgment as to Indemnitee in any Proceeding (in whole or in part) without the Corporations prior written consent, which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of the Enterprises and does not (A) require or impose any injunctive or other non-monetary remedy on any Enterprise, (B) require or impose an admission or consent as to any wrongdoing by any Enterprise, or (C) otherwise result in a direct or indirect payment by or monetary cost to any Enterprise.
Section 13. Procedure Upon Application for Indemnification .
(a) Upon written request by Indemnitee for indemnification pursuant to Section 12(a), a determination, if required by applicable law, with respect to Indemnitees entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, or (C) if there are no such Disinterested Directors, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Expenses incurred by or on behalf of Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Corporation (irrespective of the determination as to Indemnitees entitlement to indemnification), and the Corporation hereby indemnifies and agrees to hold Indemnitee harmless therefrom. The Corporation promptly will advise Indemnitee in
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writing with respect to any determination that Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied.
(b) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 13(a), the Independent Counsel shall be selected as provided in this Section 13(b). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Corporation shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Corporation advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Corporation, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements set forth in Section 1(t), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or the Delaware Court has determined that such objection is without merit. If, within twenty (20) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 12(a) hereof and the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Corporation or Indemnitee may petition the Delaware Court for resolution of any objection which shall have been made by the Corporation or Indemnitee to the others selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 13(a) hereof. Upon the due commencement of any Proceeding pursuant to Section 15(a), Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
(c) If the Corporation disputes a portion of the amounts for which indemnification is requested, the undisputed portion shall be paid and only the disputed portion withheld pending resolution of any such dispute.
Section 14. Presumptions and Effect of Certain Proceedings .
(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 12(a), and the Corporation shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of the Corporation (including by its directors or Independent Counsel) to have made a determination prior to the
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commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
(b) Subject to Section 15(e), if the person, persons or entity empowered or selected under Section 13 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall, to the fullest extent not prohibited by law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such sixty (60)-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided , further , that the foregoing provisions of this Section 14(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 13(a) and if (A) within fifteen (15) days after receipt by the Corporation of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 13(a).
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitees action is based on the records or books of account of any Enterprise, including financial statements, or on information supplied to Indemnitee by the directors or officers of such Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. The provisions of this Section 14(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. Whether or not the foregoing provisions of this Section 14(d) are satisfied, it shall in any event be
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presumed that Indemnitee has at all times acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Corporation.
(e) The knowledge and/or actions, or failure to act, of any director, officer, trustee, partner, managing member, fiduciary, Agent or employee of any Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
Section 15. Remedies of Indemnitee .
(a) Subject to Section 15(e), in the event that (i) a determination is made pursuant to Section 12 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 11, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 13(a) within ninety (90) days after receipt by the Corporation of the request for indemnification, (iv) payment of indemnification is not made pursuant to Sections 5 or 6 or the last sentence of Section 13(a) within ten (10) days after receipt by the Corporation of a written request therefor, (v) payment of indemnification pursuant to Sections 3, 4, 8 or 9 is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) the Corporation or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any Proceeding designed to deny, or to recover from, the Indemnitee the benefits provided or intended to be provided to the Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such Proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such Proceeding pursuant to this Section 15(a); provided , however , that the foregoing clause shall not apply in respect of a Proceeding brought by Indemnitee to enforce his or her rights under Section 5. The Corporation shall not oppose Indemnitees right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 12(a) that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 15 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any Proceeding commenced pursuant to this Section 15, the Corporation shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 12(a) that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any Proceeding commenced pursuant to this Section 15, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
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(d) The Corporation shall, to the fullest extent not prohibited by law, be precluded from asserting in any Proceeding commenced pursuant to this Section 15 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such Proceeding that the Corporation is bound by all the provisions of this Agreement. It is the intent of the Corporation that, to the fullest extent permitted by law, the Indemnitee not be required to incur legal fees or other Expenses associated with the interpretation, enforcement or defense of Indemnitees rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. The Corporation shall, to the fullest extent permitted by law, indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Corporation of a written request therefor) advance, to the extent not prohibited by law, such Expenses to Indemnitee, which are incurred by or on behalf of Indemnitee in connection with any action brought by Indemnitee for indemnification or advancement of Expenses from the Corporation under this Agreement or under any directors and officers liability insurance policies maintained by the Corporation if, in the case of indemnification, Indemnitee is wholly successful on the underlying claims; if Indemnitee is not wholly successful on the underlying claims, then such indemnification shall be only to the extent Indemnitee is successful on such underlying claims or otherwise as permitted by law, whichever is greater.
(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement of Indemnitee to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.
Section 16. Non-exclusivity; Survival of Rights; Insurance; Subrogation .
(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement (i) shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders, a resolution of directors or otherwise, and (ii) shall be interpreted independently of, and without reference to, any other such rights to which Indemnitee may at any time be entitled. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Bylaws, the Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors, officers, employees or Agents of any Enterprise, Indemnitee shall be covered by such policy or policies in accordance with its or their
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terms to the maximum extent of the coverage available for any such director, officer, employee or Agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Corporation has director and officer liability insurance in effect, the Corporation shall give prompt notice of such claim or of the commencement of a Proceeding, as the case may be, to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.
(c) The Corporation acknowledges that Indemnitee may have certain rights to indemnification, advancement of Expenses, or insurance provided by the Sponsors or the ABS Control Group. The Corporation hereby agrees (i) that it is the indemnitor of first resort, its obligations to Indemnitee hereunder are primary, and any obligation of the Sponsors or the ABS Control Group to advance Expenses or to provide indemnification for the same Expenses or Losses incurred by Indemnitee are secondary; (ii) that it shall be required to advance the full amount of Expenses incurred by Indemnitee and shall be liable for the full amount of all Losses paid in settlement to the extent legally permitted and as required by the terms of this Agreement, the Certificate of Incorporation, the Bylaws, and any other agreement between the Corporation and Indemnitee, without regard to any rights Indemnitee may have against such Sponsor or the ABS Control Group; and (iii) that it irrevocably waives, relinquishes and releases the Sponsors and the ABS Control Group from any and all claims against the Sponsors and the ABS Control Group for contribution, subrogation or any other recovery of any kind in respect thereof. The Corporation further agrees that no advancement or payment by the Sponsors or the ABS Control Group on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Corporation shall affect the foregoing, and the Sponsors and the ABS Control Group shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Corporation. The Corporation and Indemnitee agree that the Sponsors and the ABS Control Group are express third-party beneficiaries of the terms of this Section 16(c).
(d) Except as provided in Section 16(c), in the event of any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights.
(e) Except as provided in Section 16(c), the Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
(f) Except as provided in Section 16(c), the Corporations obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Corporation as a director, officer, trustee, partner, managing member, fiduciary, employee or Agent of another Enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other Enterprise.
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Section 17. Duration of Agreement . This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director, officer, employee or Agent of any Enterprise, as applicable, or (b) one (1) year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any Proceeding commenced (including any appeal thereof) by Indemnitee pursuant to Section 15 relating thereto. The indemnification and advancement of Expenses rights provided by or granted pursuant to this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Corporation), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or Agent of any Enterprise, and shall inure to the benefit of Indemnitee and his or her spouse, assigns, heirs, devisees, executors and administrators and other legal representatives. The Corporation shall require and shall cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation to, by written agreement, expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place.
Section 18. Severability . If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
Section 19. Enforcement .
(a) The Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Corporation, and the Corporation acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Corporation.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided , however , that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws, any directors and officers insurance maintained by the Corporation and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
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Section 20. Modification and Waiver . Except as provided in Section 8 with respect to changes in Delaware law which broaden the right of Indemnitee to be indemnified by the Corporation, no supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.
Section 21. Notices . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail with postage prepaid, on the third (3 rd ) business day after the date on which it is so mailed, (c) mailed by reputable overnight courier and receipted for by the party to whom said notice or other communication shall have been directed, or (d) sent by facsimile transmission, with receipt of oral confirmation that such transmission has been received:
If to Indemnitee, to the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Corporation.
If to the Corporation, to:
Robert A. Gordon
Executive Vice President & General Counsel
Albertsons Companies, Inc.
250 Parkcenter Blvd.
Boise, ID 83706
Facsimile: (208) 395-4625
or to any other address as may have been furnished to Indemnitee by the Corporation.
Section 22. Contribution . To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Corporation, in lieu of indemnifying Indemnitee, shall contribute to the Losses incurred by or on behalf of Indemnitee in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (a) the relative benefits received by the Corporation and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (b) the relative fault of the Corporation (and its directors, officers, employees and Agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 23. Applicable Law and Consent to Jurisdiction . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 15(a), the Corporation and Indemnitee hereby irrevocably and unconditionally (a) agree that any
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Proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court, and not in any other state or federal court in the United States of America or any court in any other country, (b) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any Proceeding arising out of or in connection with this Agreement, (c) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, as its agent in the State of Delaware for acceptance of legal process in connection with any such Proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (d) waive any objection to the laying of venue of any such Proceeding in the Delaware Court, and (e) waive, and agree not to plead or to make, any claim that any such Proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 24. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 25. Headings . The headings of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
[ Signature Page Follows ]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.
ALBERTSONS COMPANIES, INC. | INDEMNITEE | |||||||
By: |
By: | |||||||
Title: |
Name: | |||||||
Address: | ||||||||
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EXHIBIT 10.23
THE TRANSFER OF THE LIMITED LIABILITY COMPANY INTERESTS DESCRIBED IN THIS AGREEMENT IS RESTRICTED AS DESCRIBED HEREIN.
FORM OF
LIMITED LIABILITY COMPANY AGREEMENT
OF
ALBERTSONS INVESTOR HOLDINGS LLC,
a Delaware Limited Liability Company
THIS LIMITED LIABILITY COMPANY AGREEMENT of Albertsons Investor Holdings LLC, a Delaware limited liability company (the Company ), is made effective as of [●], 2015 (this Agreement ), by and among Cerberus Iceberg LLC ( Cerberus ), Cerberus Capital Management, L.P., ( CCM ), Jubilee ABS Holding LLC ( Jubilee ), Klaff Markets Holdings LLC ( Klaff ), Klaff-W LLC ( Klaff W ), Lubert-Adler SAN Aggregator, L.P. ( Lubert-Adler ), L-A Asset Management Services, LLC ( L-A ASM ), Robert G. Miller ( Miller ), Robert Edwards ( Edwards ) and the Persons listed on Schedule A hereto (the Individual Members and, together with Cerberus, CCM, Jubilee, Klaff, Klaff-W, Lubert-Adler, L-A ASM, Miller, Edwards and any other Person who becomes a member of the Company from time to time in accordance with the provisions hereof, the Members ).
RECITALS:
1. A Certificate of Formation of the Company was filed with the Secretary of State of the State of Delaware on June 17, 2015;
2. Each of the Persons listed on Schedule B hereto has contributed certain interests in AB Acquisition LLC, Safeway Group Holdings Inc., NAI Group Holdings Inc., Cerberus ABS Blocker and/or Cerberus Spirit Blocker to the Company in exchange for Units issued by the Company; and
3. In accordance with the Act, the holders of Units of the Company wish to enter into this Agreement to (i) set forth the respective rights, powers and interests of such parties with respect to the Company; (ii) establish the terms for the issuance of interests therein; and (iii) provide for the management of the business and operations of the Company.
NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
GENERAL PROVISIONS
Section 1.1 Registered Office . The registered agent and office of the Company in the State of Delaware shall be The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. A majority vote of the Members may change said registered office from one location to another in the State of Delaware.
Section 1.2 Other Offices . The Company may have one or more offices as may be established from time to time.
Section 1.3 Purpose; Nature of Business Permitted; Powers . The purpose to be conducted or promoted by the Company is to engage in the following activities:
(i) to acquire, own, hold, vote, sell, Transfer, convey, safekeep, dispose of, pledge, assign, borrow money against, finance, refinance or otherwise deal with, the Albertsons Companies Stock in accordance with the terms hereof; and
(ii) to engage in any lawful act or activity and to exercise any powers permitted to limited liability companies organized under the laws of the State of Delaware that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above-mentioned purpose.
Section 1.4 Limited Liability of Members . No Member or any of its Affiliates or Affiliated Individuals shall have any liability for the debts, obligations or liabilities of the Company or of any other Member. Except as provided in Section 11.8, subject to the provisions of this Agreement, including, without limitation, Article XI hereof, any liability of any Member or any of its Affiliates or Affiliated Individuals to another Member or to the Company hereunder shall be limited to the Units of such Member or its Affiliates.
Section 1.5 Tax Classification; No State Law Partnership . The Members intend that the Company shall be treated as a partnership for federal, state and local tax purposes. Each Member and the Company agree to file all tax returns and otherwise take all tax and financial reporting positions in a manner consistent with such treatment. No provision of this Agreement shall be deemed or construed to constitute the Company (including its Subsidiaries) as a partnership (including a limited partnership) or joint venture, or any Member as a partner of or with any other Member for any purposes other than tax purposes.
Section 1.6 Definitions . Unless the context otherwise requires, the terms defined in this Section 1.6 shall, for the purposes of this Agreement, have the meanings herein specified (such meanings to be equally applicable to both the singular and plural forms of the terms defined).
1933 Act has the meaning set forth in Section 12.15.
1940 Act means the Investment Company Act of 1940, as amended, and the rules and regulations thereunder.
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50% Trigger Date has the meaning set forth in Section 3.8(i).
ABS Control Group means the Company, Management Holdco, Kimco and their respective Affiliates (as defined in Rule 12b-2 of the Exchange Act), or any person who is an express assignee or designee of their respective rights under Albertsons Companies certificate of incorporation (and such assignees or designees respective Affiliates) and who is or becomes a party to the Stockholders Agreement.
Act means the Delaware Limited Liability Company Act (as it may be amended from time to time and any successor to such Act).
Additional Units has the meaning set forth in Section 2.2(e).
Affiliate means, with respect to a Person, another Person that directly or indirectly controls, is controlled by or is under common control with such first Person; provided , however , that for purposes only of the term Permitted Transferee, the term Affiliate shall have the meaning ascribed to it therein. For the avoidance of doubt, for purposes of this Agreement, including, without limitation, the definition of Permitted Transferee, (i) an Affiliate of Cerberus includes, without limitation, any entity or fund directly or indirectly controlled by the Persons that, as of the date hereof, control Cerberus; (ii) an Affiliate of Klaff includes, without limitation, any entity or fund directly or indirectly controlled by Hersch Klaff; or any entity, fund or person that directly or indirectly invests in Klaff, provided that Hersch Klaff has and retains direct or indirect exclusive management control over Klaff; (iii) an Affiliate of Lubert-Adler includes, without limitation, any entity or fund directly or indirectly controlled by Dean Adler or Ira Lubert; or any entity, fund or person that directly or indirectly invests in Lubert-Adler, provided that Dean Adler or Ira Lubert has and retains direct or indirect exclusive management control over Lubert-Adler; and (iv) an Affiliate of Jubilee includes, without limitation, any entity or fund directly or indirectly controlled by the Persons that, as of the date hereof, control Jubilee or Schottenstein Stores Corporation or any entity, fund or person that directly or indirectly invests in Jubilee, provided that the Persons that have management control Jubilee as of the date hereof continue to retain direct or indirect exclusive management control over Jubilee.
Affiliated Individual means, with respect to a Person, any individual who is an officer, director, shareholder, employee, partner or member of such Person or an individual who is related by blood, marriage or adoption to any of the foregoing.
Agreement has the meaning set forth in the Preamble.
Albertsons Companies means Albertsons Companies, Inc., a Delaware corporation.
Albertsons Companies Contribution and Exchange Agreement means that certain Contribution and Exchange Agreement, dated as of the date hereof, by and between the Company and Albertsons Companies.
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Albertsons Companies Stock means the common stock, par value $0.01 per share, of Albertsons Companies acquired by the Company pursuant to the Albertsons Companies Contribution and Exchange Agreement and Equity Securities into which such shares of common stock shall have been changed, or any Equity Securities resulting from any reclassification, recapitalization, reorganization, merger, consolidation, conversion, stock or other equity split or dividend or similar transactions with respect to such shares of common stock or other Equity Securities.
Allocated Stock has the meaning set forth in Section 3.8(e) .
Asset means an asset owned by the Company or its Subsidiaries.
Bankruptcy means, with respect to any Person, a Voluntary Bankruptcy or an Involuntary Bankruptcy . A Voluntary Bankruptcy shall mean, with respect to any Person, (i) an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors, (ii) the filing of any petition or answer by such Person seeking to adjudicate it bankrupt or insolvent or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of such Person or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking, consenting to or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for such Person or for any substantial part of its property, or (iii) corporate action taken by such Person to authorize any of the actions set forth above. An Involuntary Bankruptcy shall mean, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy, insolvency or similar statute, law or regulation or the filing of any such petition against such Person which order or petition shall not be dismissed within 90 days or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within 90 days.
Business Day means any day other than a Saturday, Sunday or any other day on which banks in New York City are required or permitted by law to be closed.
Capital Account has the meaning set forth in Section 2.3(a).
Capital Contribution means, with respect to any Member, the amount of money or the value of other assets, in each case contributed to the Company in exchange for Units in the Company.
Cerberus has the meaning set forth in the Preamble.
Certificate of Formation means the Certificate of Formation referred to in Recital 1 and any and all amendments thereto and restatements thereof filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Act.
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Code means the Internal Revenue Code of 1986, as amended from time to time.
Company has the meaning set forth in the Preamble.
Control means, with respect to any Person, the power of another Person, through ownership of equity, contract rights or otherwise, to direct the management and policies of such Person, and controlled and controlling have correlative meanings.
Depreciation means, for each taxable period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such taxable period, except that if the Gross Asset Value of such asset differs from its adjusted basis for federal income tax purposes at the beginning of such taxable period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such taxable period bears to such beginning adjusted tax basis; provided , however , that if the adjusted basis for federal income tax purposes of an asset at the beginning of such taxable period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Management Board.
Effective Date means the date of this Agreement.
Equity Securities means, as applicable, (i) any capital stock, membership interests or other equity interest of any Person; (ii) any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other equity interest of any Person; or (iii) any rights or options directly or indirectly to subscribe for or to purchase any capital stock, membership interests or other equity interest of any Person or to subscribe for or to purchase any securities directly or indirectly convertible into or exchangeable for any capital stock, membership interests or other equity interest of any Person.
ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time.
Excluded Stock has the meaning set forth in Section 3.8(e).
Family Member means, with respect to any specified natural person, (a) any parent, child, descendant or sibling of such natural person or of such natural persons spouse (including relationships resulting from adoption) or (b) the spouse of such natural person or of any person covered by clause (a).
Fiscal Period means (i) the period commencing on the date of this Agreement and ending on the closest Thursday before the last Saturday of February, 2016 and (ii) any subsequent 12-month period commencing on the day following the last day of the immediately preceding Fiscal Period and ending on the closest Thursday before the last Saturday of February of each calendar year, or such other commencement and ending dates as the Management Board may determine.
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Fiscal Year means (i) the Fiscal Period commencing on the date of this Agreement and ending on the closest Thursday before the last Saturday of February, 2016, (ii) any subsequent 12-month period commencing on the day following the last day of the immediately preceding Fiscal Year and ending on the closest Thursday before the last Saturday of February of each calendar year, or such other commencement and ending dates as the Management Board may determine, and (iii) the period commencing on the day following the immediately preceding closest Thursday before the last Saturday of February (or other commencement date determined by the Management Board) and ending on the date on which all property of the Company is distributed to the Members pursuant to Article X.
Governmental Entity means any federal, state, local or foreign governmental, administrative, judicial or regulatory agency, commission, court, body, entity or authority.
Gross Asset Value means, with respect to any asset, the assets adjusted basis for federal income tax purposes, except as follows:
(i) the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the fair market value of such asset at the time it is accepted by the Company, unreduced by any liability secured by such asset, as reasonably determined by the Management Board;
(ii) the Gross Asset Values of all Assets shall be adjusted to equal their respective fair market values, unreduced by any liabilities secured by such assets, as reasonably determined by the Management Board as of the following times: (x) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (y) the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company; and (z) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided , however , that an adjustment described in clauses (x) and (y) of this paragraph shall be made only if the Management Board reasonably determines that such an adjustment is necessary to reflect the relative economic interests of the Members;
(iii) the Gross Asset Value of any Asset distributed to any Member shall be adjusted to equal the fair market value of such asset on the date of distribution, unreduced by any liability secured by such asset, as reasonably determined by the Management Board; and
(iv) the Gross Asset Value of all Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such
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adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and paragraph (vi) of the definition of Profits and Losses or Section 8.2(g); provided , however , that Gross Asset Value shall not be adjusted pursuant to this paragraph (iv) to the extent that an adjustment pursuant to paragraph (ii) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraphs (i), (ii) or (iv) of this definition, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.
Indemnifiable Losses has the meaning set forth in Section 11.1.
Indemnified Party has the meaning set forth in Section 11.6.
Indemnified Person has the meaning set forth in Section 11.1.
Indemnifying Party has the meaning set forth in Section 11.6.
Individual Member has the meaning set forth in the Preamble.
Investor Holdings Subsidiary means any Subsidiary of the Company other than Albertsons Companies and any Subsidiary of Albertsons Companies.
Investor Members means Cerberus, Klaff, Lubert-Adler and Jubilee.
Involuntary Bankruptcy has the meaning set forth in the definition of Bankruptcy.
Jubilee has the meaning set forth in the Preamble.
Kimco means, collectively, KRS AB Acquisition, LLC, a Delaware limited liability company and KRS ABS, LLC, a Delaware limited liability company.
Klaff has the meaning set forth in the Preamble.
Law means foreign or domestic law, statute, code, ordinance, rule, regulation, order, judgment, writ, stipulation, award, injunction, decree or arbitration award or finding of any Governmental Entity.
Loan Agreement means that certain Term (Committed Loan) Loan Agreement, dated as of July 2, 2015, by and between Goldman Sachs Bank USA, as Lender, and Management Holdco, as Borrower, as such agreement (and loan pursuant thereto) may be amended, modified or refinanced from time to time.
Lubert-Adler has the meaning set forth in the Preamble.
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Major Decision means:
(i) | subject to clause (xx) of this definition, issuance of any equity interest, or any security that is convertible into or exchangeable for an equity interest in the Company or an Investor Holdings Subsidiary, the adoption of any incentive program which grants or allocates equity interests in the Company or any Investor Holdings Subsidiary to employees, officers or directors of, or consultants or advisors to, the Company or any Investor Holdings Subsidiary; |
(ii) | amending, modifying, supplementing or changing any provision of this Agreement other than to amend Schedule B to reflect any Transfers or redemptions of Units made in accordance with this Agreement; |
(iii) | any act in contravention of this Agreement; |
(iv) | any action which would cause the Company (x) to become an entity other than a Delaware limited liability company, or other than a pass through entity for Federal income taxes or (y) to be treated as a corporation for Federal income tax purposes; |
(v) | changing the business purpose of the Company; |
(vi) | making in-kind distributions with respect to any material portion of the Assets of the Company or any Investor Holdings Subsidiary other than distributions of Albertsons Companies Stock pursuant to and in accordance with Section 3.8(d), Section 3.8(e) or Section 3.8(f); |
(vii) | indemnification of any Person by the Company or any Investor Holdings Subsidiary other than an Officer, member of the Management Board, or a Member or its Affiliates in accordance with the provisions of Article XI of this Agreement, other than any indemnification clause that is included in any contract or other agreement between the Company and any vendor or other contracting party of the Company in the ordinary course of business; |
(viii) | entering into any agreement (x) which would cause any Member to become personally liable on or in respect of or to guarantee any indebtedness of the Company or any Investor Holdings Subsidiary or (y) which is not nonrecourse to such Member, except to the extent such liability or recourse is pursuant to customary carve-outs for real estate financing; |
(ix) | causing the Company or any Investor Holdings Subsidiary (v) to redeem or repurchase all or any portion of the interest of a Member (other than as is consistent with any employment agreement with such Member), (w) to make loans to any Member, (x) to accept or require additional Capital Contributions from any Member not provided for in this Agreement, (y) to enter into any contract, arrangement or understanding with or paying any salary, fees or other compensation to, any Investor Member or any Affiliate of an Investor Member (other than as otherwise contemplated by this Agreement or as is consistent with any employment agreement with a Member), or (z) to borrow money from a Member or its Affiliates; |
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(x) | dissolving, terminating or liquidating the Company other than following a sale or distribution of all or substantially all of the assets of the Company; |
(xi) | obtaining, incurring, modifying, prepaying or refinancing any indebtedness of the Company or any Investor Holdings Subsidiary or executing or delivering on behalf of the Company any guarantee or other agreement whereby the Company or any Investor Holdings Subsidiary is or may become liable for any obligations of any other Person; |
(xii) | commencing, dismissing, terminating or settling any litigation matter, or any other matter or claim (including an insurance claim) in connection with which the amount in controversy is reasonably expected to exceed $5,000,000; |
(xiii) | establishing or releasing reserves in excess of $5,000,000 in any single instance or series of related instances for use by the Company or any Investor Holdings Subsidiary, provided, that any withholding by the Company of cash pursuant to Section 2.2(c) shall not be taken into account in the calculation of reserves to be established or released; |
(xiv) | requiring any additional Capital Contributions (other than pursuant to Section 2.2(b)); |
(xv) | forming, appointing members to, and delegating authority to any committee of the Management Board in accordance with Section 3.1(f); |
(xvi) | causing or permitting an initial public offering of the Company or any Investor Holdings Subsidiary; |
(xvii) | making a demand (or piggyback request) to register securities under the Stockholders Agreement; |
(xviii) | consenting (to the extent consent of the Management Board is required) to a Member directly or indirectly making a Transfer of all or any portion of its Units pursuant to Section 5.1(a)(i); |
(xix) | approving a sale of all of the Albertsons Companies Stock held by the Company, whether through a tender offer, asset sale, recapitalization, consolidation, reorganization or business combination; |
(xx) | admitting a Person as a Member, except as otherwise specifically provided in this Agreement; |
(xxi) | permitting the withdrawal of any Member except as otherwise provided in this Agreement; |
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(xxii) | approving any affiliate transaction (other than with respect to the employment of an Individual Member) between the Company or any Investor Holdings Subsidiary on the one hand, and any Member or any Affiliate thereof on the other hand; |
(xxiii) | conducting any business other than the purchasing, holding, voting and disposing of the Albertsons Companies Stock and taking actions permitted under the Stockholders Agreement not otherwise inconsistent with this Agreement; and |
(xxiv) | take any action in respect of the Albertsons Companies Stock in breach of Section 3.8. |
Management Board has the meaning set forth in Section 3.1(a).
Management Holdco shall mean Albertsons Management Holdco, LLC, a Delaware limited liability company.
Member Contribution and Exchange Agreement means that certain Contribution and Exchange Agreement, dated as of the date hereof, by and among the Company and certain Members, pursuant to which such Members contributed certain Equity Securities to the Company in exchange for Units.
Members has the meaning set forth in the Preamble.
Miller has the meaning set forth in the Preamble.
Non-Participating Member has the meaning set forth in Section 3.8(e) .
Officer means any officer of the Company appointed in accordance with this Agreement.
Percentage Interest means, with respect to any Member, the percentage obtained by dividing the number of Units held by such Member by the aggregate number of Units held by all of the Members.
Permitted Transferee means: (i) with respect to any Member who is not a natural person, any Affiliate of such Member ( provided that for purposes of this clause (i), Affiliate shall mean, with respect to the Member in question, that such Member solely controls, is controlled solely by or under common control with such Affiliate (and no Person other than the common controlling Person controls such Affiliate) and such Member or its ultimate parent owns, directly or indirectly, more than 80% of the economic interests of such Affiliate and provided further that notwithstanding the immediately preceding proviso, Affiliates as further defined in the second sentence of the definition of Affiliate are affiliates for this subsection (i); (ii) with respect to any Member who is a natural person, (x) upon the death of such natural person, any Person in accordance with such natural persons will or the laws of intestacy; (y) the Family Members of such natural person, entities formed for estate or family planning purposes
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and/or one or more trusts for the sole benefit of such natural person and/or the Family Members of such natural person, provided that such natural person shall not be released from his obligations under this Agreement as a Member; (iii) with respect to any Member who is also an equityholder of Management Holdco, Management Holdco, but only to the extent necessary to satisfy minimum collateral requirements pursuant to the Loan Agreement; (iv) with respect to Management Holdco upon receipt of Units by Management Holdco pursuant to clause (iii) above, (A) a member of Management Holdco upon termination and release of any security interests of a lender pursuant to the Loan Agreement with respect to Units held by Management Holdco (and only the Units attributable to such member of Management Holdco and previously subject to such security interests) or (B) the lender under the Loan Agreement in connection with the default of a loan and foreclosure on Units held by Management Holdco and pledged to such lender pursuant to the Loan Agreement and (v) in the event of the dissolution, liquidation or winding up of any such Person that is a corporation, partnership or limited liability company, the stockholders of a corporation that is such Person, the partners of a partnership that is such Person, the members of a limited liability company that is such Person or a successor corporation all of the stockholders of which or a successor partnership all of the partners of which or a limited liability company all of the members of which are the Persons who were the stockholders of such corporation or the partners of such partnership or the members of such limited liability company immediately prior to the dissolution, liquidation or winding up of such Person; provided further , however , that no such Transfer under any one or more of the foregoing clauses (i) through (v) to any such Person shall be permitted where such Transfer (x) fails to comply with the terms of Section 5.1(a), including, without limitation, by reason of a failure to comply in any respect with any federal or state securities laws, including, without limitation, the 1940 Act, or (y) would result in the Company becoming subject to the Securities Exchange Act of 1934.
Person means any individual, corporation, association, partnership (general or limited), joint venture, trust, joint-stock company, estate, limited liability company, Series, unincorporated organization or other legal entity or organization.
Preemptive Right Notice has the meaning set forth in Section 2.2(e).
Pro Rata Portion has the meaning set forth in Section 2.2(e).
Profits or Losses means for each taxable period, an amount equal to the taxable income or loss for such taxable period. Such amount shall be determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication):
(i) any income that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss;
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(ii) any expenditures described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss;
(iii) in the event the Gross Asset Value of any Asset is adjusted pursuant to paragraphs (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses;
(iv) gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;
(v) in lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss there shall be taken into account Depreciation for such taxable period, computed in accordance with the definition of Depreciation; and
(vi) to the extent an adjustment to the adjusted tax basis of any Asset pursuant to Code Section 734(b) or 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Members interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses.
QIB means a qualified institutional buyer within the meaning of Rule 144A under the 1933 Act.
Regulations means the federal income tax regulations promulgated by the Treasury Department under the Code, as such regulations may be amended from time to time. All references herein to a specific section of the Regulations shall be deemed also to refer to any corresponding provisions of succeeding Regulations.
Representative has the meaning set forth in Section 10.2.
Requisite Distribution Deferral Majority has the meaning set forth in Section 3.8(d) .
Security or Securities has the meaning set forth in Section 2(1) of the 1933 Act.
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Sell-Down has the meaning set forth in Section 3.8(e) .
Sell-Down Notice has the meaning set forth in Section 3.8(e) .
Side Letter means any letter agreement between the Company and any employee of the Company or its Subsidiaries relating to or in connection with such employees employment, compensation, participation in any incentive program or otherwise. In the event of any conflict between (i) a Side Letter between any employee of the Company or its Subsidiaries and the Company and (ii) this Agreement, such Side Letter shall control with respect to such employee.
Stockholders Agreement means the Albertsons Companies Stockholders Agreement, dated as of the date hereof, by and among the Company and the other parties thereto, as amended from time to time.
Subsidiary of a Person means any corporation, partnership, limited liability company, trust and other entity, whether incorporated or unincorporated, with respect to which such Person, directly or indirectly, legally or beneficially, owns (i) a right to a majority of the profits of such entity; or (ii) securities having the power to elect a majority of the board of directors or similar body governing the affairs of such entity.
Tax Matters Member has the meaning set forth in Section 8.1.
Third Party Claim has the meaning set forth in Section 11.6.
Transaction Transfer Restriction has the meaning set forth in Section 3.8(e).
Transfer has the meaning set forth in Section 5.1(a).
Units means the units issued by the Company representing a fractional part of the ownership of the Company and having the rights, preferences and obligations specified in this Agreement.
Voluntary Bankruptcy has the meaning set forth in the definition of Bankruptcy.
Any capitalized term not defined herein shall have the meaning ascribed to such term in the Act.
Section 1.7 Certificates . Each Officer of the Company is an authorized Person within the meaning of the Act to execute, deliver and file any certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction within the United States in which the Company may wish to conduct business. Alan Bossman is hereby designated as an authorized person within the meaning of the Act, and has executed, delivered and filed the Certificate of Formation of the Company with the Secretary of State of the State of Delaware.
Section 1.8 Term . The term of the Company shall begin on the date the Certificate of Formation was filed with the Secretary of State of the State of Delaware and shall continue until terminated in accordance with the provisions hereof or pursuant to the Act.
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ARTICLE II.
UNITS, CAPITAL
CONTRIBUTIONS AND CAPITAL ACCOUNTS
Section 2.1 Units .
(a) As of the date hereof, the Company shall have one class of Units which shall have the rights, preferences and privileges as are described herein.
(b) Title to assets of the Company, whether real, personal or mixed, tangible or intangible, shall be deemed to be owned by the Company, and no Member, individually or collectively, shall have any ownership interest in such assets or any portion thereof.
(c) The Units shall be uncertificated unless the Management Board otherwise determines.
Section 2.2 Capital Contributions .
(a) Capital Contributions . Each of the Members has contributed interests in AB Acquisition LLC, Safeway Group Holdings Inc., NAI Group Holdings Inc., Cerberus ABS Blocker and/or Cerberus Spirit Blocker in exchange for Units of the Company such that such Members ownership of Units as of the date of this Agreement is as reflected on Schedule B hereto.
(b) Additional Capital Contributions . Other than as the Management Board determines in its reasonable discretion is necessary to pay reasonable third-party (and not, for the avoidance of doubt, any Members or such Members Affiliates) costs and expenses incurred by the Company in carrying out its business not to exceed $5,000,000 per annum, including, without limitation, liability and other insurance premiums, expenses incurred in the preparation of reports to the Members and any third-party legal, accounting and other professional fees and expenses, none of the Members shall have any further capital commitment with regard to the ongoing conduct of the business of the Company beyond their respective initial Capital Contributions, provided , that , no requirement to fund additional capital pursuant to this Section 2.2(b) shall apply to Miller, Edwards or any Individual Member.
(c) Withholding of Distributions to Fund Capital Contributions . In the event of a secondary offering of Albertsons Companies Stock by the Company, the Management Board may authorize the withholding of up to $5,000,000 from the Investor Members to fund the costs and expenses of the Company in lieu of requiring contributions (to the extent of such withholding) from the participating Investor Members pursuant to clause (b) above. If one or more Investor Members is a Non-Participating Member (as defined in Section 3.8) with respect to such secondary offering, then such aggregate withholding shall be reduced by an amount equal to the Non-Participating Members pro rata ownership of the Units as of immediately prior to the secondary offering multiplied by the aggregate amount otherwise to be withheld, such that withholdings shall only be allocated among Investor Members participating in the secondary offering.
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(d) Payment of Capital Contributions . Any Capital Contributions in cash made by the Members shall be made in U.S. dollars by wire transfer of federal funds to an account or accounts of the Company specified by the Company or the Management Board. Except as otherwise provided herein, no Member shall be entitled to any compensation by reason of its Capital Contribution or by reason of serving as a Member. No Member shall be required to lend any funds to the Company.
(e) Preemptive Rights .(i) In the event that the Company, at the direction of the Management Board, proposes to sell any Additional Units, the Company shall first give each Member a notice setting forth in reasonable detail the price and other terms on which such Additional Units are proposed to be issued or sold, the terms of such Additional Units and the amount thereof proposed to be sold (a Preemptive Right Notice ). Each Member shall thereafter have the preemptive right, exercisable by written notice to the Company no later than twenty (20) days following receipt of the Preemptive Right Notice, to purchase the portion of the Additional Units as shall be equal to (A) the aggregate Additional Units multiplied by (B) such Members Percentage Interest. The portion of such Additional Units such Member is entitled to purchase under this Section 2.2(e)(i) shall be referred to as its Pro Rata Portion and shall be set forth in such Members Preemptive Right Notice. Any notice by a Member exercising the right to purchase Additional Units pursuant to this Section 2.2(e)(i) shall constitute an irrevocable commitment to purchase from the Company the Additional Units set forth in such notice. If, as contemplated by clause (ii) of this Section 2.2(e), the Company shall issue or sell the remaining Additional Units to third parties, then the closing of the purchase by the Members shall take place at the same time as the closing of such issuance or sale to such third parties. If for any reason the Company shall not issue or sell Additional Units to any Persons other than the Members, then the closing of the purchase of the Additional Units by the Members shall take place on such date, no less than ten (10) and no more than thirty (30) days after the expiration of the twenty (20) day period referred to above, as the Management Board may select.
(ii) In the event of a failure by any Member to purchase all or any portion of its Pro Rata Portion of the Additional Units proposed to be issued or sold by the Company in the Preemptive Right Notice, any Member that has elected pursuant to Section 2.2(e)(i) above to purchase its entire Pro Rata Portion, may purchase its Percentage Interest (based on all of the Members, purchasing pursuant to this Section 2.2(e)) of the unpurchased Additional Units. In the event of a failure by the Members to purchase all or any portion of the Additional Units pursuant to Section 2.2(e)(i) and (ii), the Company shall be entitled to issue or sell the remaining Additional Units on the terms set forth in the Preemptive Right Notice. From the expiration of the twenty (20) day period referred to in clause (e)(i) of this Section 2.2 and for a period of ninety (90) days thereafter, the Company, at the direction of the Management Board, may offer, issue and sell to any Person, the remaining Additional Units having the terms set forth in the Preemptive Right Notice for a price and other terms no less favorable to the Company, and including no less cash, than those set forth in the Preemptive Right Notice (without deduction for reasonable underwriting, sales agency and similar fees payable in connection therewith); provided , however , that the Company may not issue or sell Additional Units in an amount greater than the amount set forth in the Preemptive Right Notice minus the amount purchased or committed to be purchased by the Members upon exercise of their preemptive rights.
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(iii) For purposes of this Section 2.2(e), Additional Units means all Units sold by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than Units granted or issued upon conversion of any securities then outstanding convertible for or exchangeable into Units.
(iv) Notwithstanding anything to the contrary contained in this Agreement, the provisions of this Section 2.2(e) shall not apply to any grant, exchange or sale of Units as consideration in any merger, consolidation or other acquisition of any Person, business, division, or assets approved by the Management Board.
Section 2.3 Capital Accounts .
(a) Capital Accounts . A capital account ( Capital Account ) shall be maintained for each Member in accordance with this Section 2.3. A Members Capital Account shall be increased by (i) the amount of money contributed by the Member to the Company, (ii) the initial Gross Asset Value of property contributed by the Member to the Company, as determined by the contributing Member and the Management Board (net of liabilities that the Company is considered to assume or take subject to pursuant to Code Section 752), and (iii) allocations to the Member of Profits pursuant to Article VI. A Members Capital Account shall be decreased by (x) the amount of money distributed to the Member, (y) the Gross Asset Value of any property so distributed to the Member as determined by the distributee Member and the Management Board (net of any liabilities that such Member is considered to assume or take subject to pursuant to Code Section 752), and (z) allocations to the Member of Losses pursuant to Article VI.
(b) Negative Capital Account . No Member shall be required to make up a deficit balance in such Members Capital Account or to pay to any Member the amount of any such deficit in any such account.
(c) Credit of Capital Contribution . For purposes of computing the balance in a Members Capital Account, no credit shall be given for any Capital Contribution which such Member is to make until such Capital Contribution is actually made.
Section 2.4 Admission of New Members . Unless otherwise permitted under Article V, new Members may only be admitted to membership in the Company with the approval of the Management Board. A new Member must agree in writing to be bound by the terms and provisions of the Certificate of Formation and this Agreement, each as may be amended from time to time, and must execute a counterpart of, or an agreement adopting, this Agreement and any other related agreement as the Management Board may require. Upon admission, the new Member shall have all rights and duties of a Member of the Company; provided , however , that such new Member shall only be entitled to such voting rights as are provided pursuant to this Agreement.
Section 2.5 Interest . No interest shall be paid or credited to the Members on their Capital Accounts or upon any undistributed amounts held by the Company.
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Section 2.6 Capital Withdrawal Rights, Interest and Priority . Except as expressly provided in this Agreement, no Member shall be entitled to withdraw or reduce such Members Capital Accounts in whole or in part until the dissolution, liquidation and winding-up of the Company, except to the extent that distributions pursuant to Article VII represent returns of capital. A Member who withdraws or purports to withdraw as a Member of the Company without the consent of all of the Members or as otherwise allowed by this Agreement shall be liable to the Company for any damages suffered by the Company on account of the breach and shall not be entitled to receive any payment in respect of its Units in the Company or a return of its Capital Contribution until the time otherwise provided herein for distributions to Members.
ARTICLE III.
MANAGEMENT OF THE COMPANY
Section 3.1 Company Governance .
(a) The Company hereby establishes a Management Board for the Company (the Management Board ), which shall have all of the powers of a board of directors of a Delaware corporation and, pursuant to such powers shall have the overall responsibility for the management, operation and administration of the Company. The Management Board is, to the extent of its rights and powers set forth in this Agreement, an agent of the Company and the actions of the Company by and through the Management Board taken in accordance with such rights and powers shall bind the Company. Except as authorized by the Management Board or as set forth in this Agreement, no Member shall participate in the management and control of the business of the Company nor shall any Member have the right or authority to act on behalf of the Company in connection with any matter.
(b)(i) The Management Board shall consist as of the date hereof of the following voting members: Lenard Tessler, Ronald Kravit, Lisa Gray, Scott Wille, Jay Schottenstein, Dean Adler, Hersch Klaff and Miller. By signing this Agreement, each Member shall be deemed to have voted for the election of each of the foregoing persons to serve as a Management Board member. The names and mailing addresses of the members of the Management Board shall be set forth in the books and records of the Company. Subject to Sections 3.1(b)(ii) and (iii) below, the number of members of the Management Board shall be fixed at eight. Each member of the Management Board shall have one (1) vote with respect to matters to be considered by the Management Board.
(ii) Each of the Members will agree to vote and otherwise use its reasonable best efforts to cause the Management Board to consist of four (4) members appointed by Cerberus; one (1) member appointed by Jubilee; one (1) member appointed by Lubert-Adler; one (1) member appointed by Klaff; and one (1) member appointed by Miller; provided that in the event that any such Member (x) shall transfer more than 50% of such Members Units (excluding however, transfers made by such Member to a Permitted Transferee) or (y) with respect to an Investor Member, ceases to be controlled by Cerberus Capital Management, LP, Klaff Realty, LP, Schottenstein Stores Corp. or Lubert-Adler Partners, L.P. or their respective controlled Affiliates, as applicable, such Member shall not be entitled to have the other Members so vote or cause the Management Board to consist of any of its appointees. Immediately prior to such event described in the preceding sentence or concurrently therewith, such Member shall cause its appointee(s) to resign from the Management Board, reducing the members of the Management Board accordingly. Except as provided in Section 3.1(c), any vacancies on the Management Board will be filled by a vote of the Members.
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(c) The status of a member of the Management Board shall terminate if the Management Board member: (i) shall die; (ii) shall be adjudicated incompetent; (iii) shall voluntarily resign as a Management Board member (which shall require not less than 10 days prior written notice to the Company); (iv) shall be removed by the written request of the Member that appointed such member of the Management Board pursuant to Section 3.1(b); (v) shall be certified by a physician to be mentally or physically unable to perform his or her duties; (vi) shall be declared bankrupt by a court with appropriate jurisdiction, file a petition commencing a voluntary case under any bankruptcy law or make an assignment for the benefit of creditors; (vii) shall have a receiver appointed to administer the property or affairs of such Management Board member or (viii) shall otherwise cease to be a Management Board member of the Company under the Act. Upon such termination, the Member that appointed the terminating member of the Management Board shall be entitled to designate a replacement to be a Member of the Management Board by written notice to the Secretary of the Company.
(d) Meetings . Meetings of the Management Board may be called by any two members of the Management Board on at least five (5) Business Days prior written notice to each member of the Management Board, which notice shall contain the time and place of such meeting. Seventy percent (70%) of the total number of votes held by members of the Management Board shall constitute a quorum for the transaction of business by the Management Board. Except as provided in Section 3.6 and as otherwise provided in this Section 3.1(d) or explicitly set forth elsewhere in this Agreement, all actions of the Management Board shall require the affirmative majority vote of the total number of votes held by members of the Management Board. Decisions made by the Management Board at any meeting, however convened, shall be as valid as though held after due notice if, either before or after the meeting, each and every member of the Management Board signs a written waiver of notice or a consent to the holding of such meeting or written approval of the minutes thereof.
(e) Telephone Conference; Unanimous Written Consent . Meetings of the Management Board may be held by telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other and participate in the conversation. Any action required or permitted to be taken by the Management Board may be taken without a meeting and without prior notice if all of the voting members of the Management Board shall consent in writing to such action. Such consent or consents shall be filed with the minutes of the proceedings of the Management Board and shall have the same force and effect as a unanimous vote of the Management Board.
(f) Committees of the Board .
(i) The Management Board may designate an executive committee and other committees, each consisting of one or more members of the Management Board or other individuals appointed by the Management Board. Each committee (including the members thereof) shall serve at the pleasure of the Management Board. Each committee shall keep minutes of its meetings and report the same to such Board. Except as may be required by applicable securities laws or any exchange on which the securities of any of the Companys
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Subsidiaries are listed, the Executive Chairman shall be a member of each committee. The Management Board may designate one or more members of the Management Board or other individuals appointed by the Management Board as alternate members of any committee, who may replace any absent or disqualified member or members at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, if no alternate member has been designated by the Management Board, the member or members present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Management Board to act at the meeting in the place of the absent or disqualified member. Except as limited by applicable law, each committee, to the extent provided in the resolution of the Management Board establishing it, shall have and may exercise all the powers and authority of the Management Board in the management of the business and affairs of the Company; provided that no Committee shall have the authority to take any action constituting a Major Decision or an action of the Management Board under Section 3.8(k).
(ii) Two-thirds (2/3) of all the voting members of a committee shall constitute a quorum for the transaction of business, and the vote of a majority of all the voting members of a committee shall be the act of the committee. In other respects each committee shall conduct its business in the same manner as the Management Board conducts its business pursuant to this Section 3.1. Each committee shall adopt whatever other rules of procedure it determines for the conduct of its activities.
(g) Executive Chairman . The Management Board shall have (x) an Executive Chairman who, as of the date hereof, shall be Robert Miller, or (y) except as provided in a Side Letter, at the Management Boards option, a non-executive Chairman. The Executive Chairman (or, if applicable, the non-executive Chairman) shall preside at all meetings of the Management Board and of the Members at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Management Board or as may be provided by applicable law. In the absence of the Executive Chairman (or, if applicable, the non-executive Chairman), a member of the Management Board selected by Cerberus shall preside at all meetings of the Management Board and of the Members at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Management Board or as may be provided by applicable law.
(h) Limitation on Liability of Member of the Management Board . Members of the Management Board shall not, solely by reason of being a member of the Management Board, be personally liable for the expenses, liabilities or obligations of the Company whether arising in contract, tort or otherwise.
(i) Compensation and Reimbursement of Management Board . Members of the Management Board shall not receive compensation for their services performed on behalf of the Company or other benefits they provide to the Company. Members of the Management Board shall be entitled to reimbursement for reasonable, documented out-of-pocket expenses incurred by them in connection with attendance at meetings of the Management Board or any committee thereof conducting the business and affairs of the Company.
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Section 3.2 Authority, Duties and Obligations of the Management Board .
(a) Except as otherwise expressly provided in this Agreement, the Management Board shall have the authority, on behalf of the Company, to take any action or make any decisions on behalf of the Company hereunder, to carry out any and all of the purposes of the Company and to perform all acts and enter into and perform all contracts and other undertakings which it may deem necessary or advisable or incidental thereto.
(b) Without limiting Section 3.2(a), each of the Members, by executing this Agreement, authorizes the Company and the Management Board to make such regulatory and other filings as shall be required in connection with the acquisition of the Albertsons Companies Stock and the operation of the business of the Company, all without any further act, vote or approval of the Company, any Member or any other Person notwithstanding any other provision of this Agreement, the Act or applicable law, rule or regulation. In furtherance of the foregoing, unless otherwise directed in writing by the Management Board, the Company and the Management Board hereby designates Cerberus to sign on behalf of the Company with respect to any such regulatory and/or other filings to be made by the Company pursuant to this Section 3.2(b).
(c) The Company shall not approve or take any action with respect to any Major Decision without the affirmative vote or written consent of members of the Management Board representing seventy percent (70%) of the total number of votes held by the members of the Management Board; provided , that the Management Board shall not approve or take any action with respect to any of the Major Decisions specified in clauses (ii), (iii), (iv), (v), (viii), (ix), (x), (xi), (xiv), (xvi), (xx), (xxi), (xxii), (xxiii) or (xxiv) of the definition thereof without the unanimous vote of the members of the Management Board, and, in the case of the Major Decisions specified in subclause (v) of clause (ix) and clauses (xvi), (xx), and (xxi), Kimco; provided, that unanimous consent shall not be required with respect to clause (xiv) if such Capital Contributions are required to alleviate exigent circumstances of the Company or its Subsidiaries (as determined in good faith by members representing 70% of the total number of votes held by members of the Management Board).
Section 3.3 Other Activities of the Members of the Management Board . The members of the Management Board shall devote as much of their time to the affairs of the Company as in the judgment of the members of the Management Board the conduct of the Companys business shall reasonably require, and the members of the Management Board shall not be obligated to do or perform any act or thing in connection with the business of the Company not expressly set forth herein. Nothing contained in this Agreement shall be deemed to preclude the members of the Management Board from engaging directly or indirectly in any other business or from directly or indirectly purchasing, selling, holding or otherwise dealing with any securities for the account of any such other business, for its own accounts or for other clients. No Member shall, by reason of being a Member, have any right to participate in any manner in any profits or income earned, derived by or accruing to the members of the Management Board or any of their Affiliates from the conduct of any business other than the business of the Company (to the extent provided herein) or from any transaction in securities effected by the members of the Management Board or any of their Affiliates for any account other than that of the Company.
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Section 3.4 Management Board Certifications . Any Person dealing with the Company may rely (without duty of further inquiry) upon a certificate issued by the Company that is signed by any member of the Management Board or any of the Officers as to any of the following:
(a) the identity of any Member or Officer or other agent of the Company;
(b) the existence or nonexistence of any fact or facts which constitute(s) a condition precedent to acts by the Management Board or the Members;
(c) the Person or Persons authorized to execute and deliver any instrument or document of the Company; or
(d) any act or failure to act by the Company or any other matter whatsoever involving the Company.
Section 3.5 Officers .
(a) Executive Chairman . The Officers of the Company shall include an Executive Chairman (unless the Management Board shall have appointed a non-executive Chairman in accordance with a Side Letter entered into with Miller).
(b) General . The Management Board may, from time to time, designate one or more Persons to be other Officers of the Company, with such titles as the Management Board may assign to such Persons. No Officer need be a Member or a resident of the State of Delaware. Officers so designated will have such authority and perform such duties as the Management Board may, from time to time, delegate to them. Any number of offices may be held by the same Person. Any Officer may resign as such at any time. Such resignation will be made in writing and will take effect at the time specified therein, or if no time be specified, at the time of its receipt by the Management Board. Any Officer may be removed as such, either with or without cause, by the Management Board, in its sole discretion. Any vacancy occurring in any office of the Company may be filled by the Management Board. Officers shall not receive any compensation for services in their capacity as Officers of the Company; provided, however, that nothing herein contained shall be construed to preclude any Officer from serving any Member or any of its Affiliates in any other capacity and receiving compensation therefor.
(c) Limitations on Officers Powers . Notwithstanding any other provision contained in this Agreement to the contrary, should a delegation of authority be established by the Management Board, no act shall be taken, sum expended, decision made, obligation incurred or power exercised by any Officer on behalf of the Company other than in accordance with such delegation of authority, provided that no Officer shall have to right to take any action constituting a Major Decision or an action of the Management Board under Section 3.8(k) unless so authorized by the requisite vote of the Management Board.
(d) Term of Officers . An Officer of the Company may resign at any time by giving written notice to the Management Board. The resignation of an Officer of the Company shall take effect upon the Management Boards receipt of written notice of the
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Officers resignation or at such later time as shall be specified in the written notice. Unless otherwise specified in the Officers written notice of resignation, the acceptance of the Officers resignation shall not be necessary to make it effective. If the Officer also is a Member, the Officers resignation as an Officer shall not affect the Officers rights as a Member and shall not constitute a withdrawal of the Officer as a Member.
(i) The Management Board may terminate the employment of and remove any Officer of the Company with or without cause, subject to any applicable employment agreement.
(ii) The Management Board may elect at any time a new or replacement Officer of the Company to fill the vacancy.
Section 3.6 Voting Rights of Members .
(a) Members shall have no right or authority to vote on matters other than matters explicitly requiring such vote in this Agreement or in the Act. On matters set forth in this Agreement or in the Act explicitly requiring a vote of the Members, each Member shall have a number of votes equal to a fraction, expressed as a percentage, of (i) the number of Units held by such Member and (ii) the number of Units held by all Members. In the event any Member shall transfer less than all of its Units to an unaffiliated third party or any other Member in a transaction or in a series of transactions then the portion of such Members votes that is equal to the portion of such Members Units transferred shall be deemed cancelled and the transferee (if an unaffiliated third party) in such transfer shall not be a Member. In the event any Member shall transfer all its Units held on the date of such transfer to an unaffiliated third party or any other Member in a transaction or in a series of transactions, then all of the votes of its Units on the date of such transfer shall be deemed to have been transferred to such transferee upon the satisfaction of the conditions contained in Article V. Notwithstanding the foregoing, if at any time a Member (x) shall transfer more than 50% of such Members Units (excluding, however, transfers made by such Member to a Permitted Transferee), (y) with respect to an Investor Member, ceases to be controlled by Cerberus Capital Management, LP, Klaff Realty, LP, Schottenstein Stores Corp. or Lubert-Adler Partners, L.P. or their respective controlled Affiliates, as applicable or (z) shall be in default with respect to its obligations to fund additional Capital Contributions pursuant to Section 2.2 above, the remaining votes of such Member shall be deemed cancelled and such Member shall have no voting rights except as otherwise required by the Act; provided , that in the case of clause (y), (A) to the extent a Member elects to treat its obligation to fund capital as a loan and such Member repays all such loans (including all interest thereon) within 15 days, the voting rights of such Member shall be reinstated and (B) to the extent a Member elects to treat its obligation to fund capital as a Capital Contribution, the Company shall provide notice to such Member on the next Business Day indicating such election and the voting rights of such Member shall be deemed cancelled if the Member does not provide its Capital Contribution to the Company within 15 days after receipt of such notice.
(b) Any action by the Members shall require the affirmative vote or written consent of the majority of the voting power of the Members entitled to vote, voting together as one class, except as otherwise set forth in Section 3.8(d) and Section 12.2. Notwithstanding anything in this Agreement to the contrary, this Section 3.6(b) shall not be amended without the unanimous consent of the Members.
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Section 3.7 Cost of Services; Expenses . Subject to Sections 3.1(d) and 3.6 above, Members shall be entitled to reimbursement of their third-party out-of-pocket costs and expenses, upon presentation of reasonable documentation with respect to such expenses incurred by such Member, in connection with providing services to the Company. The Company shall be responsible for paying, and, except as otherwise contemplated by this Agreement, the Management Board shall pay directly out of Company funds, all reasonable third-party costs and expenses incurred by the Company in carrying out its business, including, without limitation, liability and other insurance premiums, expenses incurred in the preparation of reports to the Members and any legal, accounting and other professional fees and expenses incurred by the Company.
Section 3.8 Certain Provisions Relating to Albertsons Companies Stock .
(a) Each of the Members hereby agrees and authorizes the Company and the Management Board to, in the Companys and/or the Management Boards sole discretion exercised in good faith, at any special or any general meeting of the stockholders of Albertsons Companies, vote or direct the voting of, the Albertsons Companies Stock.
(b) Each of the Members hereby agrees that the Company and/or the Management Board shall have the right, at its sole discretion, to sell, in a single transaction or series of related transactions (other than Sell-Down transactions as contemplated under Section 3.8(e)), all of the Albertsons Companies Stock if such sale is previously consented to by the Management Board in accordance with clause (xix) of the definition of Major Decisions; provided , however , that subject to compliance with applicable securities Laws, promptly after receipt by the Company of the proceeds of such sale, the Management Board shall cause the Company to promptly distribute such proceeds (less the reasonable fees and expenses incurred by the Management Board or the Company in connection with such sale) to the Members pro rata in accordance with their Percentage Interests.
(c) Except as permitted by this Section 3.8 or as otherwise permitted under this Agreement the Company shall not, and the Management Board shall not permit the Company to vote, sell or pledge any of the Albertsons Companies Stock.
(d) Except as otherwise provided in the following sentence, after the earlier of (x) four years from the date of this Agreement, and (y) the date upon which the ABS Control Group holds less than 35% of the issued and outstanding common stock of Albertsons Companies in the aggregate (unless otherwise instructed in writing by the Requisite Distribution Deferral Majority), subject to compliance with applicable securities laws (including any blackout periods then in effect), the Management Board shall cause the Company to distribute the Albertsons Companies Stock to the Members pro rata in accordance with their Percentage Interests. The Management Board may not defer the distribution of Albertsons Companies Stock for more than one year from the date the distribution would otherwise have occurred pursuant to the preceding sentence without the consent of all the Members, as well as Kimco and Management Holdco (so long as Kimco and Management Holdco are members of the ABS
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Control Group). As used herein, Requisite Distribution Deferral Majority means the affirmative vote of Members and Kimco, voting as a single class, that directly or indirectly own Albertsons Companies Stock acquired by the Company and Kimco on the date hereof representing at least 70% of such Albertsons Companies Stock.
(e) In the event the Company proposes to effect a private block sale, resale or to demand or participate in a registered offering of Albertsons Companies Stock (a Sell-Down ), the Company shall promptly provide written notice to each Member, specifying the amount and percentage of Albertsons Companies Stock then held by the Company to be sold in such Sell-Down, the amount of Albertsons Companies Stock allocable to such Member that will be sold in such Sell Down (a Members Allocated Stock ) and all other material terms and conditions of the Sell-Down (the Sell-Down Notice ). Each Members Allocable Stock shall be sold in such Sell-Down, unless such Member delivers a written notice to the Company by the close of business on the date which is 10 Business Days after the Sell-Down Notice is delivered to such Member, which such notice shall include the amount of Allocated Stock such Member elects to exclude from such Sell-Down (the Excluded Stock , and such notifying Member, the Non-Participating Member ). Any Member that does not deliver such notice shall have its Allocated Stock sold in the Sell Down. If any Member elects not to have Allocated Stock sold in such Sell-Down, the Company shall, unless prohibited by applicable Law, promptly distribute the Excluded Stock to the Non-Participating Member, provided , that (i) the Non-Participating Member complies with the provisions of Section 3.8(g) and (ii) the Excluded Stock shall be subject to the same restrictions on transfer, market stand-off and lock-up provisions to which the Albertsons Companies Stock of Investor Holdco to be sold in the Sell-Down are subject in the Stockholders Agreement and with respect to such Sell-Down (the Transaction Transfer Restrictions ). Subject to compliance with applicable Law, the Excluded Stock may be sold or otherwise disposed of by the Member so long as no Transaction Transfer Restriction period is in effect. The fees and expenses incurred by the Company in connection with such Sell-Down, other than any underwriters fees and expenses, shall be borne pro rata by the Members and the Non-Participating Members. The Company shall provide notice to such Non-Participating Member or its representatives of its intention to effect a Sell-Down not more than 30 calendar days prior to the intended date for the completion of such Sell-Down, in which event the Non-Participating Member, after receiving notice of such sale, shall have the right to participate in such Sell-Down with Investor Holdco on the same terms and conditions as Investor Holdco pro rata based on the Non-Participating Members beneficial ownership of Albertsons Companies Stock, or, if not participating in such Sell-Down, shall not sell or otherwise dispose of the Excluded Stock (or other Albertsons Companies Stock beneficially owned by such Member) during such 30 calendar day period following delivery of such notice and such longer transfer, market stand-off or lock up provision that the Company and/or its Members shall become subject to in connection with such Sell-Down, and fees and expenses incurred by the Company, other than any underwriters fees and expenses, shall be borne pro rata by the Members and any Non- Participating Member participating in such Sell-Down with respect to any Albertsons Companies Stock beneficially owned by such Non-Participating Member.
(f) A Member who is also an equityholder of Management Holdco may require the Company to distribute to such Member for immediate contribution to Management Holdco shares of Albertsons Companies Stock allocable to such Member, solely to the extent necessary to permit such Member to satisfy margin requirements in accordance with
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the Loan Agreement. Management Holdco may, upon termination and release of any security interests of a lender pursuant to the Loan Agreement with respect to Units held by Management Holdco, distribute to a member of Management Holdco the Units attributable to such member of Management Holdco and previously subject to such security interests.
(g) Any Member who receives a distribution of Albertsons Companies Stock shall, to the extent not already a party to the Stockholders Agreement, execute and deliver a joinder agreement, in form and substance reasonably acceptable to the Albertsons Companies, agreeing to be bound by the terms and conditions of the Stockholders Agreement. Subject to compliance with applicable securities laws and rules and for so long as no Transaction Transfer Restriction period or Albertsons Companies black-out period (including periods during which Albertsons Companies insiders are restricted from trading under an insider trading policy adopted by Albertsons Companies or other special black-out period) is then in effect with respect to such Member, a Member may make a subsequent distribution of Excluded Stock to an equityholder of such Member (A) free of any obligations set forth in this Agreement and the Stockholders Agreement and (B) free of any restrictive legend other than restrictions relating to applicable securities rules and laws. For the sake of clarity, any equityholder of a Member to whom Excluded Stock is distributed pursuant to the preceding sentence may make transfers without restriction other than restrictions relating to applicable securities rules and laws.
(h) As of the Effective Date, the Companys initial nominees to the board of directors of Albertsons Companies are Miller, Dean S. Adler, Sharon L. Allen, Steven A. Davis, Kim Fennebresque, Lisa A. Gray, Hersch Klaff, Ronald Kravit, Alan Schumacher, Jay L. Schottenstein, Lenard B. Tessler and Scott Wille. From and after the designation of the initial nominees set forth in the previous sentence, each Investor Member (for so long as it has a right to designate a director) shall have the right to select its own nominee or nominees to the board of directors of Albertsons Companies in place of its initial nominee, provided , that such nominee (i) is affiliated with such Investor Member, (ii) satisfies the Director Requirements (as such term is defined in the Stockholders Agreement) and (iii) is otherwise not disqualified (in the reasonable determination of the Management Board) from serving as a director on the board of directors of Albertsons Companies.
(i) For so long as Albertsons Companies is a controlled company of the ABS Control Group under the Listed Company Rules of the New York Stock Exchange (the 50% Trigger Date ), the Companys appointees to the board of directors of Albertsons Companies will include four (4) designees of Cerberus (if Cerberus so requests) and one (1) designee from each other Investor Member and Robert Miller (if such Investor Member or Miller so requests).
(j) From and after the 50% Trigger Date, for so long as the ABS Control Group owns at least 35% of the common stock of Albertsons Companies, such that the Company is entitled to appoint six (6) members of the board of directors of Albertsons Companies, such appointees will be selected by the affirmative vote of members of the Management Board, which appointees to the board of directors will include three (3) designees of Cerberus (if Cerberus so requests), three (3) designees in total from the other Investor Members and Robert Miller, whose contractual rights to a board seat shall be unaffected (if such Investor Members or Miller so request).
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(k) From and after the 50% Trigger Date, for so long as the ABS Control Group owns at least 35% of the common stock of Albertsons Companies then outstanding, the Company shall cause its directors appointed to the board of directors of Albertsons Companies to vote in favor of maintaining a 13 person board of directors of Albertsons Companies, unless the Management Board otherwise agrees by the affirmative vote of members of the Management Board representing 80% of the total number of votes held by the members of the Management Board.
(l) Nominees by the Company to the board of directors of Albertsons Companies shall include a sufficient number of individuals who are independent for purposes of the Listed Company Rules of the New York Stock Exchange if the board of directors of Albertsons Companies is so required to comply with such rules.
ARTICLE IV.
GENERAL GOVERNANCE
Section 4.1 Other Ventures .
(a) It is expressly agreed that, except as may be provided with respect to any Member in any agreement between the Company or one of its Subsidiaries, on the one hand, and such Member, on the other hand, each Investor Member, and any Affiliates, officers, directors, managers, stockholders, members, partners or employees of such Investor Member, may engage in other business ventures of every nature and description, whether or not in competition with the Company, independently or with others, and neither the Company nor the other Members shall have any rights in and to any independent venture or activity or the income or profits derived therefrom; the pursuit of other ventures and activities by any such Person is hereby consented to by each Member and shall not be deemed wrongful or improper.
(b) Subject to any applicable restrictions and limitations in the Stockholders Agreement, nothing in this Agreement shall be construed so as to prohibit any Investor Member or its respective Affiliates, officers, directors, managers, stockholders, members, partners or employees from owning, operating or investing in any business of any nature and description, independently or with others, and, except as may be provided with respect to any Member in any agreement between the Company or one of its Subsidiaries, on the one hand, and such Member, on the other hand, no Investor Member need disclose its intention to make any such investment to the other, nor advise the Company of the opportunity presented by any such prospective investment.
Section 4.2 Information . The Company covenants and agrees to deliver to each Member, (a) financial reports of the Company audited by PricewaterhouseCoopers LLP or such other independent accounting firm of national reputation for the Company and its subsidiaries, within 90 days after the end of the Fiscal Year of the Company; (b) quarterly unaudited financial reports for the Company within 45 days after the end of each fiscal quarter of the Company; (c) monthly financial reports for the Company within 30 days after the end of the each month; and (d) such other information and data (including such information and reports made available to any lender of the Company or any of its Subsidiaries under any credit
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agreement or otherwise) as from time to time may be reasonably requested by any such Member without creating an undue burden on the Company. The Company covenants and agrees to deliver to each of Edwards and the Individual Members the information set forth in clauses (a) and (b) above, subject to such Persons agreeing to customary confidentiality provisions and restrictions on disclosure.
Section 4.3 Access . The Company shall, and shall cause its Officers, directors, employees, auditors and other agents to afford the Officers, employees, auditors and other agents of the Investor Members and, so long as he is a Member, of Miller, during normal business hours and upon reasonable notice reasonable access to its officers, employees, auditors, legal counsel, properties, offices and other facilities and to all books and records.
Section 4.4 Standard of Care . Each Member expressly acknowledges that an interest in the Company is highly speculative in nature. The Management Board shall exercise all of its powers and duties under this Agreement in accordance with the terms of this Agreement and with a degree of skill, diligence, prudence and care which, and in a manner which, a director of a Delaware corporation is required to use in the proper discharge of such a directors fiduciary duties; provided, however, that in the event that a member of the Management Board is also an officer or a member of the board of directors of Albertsons Companies, this Section 4.4 shall not restrict such member of the Management Board from exercising his fiduciary duties as an officer or a member of the board of directors of Albertsons Companies.
ARTICLE V.
TRANSFERS OF UNITS
Section 5.1 Transfers .
(a) Restrictions on Transfer.
(i) Except as provided in Section 3.8, no Member, including any assignee or successor in interest of any such Member, shall (voluntarily or involuntarily), directly or indirectly, transfer, assign or otherwise dispose of (each, a Transfer) all or any portion of its Units (including a Transfer pursuant to a foreclosure sale of all or any part of the assets of a Member) without the prior written consent of the Management Board (which may be withheld in its sole discretion), except, in each case subject to the next sentence, the last sentence of this Section 5.1(a)(i) and to Section 5.1(a)(ii) below, (A) a Transfer to a Permitted Transferee, (B) a pledge by a Member of its Units or of its rights to any cash distributions or other distributions made in respect of such Members Units or of the rights to the proceeds to such Member resulting from the disposition by such Member of such Units in accordance with the provisions of this Agreement, provided that, except with respect to Units Transferred to Management Holdco in accordance with this Agreement and pursuant to the Loan Agreement, such pledge does not entitle the pledgee to foreclose upon or otherwise acquire any ownership interest in such Units. No Transfer by a Member other than in the case of a Transfer from a Member to a Permitted Transferee under clauses (i) or (ii) of the definition thereof, shall be effected until 10 Business Days after and excluding the day upon which written notice of such proposed Transfer has been given to each of the Members. Any direct or indirect Transfer,
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assignment or other disposition of any securities or other interests of a Member or of any securities or other interests of any Person or Persons having a direct or indirect ownership interest in a Member shall be deemed a Transfer of the Units of such Member for purposes of this Section 5.1(a); provided that a Transfer shall not include (I) any sale, assignment or other disposition of Equity Securities of any Person (whether by merger, consolidation or otherwise) whose Equity Securities are traded on a national securities exchange or NASDAQ or (II) any sale, assignment, redemption or other disposition of limited partnership interests or shares of any investment partnership or investment vehicle not formed for the purpose of making an investment in the Company.
(ii) Any direct transferee of Units permitted under this Section 5.1(a) shall become a substitute Member under this Agreement and of the Company upon: (A) the direct transferee agreeing in writing (1) to be bound by all the terms and conditions of this Agreement as then in effect (unless such transferee is already a Member) and (2) that such transferee is not in violation of the Patriot Act or any law regulating the identity of investors or the source of funds used to make an investment, and the Management Board being reasonably satisfied that such transfer will not result in any violation of, or failure to comply with, the Patriot Act or any law regulating the identity of investors or the source of funds used to make an investment; (B) compliance with applicable federal and state securities laws; (C) receipt of any regulatory approvals required under applicable law; and (D) the Management Board being reasonably satisfied that such Transfer would not result in (1) any violation of or failure to comply with applicable federal and state securities law and (2) the Company becoming a publicly traded partnership within the meaning of Section 7704(b) of the Code, and the regulations issued thereunder. Unless and until a direct transferee is admitted as an additional or substitute Member under this Agreement and under the applicable formation and governing documents of the Company, the direct transferee shall have no right to exercise any of the powers, rights and privileges of a Member hereunder or under the applicable formation and governing documents of the Company. Any Member that, in accordance with the terms of this Agreement, acquires all (but not less than all) of the Units of another Member shall have the right to exercise all of the powers, rights and privileges of the transferring Member. A Member who has transferred all of its Units shall cease to be a Member upon Transfer of all of the Members Units and thereafter shall have no powers, rights and privileges as a Member hereunder.
(iii) The Company, any Member, Management Board, officers, directors and equity holders of the Company and any other Person or Persons having business with the Company need only deal with Members who are admitted as Members or as additional or substitute Members of the Company, and they shall not be required to deal with any other Person by reason of a Transfer by a Member, except as may be otherwise expressly provided in this Agreement. In the absence of a transferee of a transferring Members Units being admitted as a Member as provided herein, any payment to a Member shall release the other parties hereto of all liability to any other Persons who may be interested in such payment by reason of an assignment by such Member.
(iv) Notwithstanding anything in this Agreement to the contrary, the Members acknowledge that any Transfer of Units that would require the prior approval of the Federal Communications Commission or Federal Energy Regulatory Commission may only be made upon receipt of such approval.
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(b) Non-Permitted Transfers .
(i) Any purported Transfer of all or any portion of Units of the Company or any economic benefit or other interest therein not in compliance with Section 5.1(a) shall be null and void ab initio, regardless of any notice provided to any of the parties hereto, and shall not create any obligation or liability of any of the parties hereto to the purported transferee, and any Person purportedly acquiring all or any portion of any Units or any economic benefit or other interest therein transferred not in compliance with Section 5.1(a) shall not be entitled to admission to the Company as a substitute Member.
(ii) In the case of an attempted Transfer of all or any portion of any Units of the Company or any economic benefit or other interest therein that is not in compliance with Section 5.1(a), the parties engaging or attempting to engage in such Transfer shall indemnify and hold harmless the other parties hereto and their respective officers, directors, affiliates, members, partners and employees from all cost, liability and damage that any of such indemnified persons may incur (including, without limitation, incremental tax liability and attorneys fees and expenses) as a result of such Transfer or attempted Transfer and the enforcement of this indemnity.
(iii) No Member, including any assignee or successor in interest of any Member, shall Transfer all or any portion of its Units of the Company or any economic benefit or other interest therein if such Transfer would cause the Company to be treated as a publicly traded partnership within the meaning of Code Section 7704 and the Regulations promulgated thereunder.
(c) Injunctive Relief . The Company and the Members hereby declare that it is impossible to measure in money the damages which will accrue to the parties hereto by reason of the failure of any Member to perform any of its obligations set forth in this Section 5.1. Therefore, the Company and the Members shall have the right to specific performance of such obligations, and if any party hereto shall institute any action or proceeding to enforce the provisions hereof, each of the Company and the Members hereby waives the claim or defense that the party instituting such action or proceeding has an adequate remedy at law.
ARTICLE VI.
ALLOCATIONS
Section 6.1 General Rules; Allocation of Profits and Losses . Except as otherwise provided in this Article VI, Profits and Losses for any taxable period shall be allocated among the Members in such manner that, as of the end of such taxable period, the respective Capital Accounts of the Members shall be equal to the respective amounts that would be distributed to them, determined as if the Company were to (i) liquidate the assets of the Company for an amount equal to their Gross Asset Value and (ii) distribute the proceeds of liquidation pursuant to Section 10.3.
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Section 6.2 Other Allocation Rules .
(a) For purposes of determining the Profits, Losses or other items allocable to any taxable period, Profits, Losses and such other items shall be determined on a daily, monthly or other basis as determined by the Management Board in its reasonable discretion using any permissible method under Code Section 706 and the Regulations thereunder.
(b) The Members are aware of the United States federal income tax consequences of the allocations made by this Article VI and hereby agree to be bound by the provisions of this Article VI in reporting their shares of Company income and loss for income tax purposes.
(c) All items of income, gain, loss, deduction, or credit and any other allocations not otherwise provided for shall be allocated among the Members as determined by the Management Board in its reasonable discretion.
(d) If a Member transfers all or a portion of its Units during any taxable period, then Profits, Losses, each item thereof and all other items attributable to the transferred interest for such taxable period shall be divided and allocated between the transferor and the transferee by taking into account their varying interests in the Company during the taxable period in accordance with Section 706(d) of the Code, using any conventions permitted by law and selected by the Management Board.
(e) Tax returns shall be provided to the Management Board for review before submission, and any reasonable requests by the Management Board for changes in order to ensure compliance with such requirements shall be made, provided that such changes shall not result in the amount of cash or other distributions to any Member being affected or cause a material adverse tax or other effect for any Member.
Section 6.3 Tax Allocations: Code Section 704(c) .
(a) Subject to Section 6.3(f), for each taxable year, items of income, deduction, gain, loss and credit shall be allocated for tax purposes among the Members to reflect equitably the amounts which have been credited or debited to the Capital Account of each such Member for such taxable year and prior taxable years.
(b) In accordance with Code Section 704(c) and the Regulations thereunder, items of income, gain, loss, deduction and credit with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted tax basis of such property at the time of contribution to the Company for federal income tax purposes and its initial Gross Asset Value at the time of contribution using a method permitted by applicable Regulations under Code Section 704(c), as determined by the Management Board in its reasonable discretion.
(c) In the event the Gross Asset Value of any Asset is adjusted in accordance with paragraph (b) of the definition of Gross Asset Value hereof, subsequent allocations of items of income, gain, loss, deductions or credit with respect to such asset shall take into account any variation between the adjusted tax basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder.
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(d) The Company shall use its reasonable best efforts to specifically identify individual shares of Albertsons Companies Stock that correspond to any property contributed by a Member for purposes of Code Section 704(c), and in the case of a distribution of shares of Albertsons Companies Stock to one or more Members or a sale of shares of Albertsons Companies Stock relating to a Member in connection with a Sell-Down, the Company shall use its reasonable best efforts to distribute to each such Member, or sell, as applicable, the shares of Albertsons Companies Stock identified with such Member.
(e) Subject to Section 6.3(d), if the Company distributes Albertsons Companies Stock to one or more Members in connection with a Sell-Down pursuant to Section 3.8(e), then for U.S. federal income tax purposes, the taxable gain and taxable loss on the Albertsons Companies Stock sold in connection with such Sell-Down shall be specially allocated, to the maximum extent permitted, among the Members who receive cash from such Sell-Down proportionately and in a reasonable manner that reflects the receipt of such cash.
(f) Any elections or other decisions relating to allocations for tax purposes, basis adjustments or other tax matters shall be made by the Management Board in its reasonable discretion. Allocations pursuant to this Section 6.3 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Members Capital Account, share of Profits or Losses, or other items or distributions pursuant to any provision of this Agreement.
ARTICLE VII.
DISTRIBUTIONS AND EXPENSES
Section 7.1 Distributions . Subject to Section 3.8, distributions of cash or other property by the Company shall be made, when, as and if declared by the Management Board, to the Members on a pro rata basis in proportion to the aggregate number of Units owned by such Members.
Section 7.2 Amounts Withheld . All amounts withheld or paid pursuant to the Code or any provisions of state, local or foreign tax law with respect to any payment, distribution, allocation or other consideration paid to the Members, including in connection with a contribution of assets to the Company by a Member, shall be treated as amounts paid or distributed, as the case may be, to the Members with respect to which such amount was withheld or paid pursuant to this Section 7.2 for all purposes under this Agreement. The Company is authorized to withhold or pay, when required under applicable law, from payments, distributions, or other consideration paid to Members, and with respect to allocations to the Members, and to pay over to any federal, state, local or foreign government any amounts required to be so withheld or paid pursuant to the Code or any provisions of any federal, state, local or foreign law, and shall allocate any such amounts to the Members with respect to which such amounts were withheld or paid.
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Section 7.3 Expenses . Except as otherwise provided in this Agreement, as between the Company and its Members, the Company will be responsible for all third party expenses of the Company. Subject to Section 3.7, each Member shall otherwise be responsible for all costs and expenses incurred by such Member in the performance of its obligations under this Agreement.
Section 7.4 Tax Distributions . The Management Board may, in its reasonable discretion, cause the Company to make distributions to each Member (to the extent that cash is available for such distributions, after necessary expenses and reserves in accordance with this Agreement and as otherwise determined by the Management Board or as may be required by such Members employment agreement or any Side Letter) so that each such Member may pay its taxes with respect to its share of the taxable income of the Company for a taxable year or other taxable period. If the Management Board determines that enough cash is available for such distributions, then the Management Board shall calculate the amount of any such distributions by applying the highest marginal effective tax rate applicable to a corporation doing business in New York, New York to each Member and may make such distributions to the extent that cash is available. Any distribution made to a Member pursuant to this Section 7.4 shall be made as soon as practicable after the end of the taxable year or other taxable period for which such distribution is being made. Any distribution made to a Member shall reduce the amount distributable to such Member from the Company under Section 7.1.
ARTICLE VIII.
OTHER TAX MATTERS
Section 8.1 Tax Matters Member . The Company and each Member hereby designate the following Member as the tax matters partner for purposes of Code Section 6231(a)(7) (the Tax Matters Member ): Cerberus. The Management Board (after consultation with the Tax Matters Member) shall: (a) cause to be prepared and timely filed by the Company all United States federal, state and local income tax returns of the Company for each year for which such returns are required to be filed, and (b) determine the appropriate treatment of each item of income, gain, loss, deduction and credit of the Company and the accounting methods and conventions under the tax laws of the United States, the several states and other relevant jurisdictions as to the treatment of any such item or any other method or procedure related to the preparation of such tax returns. Subject to the express provisions of this Agreement, the Management Board may in its reasonable discretion cause the Company to make or refrain from making any and all elections permitted by such tax laws.
Section 8.2 Furnishing Information to Tax Matters Member . Each Member shall furnish to the Tax Matters Member such information (including information specified in Code Section 6230(e)) as such Tax Matters Member may, at its reasonable discretion, request to permit it to provide the Internal Revenue Service with sufficient information to allow proper notice to the Members in accordance with Code Section 6223 or any other provisions of the Code or the published regulations thereunder which require the Tax Matters Member to obtain information from the Members.
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Section 8.3 Tax Claims and Proceedings . In respect of any income tax audit of any tax return of the Company, the filing of any amended return or claim for refund in connection with any item of income, gain, loss, deduction or credit reflected on any income tax return of the Company, or any administrative or judicial proceedings arising out of or in connection with any such audit, amended return, claim for refund or denial of such claim, (a) all expenses reasonably incurred by the Tax Matters Member in connection therewith shall be expenses of the Company, (b) in any material proceeding the Tax Matters Member shall promptly take such action as may be necessary to cause each of the other Members to become a notice partner within the meaning of Code Section 6231(a)(8), (c) in any material proceeding the Tax Matters Member shall furnish to the other Members a copy of all material notices or other written communications received by the Tax Matters Member from the Internal Revenue Service (except such notices or communications as are sent directly to the Members), and (d) in any material proceeding the Tax Matters Member shall notify the other Members of all material conversations it has with the relevant taxing authority and shall keep the other Members reasonably informed of all material matters which may come to its attention in its capacity as Tax Matters Member. The Tax Matters Member shall use commercially reasonable efforts to provide tax returns to all Members within 120 days after the end of the relevant fiscal year.
Section 8.4 Books and Records . The books and records of the Company shall reflect all Company transactions and shall be appropriate and adequate for the Companys business. The books and records of the Company shall include a record of each transfer of participating interests of the Company. The taxable year of the Company for federal income tax purposes shall be the calendar year or such other taxable year as is required for U.S. federal income tax purposes. All books and records of the Company shall be maintained at any office of the Company or at the Companys principal place of business in the United States, and each Member, and any duly authorized representative, shall have access to them at such office of the Company and the right to inspect and copy them at reasonable times. The Companys books of account shall be kept on an accrual basis or as otherwise provided by the Management Board and otherwise in accordance with generally accepted accounting principles, consistently applied, except that for income tax purposes such books shall be kept in accordance with applicable tax accounting principles (including the Regulations).
Section 8.5 Survival . The provisions of this Article VIII shall survive the termination of the Company (as well as any termination, purchase or redemption of any Members Interest in the Company for any reason whatsoever), and shall remain binding on the Members and all former Members for a period of time necessary to resolve with the appropriate taxing authorities any and all material matters regarding the taxation of the Company and its Members by reason of their percentage interests.
ARTICLE IX.
REPRESENTATIONS AND WARRANTIES
Section 9.1 Representations and Warranties of Members . Each of the Members hereby represents and warrants to the Company and to each of the other Members, as of the date hereof, that:
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(a) If it is a corporation, a limited liability company or limited partnership, it is as of the date hereof, duly incorporated or otherwise duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and if it is a partnership, is as of the date hereof, validly constituted and not dissolved, and, in each case, has the power and lawful authority to own its assets and properties and to carry on its business as now conducted.
(b) It has, as of the date hereof, the full right, power and authority to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been, fully executed and delivered by such Member and, assuming the due execution and delivery by the other parties, constitutes, in the case of this Agreement, the valid and binding obligation of such Member, enforceable in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, reorganization or moratorium or other similar laws affecting the enforcement of creditors rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.
(c) No approval or consent of any governmental authority or of any other Person is required in connection with the execution and delivery by it of this Agreement and the consummation and performance by such member of the transactions contemplated hereunder, except such as have been obtained and are in full force and effect.
(d) The execution and delivery of this Agreement by it, the consummation of the transactions contemplated hereunder and the performance by such Member of its obligations under this Agreement, in accordance with the terms and conditions hereof, will not, as of the date hereof, conflict with or result in the breach or violation of any of the terms or conditions of, or constitute (or with notice or lapse of time or both would constitute) a default under, (i) the certificate of incorporation, by-laws, certificate of formation, limited liability company agreement or other constitutive documents of such Member; (ii) any instrument or contract to which such Member is a party or by or to which it or its assets or properties are bound or subject; or (iii) any statute or any regulation, order, judgment or decree of any governmental authority, except, in each case, for such breaches violations or defaults that would not, individually or in the aggregate, materially impair the ability of such Member to perform its obligations hereunder.
(e) It understands that there are substantial risks to an investment in the Company and it has both the sophistication to be able to fully evaluate the risk of an investment in the Company and the capacity to protect its own interests in making such investment. Such Member fully understands and agrees that the investment in the Company is an illiquid investment.
(f) If it is an Investor Member, it is a QIB or an accredited investor within the meaning of the 1933 Act and is able to bear the economic risk of such an investment in the Company for an indefinite period of time, that it has no need for liquidity of this investment and it could bear a complete loss of this investment. Each such Investor Member is either (i) a qualified purchaser within the meaning of the 1940 Act or (ii) if the Member is an entity formed and is being utilized primarily for the purpose of making an investment in the Company, each beneficial owner of such Members securities is such a qualified purchaser.
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(g) It is acquiring its Units for investment solely for such Members own account and not for distribution, transfer or sale to others in connection with any distribution or public offering. It understands that, irrespective of whether or not the Units might be deemed securities under applicable laws, the Company is not obligated to register any Units for resale under the 1933 Act or any applicable state securities laws.
(h) It specifically understands and agrees that no other Member has made nor will make any representation or warranty with respect to the worthiness, terms, value or any other aspect of the Company, any Units or the Albertsons Companies Stock and it explicitly disclaims any warranty, express or implied, with respect to such matters. In addition, such Member specifically acknowledges, represents and warrants that (i) it is not relying on any other Member, for its own due diligence concerning, or evaluation of, the Company or any related transaction and (ii) that it is not relying on any other Member with respect to tax and other economic considerations involved in an investment in the Company.
(i) No broker, investment banker, financial advisor or other Person is entitled to any brokers, finders, financial advisors or other similar fee or commission in connection with the Company based upon arrangements made by or on behalf of such Member.
Section 9.2 ERISA Representation . Each of the Members represents, warrants and covenants to each other Members and to the Company that no portion of the assets being used by it to purchase and hold its Units constitute assets of a plan within the meaning of Section 3(32) of ERISA.
Section 9.3 Survival . The representations and warranties of the Members contained in this Agreement shall survive the Effective Date.
ARTICLE X.
DISSOLUTION AND TERMINATION OF THE COMPANY
Section 10.1 Dissolution . The Company shall be dissolved and its affairs wound up upon the entry of a decree of judicial dissolution pursuant to Section 18-802 of the Act.
Section 10.2 Continuation of Interest of Members Representative . Notwithstanding anything contained herein, upon the expulsion, receivership, dissolution or Bankruptcy of a Member, the personal representative, trustee-in-bankruptcy, debtor-in-possession, receiver, other representative, successor, heir or legatee (each a Representative ) of such Member shall, subject to the provisions of Section 5.1, immediately succeed to the Units of such Member in the Company. Such Representative shall appoint an individual (which may be such Representative) who will represent the Representatives voting interest, if any.
Section 10.3 Dissolution, Winding Up and Liquidation .
(a) Upon a dissolution of the Company, the Company shall continue solely for purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying claims of its creditors. The liquidator of the Company shall take full account of the Companys liabilities and property and shall cause the property or the proceeds from the sale thereof, to the extent sufficient therefor, to be applied and distributed, to the maximum extent permitted by law, in the following order:
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(i) first, to creditors (including Members who are creditors) in satisfaction of all of the Companys debts and other liabilities (including any liabilities pursuant to any Unit repurchase obligation of the Company that are then due and payable), including the expenses of the winding-up, liquidation and dissolution of the Company (whether by payment or the making of reasonable reserves to provide for payment thereof); and
(ii) second, to the Members in accordance with Section 7.1.
(b) Distributions pursuant to this Section 10.3 shall be made no later than the end of the Fiscal Year during which the Company is liquidated (or, if later, 90 days after the date on which the Company is liquidated).
Section 10.4 Member Bankruptcy .
(a) Notwithstanding any other provision of this Agreement, the Bankruptcy of a Member shall not cause the Member to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution.
(b) Notwithstanding any other provision of this Agreement, each of the Members waives any right it might have to agree in writing to dissolve the Company upon the Bankruptcy of the Members, or the occurrence of an event that causes the Member to cease to be a member of the Company.
ARTICLE XI.
INDEMNIFICATION AND CONTRIBUTION
Section 11.1 Indemnity by the Company . Subject to the provisions of Section 11.4, the Company shall indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such Person is or was a Member, Officer, director, member of the Management Board, controlling person, employee, legal representative or agent of the Company, or is or was serving at the request of the Company as manager, director, member of the Management Board, officer, partner, member, shareholder, controlling person, employee, legal representative or agent of another limited liability company, partnership, corporation, joint venture, trust or other enterprise (a Indemnified Person ), from and against any and all claims, actions, suits, proceedings, liabilities, obligations, losses, damages, judgments, fines, penalties, amounts paid in settlement, interest, costs and expenses (including reasonable attorneys and accountants fees, court costs and other out-of-pocket expenses actually and reasonably incurred in investigating, preparing or defending the foregoing) (including any such brought by or in the right of the Company) suffered or incurred by such Indemnified Person while serving in such capacity or that otherwise in any way relate to or arise out of any action or inaction by such Indemnified Person or the Company (collectively, Indemnifiable Losses ), either (i) in accordance with the terms of an applicable Side Letter or
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(ii) in the absence of a Side Letter, if such Indemnified Person acted in good faith and in a manner that such Indemnified Person reasonably believed to be in or not opposed to the best interests of the Company and not in violation of this Agreement, and, with respect to a criminal action or proceeding, had no reasonable cause to believe such Persons conduct was unlawful; provided , that the Company shall have no obligation to indemnify or defend hereunder to the extent such action, suit or proceeding arises from fraud, willful misconduct or gross negligence on the part of such Indemnified Person.
Section 11.2 Exculpation . No Indemnified Person shall be liable to any Member of the Company for any act or failure to act on behalf of the Company, unless such act or failure to act resulted from fraud, willful misconduct or gross negligence of the Indemnified Person. Each Indemnified Person may consult with legal counsel and accountants in respect of the Companys affairs and shall be fully protected and justified in any action or inaction which is taken in accordance with the advice or opinion of such counsel or accountants.
Section 11.3 Expenses . Any indemnification under Section 11.1, as well as the advance payment of expenses permitted under Section 11.4 shall be made by the Company to the fullest extent permitted under the Act.
Section 11.4 Advance Payment of Expenses . In addition to any provisions of any Side Letter, the expenses of any Member incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of such Member (in form and substance, from an indemnitor, reasonably satisfactory to the Management Board), to repay the amount if it is ultimately determined by a court of competent jurisdiction that such Member is not entitled to be indemnified by the Company. The provisions of this Section 11.4 do not affect and shall not be deemed exclusive of any other rights, including, without, limitation, any rights to indemnification or advancement of expenses to which any such Indemnified Person other than the Members may be entitled under any contract, pursuant to approval of the Members, or otherwise by law.
Section 11.5 Beneficiaries . The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article XI continues for a Person who has ceased to be a Member, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such Person.
Section 11.6 Indemnification Procedure for Third Party and Other Claims . The Company shall have the right, but not the obligation, exercisable by written notice to the Person seeking such indemnification hereunder (the Indemnified Party ) promptly but in any event no later than 30 days after receipt of written notice from the Indemnified Party of the commencement of or assertion of any claim, action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a Third Party Claim ), to assume the defense and control the settlement of such Third Party Claim that (a) involves (and continues to involve) solely money damages or (b) involves (and continues to involve) claims for both money damages and equitable relief against the Indemnified Party that cannot be severed, where the claims for money damages are the primary claims asserted by the third party and the claims for equitable relief are incidental to the claims for money damages. The Indemnified Party shall have the right
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to assume the defense and control the settlement of any Third Party Claim (i) not described in clauses (a) or (b) of the preceding sentence or (ii) described in clauses (a) or (b) of the preceding sentence whose defense and control of settlement has not been promptly assumed by the Company. The Company or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim that the other is defending, as provided in this Agreement. The Company, if it has assumed the defense of any Third Party Claim as provided in this Agreement, shall not consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim without the Indemnified Partys prior written consent (which consent shall not be unreasonably withheld). The Company shall not, without the Indemnified Partys prior written consent, enter into any compromise or settlement which (x) commits the Indemnified Party to take, or to forbear to take, any action or (y) does not provide for a complete release by such Third Party of the Indemnified Party. The Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third Party Claim involves equitable or other non-monetary relief against the Indemnified Party, and shall have the right to settle any Third Party Claim involving money damages for which the Company has not assumed the defense pursuant to this Section 11.6 with the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
Section 11.7 Other Claims . In the event an Indemnified Party shall claim a right to payment pursuant to this Agreement for other than a Third Party Claim, such Indemnified Party shall send written notice of such claim to the Indemnifying Party. Such notice shall specify the basis for such claim. As promptly as possible after the Indemnified Party has given such notice, the Indemnified Party and the Company shall attempt to resolve such claim by mutual agreement before resorting to other legal means to resolve such claim.
Section 11.8 Limitation on Damages . Notwithstanding anything contained in this Agreement to the contrary, no party shall be liable to the other party for any indirect, special, punitive, exemplary or consequential loss or damage (including any loss of revenue or profit) arising out of this Agreement including, without limitation, in respect of any breach by any Member of this Agreement; provided , that the foregoing shall not be construed to preclude recovery by the Indemnified Party in respect of Indemnifiable Losses directly incurred from Third Party Claims. Any Indemnified Person shall take commercially reasonable actions to mitigate his, her, its or their damages. The obligation of any Member to indemnify any Person(s) pursuant to this Agreement is limited, in the aggregate for all claims, to such Members Units, and no Person claiming indemnification or otherwise making any claim against a Member shall have recourse against such Member for any deficiency.
ARTICLE XII.
MISCELLANEOUS PROVISIONS
Section 12.1 Entire Agreement . This Agreement, the Member Contribution and Exchange Agreement, employment agreements with the Company or one of its Affiliates, any Side Letters and the Certificate of Formation constitute the complete and exclusive statement of the agreement among the Members with respect to the subject matter contained herein and therein. This Agreement, the Member Contribution and Exchange Agreement, employment agreements with the Company or one of its Affiliates, any Side Letters and the Certificate of Formation replace and supersede all prior agreements by and among the Members with respect to the subject matter contained herein and therein.
-38-
Section 12.2 Amendments . Except as otherwise expressly provided in this Agreement, this Agreement may be amended or waived only by a unanimous vote of the Investor Members entitled to vote. Notwithstanding the foregoing or anything in this Agreement to the contrary:
(a) this Agreement may not be amended, without the prior written consent of Miller, in a manner that would adversely affect Millers rights as a Member in a disproportionate manner from the effect of such amendment on any holder of any equity interests of the Company or would adversely affect Millers pre-emptive rights as set forth in Section 2.2(e), rights to be a member of the Management Board or committee thereof as set forth in Section 3.1(b), Section 3.1(f), Section 3.1(g) respectively, rights to be designated to the board of directors of Albertsons Companies as set forth in Section 3.8, the authority of the Executive Chairman and the information and access rights of Miller in Sections 4.2 and 4.3;
(b) this Agreement may not be amended without the prior written consent of holders of a majority of Units held by the Individual Members in a manner that would adversely affect the Individual Members in a disproportionate manner from the effect of such amendment on any holder of any equity interests of the Company;
(c) any amendment to the provisions of this Section 12.2(c), the proviso of the last sentence of Section 2.2(b), the language set forth in the definition of Side Letter or the use of the term Side Letter or employment agreement (but only to the extent such amendment affects a Side Letter or employment agreement entered into by an Individual Member) shall require the consent of Miller, if he shall then be a Member, on behalf of Miller and the Individual Members; and
(d) Section 3.2(c) (solely to the extent such amendment relates to Kimcos right to approve specified Major Decisions), Section 3.8(d) and this Section 12.2(d) may not be amended without the prior written consent of Kimco.
(e) The penultimate sentence of Section 3.8(d) and this Section 12.2(e) may not be amended without the prior written consent of Management Holdco.
(f) this Agreement may not be amended without the prior written consent of Edwards in a manner that would adversely affect Edwards in a disproportionate manner from the effect of such amendment on the Individual Members.
Section 12.3 Applicable Law; Venue .
(a) The Certificate of Formation and this Agreement shall be governed exclusively by their respective terms and the laws of the State of Delaware, without regard to the conflicts of laws principles thereof.
-39-
(b) Any legal action or proceeding with respect to this Agreement and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York located in New York City in the Borough of Manhattan or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, each Member hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and the appellate courts thereof. Each Member irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at the address for notices set forth herein. Each Member hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.
Section 12.4 Enforcement . In the event of an action, suit or proceeding initiated by one Member against another Member or the Company involving the enforcement of its rights hereunder, the prevailing party shall be entitled to indemnification from the other party of reasonable attorneys fees and expenses incurred in enforcing its rights in such action, suit or proceeding in accordance with this Section, or in accordance with an employment agreement.
Section 12.5 Headings . The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement or any provisions contained herein.
Section 12.6 Severability . If any provision of this Agreement or the application thereof to any Person or circumstance shall be deemed invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law.
Section 12.7 Counterparts . This Agreement may be executed in several counterparts with the same effect as if the parties executing the several counterparts had all executed one counterpart.
Section 12.8 Filings . Following the execution and delivery of this Agreement, representatives of the Company, shall promptly prepare any documents required to be filed and recorded under the Act, and such representatives shall promptly cause each such document to be filed and recorded in accordance with the Act and, to the extent required by local law, to be filed and recorded or notice thereof to be published in the appropriate place in each jurisdiction in which the Company may hereafter establish a place of business. Such representatives, under shall also promptly cause to be filed, recorded and published such statements of fictitious business name and any other notices, certificates, statements or other instruments required by any provision of any applicable law of the United States or any state or other jurisdiction which governs the conduct of its business from time to time.
-40-
Section 12.9 Additional Documents . Each Member agrees to perform all further acts and to execute, acknowledge and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement.
Section 12.10 Notices . All notices, requests and other communications to any party hereunder shall be in writing (including facsimile) and shall be effective and deemed delivered or given, as the case may be, (a) if given by facsimile, when transmitted and the appropriate confirmation is received from the machine transmitting such facsimile, and followed by hard copy via overnight mail or reputable overnight courier for receipt the next Business Day, (b) if given by reputable overnight courier, on the next Business Day, (c) by hand delivery, when delivered or (d) if mailed, on the second Business Day following the day on which sent by first class mail:
If to Cerberus, addressed as follows:
c/o Cerberus Capital Management, L.P.
875 Third Avenue, 11 th Floor
New York, NY 10022
Attention: | Lenard Tessler |
Mark A. Neporent, Esq. |
Lisa A. Gray, Esq. |
Facsimile number: (212) 755-3009
With a copy to:
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attention: | Stuart D. Freedman, Esq. |
Robert B. Loper, Esq. |
Facsimile number: (212) 593-5955
If to Jubilee, addressed as follows:
Jubilee Limited Partnership
4300 E. Fifth Ave.
Columbus, OH 43219
Attention: | Ben Kraner |
Tod H. Friedman, Esq. |
If to Klaff, addressed as follows:
Klaff Realty, L.P.
122 S. Michigan Avenue
Suite 1000
Chicago, IL 60603
Attention: Hersch M. Klaff
Facsimile number: (312) 360-0606
-41-
With a copy to:
Fox, Swibel, Levin & Carroll, LLP
200 W. Madison Street, Suite 3000
Chicago, IL 60603
Attention: | Laurie A. Levin |
Facsimile number: (312) 224-1201
If to Lubert-Adler, addressed as follows:
Lubert-Adler Partners
The Cira Centre
2929 Arch Street
Philadelphia, PA 19104
Attention: | Gerald A. Ronon |
With a copy to:
Kirkland & Ellis LLP
300 North LaSalle
Chicago, IL 60654
Attention: | Richard J. Campbell |
Facsimile number: (312) 862-2200
If to Miller or any of the Individual Members, at such address or facsimile numbers as such Member may hereinafter specify to the Management Board, with a copy to:
Hogan Lovells US LLP
1999 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067
Attention: | Barry L. Dastin, Esq. |
Russ A. Cashdan, Esq. |
Facsimile: (310) 785-4601
If to Robert Edwards, at such address or facsimile numbers as Robert Edwards may hereinafter specify to the Management Board, with a copy to:
Vedder Price
222 North LaSalle Street
Chicago, Illinois 60601
Attention: | Robert Simon, Esq. |
Facsimile: (312) 609-7550
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If to the other Members, at the addresses or facsimile numbers set forth on the signature page to this Agreement or such other addresses or facsimile numbers as such Members may hereafter specify to the Management Board, who shall so notify the other Members.
Section 12.11 Waiver of Right to Partition and Bill of Accounting . To the fullest extent permitted by applicable law, each Member covenants that it will not, and hereby waives any right to, file a bill for partnership accounting. Each Member irrevocably waives any right that it may have to maintain any action for dissolution of the Company (unless the Company is dissolved pursuant to Section 10.1).
Section 12.12 Confidentiality; Press Releases . Each Member shall keep confidential all information of a confidential nature obtained pursuant to this Agreement, except that a Member shall be entitled to disclose such confidential information to (a) its lawyers, accountants and other service providers as reasonably necessary in the furtherance of such Members bona fide interests and to potential transferees of its Units provided that such potential transferees enter into customary confidentiality agreements, with the Company expressly stated therein to be a third party beneficiary thereof, (b) its investors provided that such investors are subject to confidentiality obligations, and (c) the extent required by law or judicial or regulatory order, or to comply with applicable reporting requirements under the Federal securities laws or the rules of any exchange or self-regulatory organization to which such Member or its Affiliates is subject. Notwithstanding anything in this Agreement to the contrary, to comply with Treas. Reg. Section 1.6011-4(b)(3)(i), each Member (and any employee, representative or other agent of such Member) may disclose to any and all Persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of the Company or any transactions undertaken by the Company, it being understood and agreed, for this purpose, (a) the name of, or any other identifying information regarding (i) the Company or any existing or future Member (or any affiliate thereof) in the Company, or (ii) any investment or transaction entered into by the Company; and (b) any performance information relating to the Company, does not constitute such tax treatment or tax structure information. Except as may be required by applicable law or judicial or regulatory order, to comply with applicable reporting requirements under the Federal securities laws or the rules of any exchange or self-regulatory organization to which such Member is subject, no Member shall publicly make any public announcements or issue any press release regarding this Agreement or the Company or its business; provided , however , each Investor Member may consult with and obtain the approval of the other Investor Members before issuing a press release or other public announcement with respect to this Agreement and may issue a press release or make a public announcement following such consultation and approval.
Section 12.13 Uniform Commercial Code . Each limited liability company interest in the Company shall constitute a security within the meaning of, and governed by, (i) Article 8 of the Uniform Commercial Code (including Section 8 102(a)(15) thereof) as in effect from time to time in the State of Delaware, and (ii) Article 8 of the Uniform Commercial Code of any other applicable jurisdiction that now or hereafter substantially includes the 1994 revisions to Article 8 thereof as adopted by the American Law Institute and the National Conference of Commissioners on Uniform State Laws and approved by the American Bar Association on February 14, 1995.
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Section 12.14 Binding Agreement . Notwithstanding any other provision of this Agreement, the Members agree that this Agreement constitutes a legal, valid and binding agreement of the Members, and is enforceable against the Members by the Company in accordance with its terms.
Section 12.15 DISCLOSURES . THE INTERESTS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 1933 ACT ), OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND SUCH LAWS. THE INTERESTS ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE 1933 ACT AND SUCH LAWS PURSUANT TO EXEMPTION FROM REGISTRATION THEREUNDER. THERE WILL NOT BE ANY PUBLIC MARKET FOR THE INTERESTS. IN ADDITION, THE TERMS OF THIS AGREEMENT RESTRICT THE TRANSFERABILITY OF INTERESTS.
[Remainder of page intentionally left blank. Signature page follows.]
-44-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, effective as of the date first above written.
MEMBERS: | ||
CERBERUS ICEBERG LLC | ||
By: |
|
|
Name: | ||
Title: |
CERBERUS CAPITAL MANAGEMENT, L.P. | ||
By: |
|
|
Name: | ||
Title: |
JUBILEE ABS HOLDING LLC | ||
By: |
|
|
Name: | ||
Title: |
KLAFF MARKETS HOLDINGS LLC | ||
By: |
|
|
Name: | ||
Title: |
KLAFF-W LLC | ||
By: |
|
|
Name: | ||
Title: |
LUBERT-ADLER SAN AGGREGATOR, L.P. | ||
By: | ||
Name: | ||
Title: |
L-A ASSET MANAGEMENT SERVICES, LLC | ||
By: | ||
Name: | ||
Title: |
|
Robert Edwards |
|
Robert G. Miller |
|
Howard Cohen |
|
Justin Dye |
|
Rick Navarro |
|
Robert Butler |
|
Wayne Denningham |
|
Mike McCarthy |
|
Andrew Scoggin |
|
Paul Rowan |
|
Robert Woseth |
|
Justin Ewing |
|
David Ober |
|
Mark Bates |
|
William Emmons |
|
Shane Dorcheus |
SOLELY FOR PURPOSES OF SECTION 3.2(C), SECTION 3.8(D) AND SECTION 12.2(D): | ||
KRS AB ACQUISITION, LLC | ||
By: | ||
Name: | ||
Title: |
KRS ABS, LLC | ||
By: | ||
Name: | ||
Title: |
SOLELY FOR PURPOSES OF SECTION 3.8(D) AND SECTION 12.2(E): | ||
ALBERTSONS MANAGEMENT HOLDCO, LLC | ||
By: | ||
Name: | ||
Title: |
SCHEDULE A
Individual Members
Howard Cohen
Justin Dye
Rick Navarro
Robert Butler
Wayne Denningham
Mike McCarthy
Andrew Scoggin
Paul Rowan
Robert Woseth
Justin Ewing
David Ober
Mark Bates
William Emmons
Shane Dorcheus
SCHEDULE B
UNITS
MEMBERS NAME |
UNITS |
OWNERSHIP PERCENTAGE |
||
Cerberus Iceberg LLC |
||||
Cerberus Capital Management, L.P. |
||||
Jubilee ABS Holding LLC |
||||
Klaff Markets Holdings LLC |
||||
Klaff-W LLC |
||||
Lubert-Adler SAN Aggregator, L.P. |
||||
L-A Asset Management Services, LLC |
||||
Robert G. Miller |
||||
Robert Edwards |
||||
Howard Cohen |
||||
Justin Dye |
||||
Rick Navarro |
||||
Robert Butler |
||||
Wayne Denningham |
||||
Mike McCarthy |
||||
Andrew Scoggin |
||||
Paul Rowan |
||||
Robert Woseth |
||||
Justin Ewing |
||||
David Ober |
||||
Mark Bates |
MEMBERS NAME |
UNITS |
OWNERSHIP PERCENTAGE |
||
William Emmons |
||||
Shane Dorcheus |
||||
TOTAL |
LIMITED LIABILITY COMPANY AGREEMENT
OF
ALBERTSONS INVESTOR HOLDINGS LLC
Table of Contents
Page | ||||||
ARTICLE I. GENERAL PROVISIONS |
2 | |||||
Section 1.1 |
Registered Office | 2 | ||||
Section 1.2 |
Other Offices | 2 | ||||
Section 1.3 |
Purpose; Nature of Business Permitted; Powers | 2 | ||||
Section 1.4 |
Limited Liability of Members | 2 | ||||
Section 1.5 |
Tax Classification; No State Law Partnership | 2 | ||||
Section 1.6 |
Definitions | 2 | ||||
Section 1.7 |
Certificates | 13 | ||||
Section 1.8 |
Term | 13 | ||||
ARTICLE II. UNITS, CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS |
14 | |||||
Section 2.1 |
Units | 14 | ||||
Section 2.2 |
Capital Contributions | 14 | ||||
Section 2.3 |
Capital Accounts | 16 | ||||
Section 2.4 |
Admission of New Members | 16 | ||||
Section 2.5 |
Interest | 16 | ||||
Section 2.6 |
Capital Withdrawal Rights, Interest and Priority | 16 | ||||
ARTICLE III. MANAGEMENT OF THE COMPANY |
17 | |||||
Section 3.1 |
Company Governance | 17 | ||||
Section 3.2 |
Authority, Duties and Obligations of the Management Board | 20 | ||||
Section 3.3 |
Other Activities of the Members of the Management Board | 20 | ||||
Section 3.4 |
Management Board Certifications | 21 | ||||
Section 3.5 |
Officers | 21 | ||||
Section 3.6 |
Voting Rights of Members | 22 | ||||
Section 3.7 |
Cost of Services | 23 | ||||
Section 3.8 |
Certain Provisions Relating to Albertsons Companies Stock | 23 | ||||
ARTICLE IV. GENERAL GOVERNANCE |
26 | |||||
Section 4.1 |
Other Ventures | 26 | ||||
Section 4.2 |
Information | 26 | ||||
Section 4.3 |
Access | 27 | ||||
Section 4.4 |
Standard of Care | 27 | ||||
ARTICLE V. TRANSFERS OF UNITS |
27 | |||||
Section 5.1 |
Transfers | 27 | ||||
ARTICLE VI. ALLOCATIONS |
29 | |||||
Section 6.1 |
General Rules; Allocation of Profits and Losses | 29 | ||||
Section 6.2 |
Other Allocation Rules | 30 | ||||
Section 6.3 |
Tax Allocations: Code Section 704(c) | 30 |
i
Table of Contents
(continued)
Page | ||||||
ARTICLE VII. DISTRIBUTIONS AND EXPENSES |
31 | |||||
Section 7.1 |
Distributions | 31 | ||||
Section 7.2 |
Amounts Withheld | 31 | ||||
Section 7.3 |
Expenses | 32 | ||||
Section 7.4 |
Tax Distributions | 32 | ||||
ARTICLE VIII. OTHER TAX MATTERS |
32 | |||||
Section 8.1 |
Tax Matters Member | 32 | ||||
Section 8.2 |
Furnishing Information to Tax Matters Member | 32 | ||||
Section 8.3 |
Tax Claims and Proceedings | 33 | ||||
Section 8.4 |
Books and Records | 33 | ||||
Section 8.5 |
Survival | 33 | ||||
ARTICLE IX. REPRESENTATIONS AND WARRANTIES |
33 | |||||
Section 9.1 |
Representations and Warranties of Members | 33 | ||||
Section 9.2 |
ERISA Representation | 35 | ||||
Section 9.3 |
Survival | 35 | ||||
ARTICLE X. DISSOLUTION AND TERMINATION OF THE COMPANY |
35 | |||||
Section 10.1 |
Dissolution | 35 | ||||
Section 10.2 |
Continuation of Interest of Members Representative | 35 | ||||
Section 10.3 |
Dissolution, Winding Up and Liquidation | 35 | ||||
Section 10.4 |
Member Bankruptcy | 36 | ||||
ARTICLE XI. INDEMNIFICATION AND CONTRIBUTION |
36 | |||||
Section 11.1 |
Indemnity by the Company | 36 | ||||
Section 11.2 |
Exculpation | 37 | ||||
Section 11.3 |
Expenses | 37 | ||||
Section 11.4 |
Advance Payment of Expenses | 37 | ||||
Section 11.5 |
Beneficiaries | 37 | ||||
Section 11.6 |
Indemnification Procedure for Third Party and Other Claims | 37 | ||||
Section 11.7 |
Other Claims | 38 | ||||
Section 11.8 |
Limitation on Damages | 38 | ||||
ARTICLE XII. MISCELLANEOUS PROVISIONS |
38 | |||||
Section 12.1 |
Entire Agreement | 38 | ||||
Section 12.2 |
Amendments | 39 | ||||
Section 12.3 |
Applicable Law; Venue | 39 | ||||
Section 12.4 |
Enforcement | 40 | ||||
Section 12.5 |
Headings | 40 | ||||
Section 12.6 |
Severability | 40 | ||||
Section 12.7 |
Counterparts | 40 | ||||
Section 12.8 |
Filings | 40 | ||||
Section 12.9 |
Additional Documents | 41 |
ii
Table of Contents
(continued)
Page | ||||||
Section 12.10 |
Notices | 41 | ||||
Section 12.11 |
Waiver of Right to Partition and Bill of Accounting | 43 | ||||
Section 12.12 |
Confidentiality; Press Releases | 43 | ||||
Section 12.13 |
Uniform Commercial Code | 43 | ||||
Section 12.14 |
Binding Agreement | 44 | ||||
Section 12.15 |
DISCLOSURES | 44 |
iii
EXHIBIT 21.1
ALBERTSONS COMPANIES, INC.
SCHEDULE OF SUBSIDIARIES
The following is a list of the Companys subsidiaries and includes all subsidiaries deemed significant. The jurisdiction of each company is listed in parentheses. Forty-one (41) companies are not listed because they are not actively conducting business, they are maintained solely for the purpose of holding licenses, they hold no assets or because they are less than majority owned.
AB Acquisition LLC and its subsidiaries: (DE)
AB Management Services Corp. (DE)
Albertsons Holdings LLC and its subsidiary: (DE)
Albertsons LLC and its subsidiaries: (DE)
ABS Real Estate Holdings LLC and its subsidiaries: (DE)
ABS Mezzanine III LLC and its subsidiaries: (DE)
ABS CA-GL LLC (DE)
ABS CA-O DC1 LLC (DE)
ABS CA-O DC2 LLC (DE)
ABS CA-O LLC (DE)
ABS ID-GL LLC (DE)
ABS ID-O DC LLC (DE)
ABS ID-O LLC (DE)
ABS MT-GL LLC (DE)
ABS MT-O LLC (DE)
ABS NV-GL LLC (DE)
ABS NV-O LLC (DE)
ABS OR-GL LLC (DE)
ABS OR-O DC LLC (DE)
ABS OR-O LLC (DE)
ABS Surplus-O LLC (DE)
ABS UT-GL LLC (DE)
ABS UT-O DC LLC (DE)
ABS UT-O LLC (DE)
ABS WA-GL LLC (DE)
ABS WA-O LLC (DE)
ABS WY-GL LLC (DE)
ABS WY-O LLC (DE)
ABS Real Estate Corp ((DE)
ABS Real Estate Investor Holdings LLC and its subsidiary: (DE)
ABS Mezzanine I LLC and its subsidiaries: (DE)
ABS DFW Investor LLC and its subsidiary: (DE)
ABS DFW Lease Investor LLC (DE)
ABS FLA Investor LLC and its subsidiary: (DE)
ABS FLA Lease Investor LLC (DE)
SCHEDULE OF SUBSIDIARIES (Continued)
ABS Realty Investor LLC (DE)
ABS RM Investor LLC and its subsidiary: (DE)
ABS RM Lease Investor LLC (DE)
ABS SW Investor LLC and its subsidiary: (DE)
ABS SW Lease Investor LLC (DE)
ABS TX Investor GP LLC (DE)
ABS TX Investor LP and its subsidiaries: (TX)
ABS TX Lease Investor GP LLC (DE)
ABS TX Lease Investor LP (TX)
ASP SW Investor LLC (DE)
ASR TX Investor GP LLC (DE)
ASR TX Investor LP and its subsidiary: (TX)
ASR Lease Investor LLC (DE)
ABS Real Estate Owner Holdings LLC and its subsidiary: (DE)
ABS Mezzanine II LLC and its subsidiaries: (DE)
ABS DFW Owner LLC and its subsidiary: (DE)
ABS DFW Lease Owner LLC (DE)
ABS FLA Owner LLC and its subsidiary: (DE)
ABS FLA Lease Owner LLC (DE)
ABS RM Owner LLC and its subsidiary: (DE)
ABS RM Lease Owner LLC (DE)
ABS SW Owner LLC and its subsidiaries: (DE)
ABS NoCal Lease Owner LLC (DE)
ABS SW Lease Owner LLC (DE)
ASP NoCal Lease Owner LLC (DE)
Lucky (Del) Lease Owner LLC (DE)
ABS TX Owner GP LLC (DE)
ABS TX Owner LP and its subsidiaries: (TX)
ABS TX Lease Owner GP LLC (DE)
ABS TX Lease Owner LP (TX)
ASP SW Owner LLC and its subsidiary: (DE)
ASP SW Lease Owner LLC (DE)
ASR Owner LLC and its subsidiary: (DE)
ASR TX Lease Owner GP LLC (TX)
ASR TX Lease Owner LP (TX)
EXT Owner LLC and its subsidiary: (DE)
EXT Lease Owner LLC (DE)
NHI TX Owner GP LLC (DE)
NHI TX Owner LP and its subsidiaries: (TX)
NHI TX Lease Owner GP LLC (TX)
NHI TX Lease Owner LP (TX)
Albertsons Liquors, Inc. (WY)
American Food and Drug LLC DE)
American Stores Properties LLC (DE)
Jewel Osco Southwest LLC (IL)
Sunrich Mercantile LLC (CA)
2
SCHEDULE OF SUBSIDIARIES (Continued)
American Stores Realty Company, LLC (DE)
Fresh Holdings LLC (DE)
Extreme LLC (DE)
Newco Investments, LLC (DE)
NHI Investment Partners, LP (DE)
Good Spirits LLC (TX)
Spirit Acquisition Holdings LLC and its subsidiary: (DE)
United Supermarkets, L.L.C. and its subsidiary: (TX)
LLano Logistics, Inc. (DE)
Safeway Inc. and its subsidiaries: (DE)
Better Living Brands LLC (DE)
Casa Ley Services, Inc. (DE)
Cayam Energy, LLC (DE)
Divario Ventures LLC (DE)
Dominicks Supermarkets, LLC and its subsidiary: (DE)
Dominicks Finer Foods, LLC and its subsidiary: (DE)
Dominicks Finer Foods, Inc. of Illinois (IL)
Eureka Land Management LLC and its subsidiary: (WA)
Eureka Development LLC (WA)
GFM Holdings I, Inc. and its subsidiary: (DE)
GFM Holdings LLC, general partner of: (DE)
Genuardis Family Markets LP (DE)
Lehua Insurance Company, Inc. (HI)
Lucerne Foods, Inc. and its subsidiaries: (DE)
Eating Right LLC (DE)
Lucerne Dairy Products LLC (DE)
Lucerne North America LLC (DE)
O Organics LLC (DE)
Milford Insurance Brokerage Services, Inc. (DE)
Milford Insurance Ltd. (Bermuda)
Oakland Property Brokerage Inc. (DE)
Pak N Save, Inc. (CA)
Randalls Holdings, Inc. and its subsidiaries: (DE)
Randalls Finance Company, Inc. (DE)
Randalls Food Markets, Inc. and its subsidiary: (DE)
Randalls Food & Drugs LP and its subsidiary: (DE)
Randalls Management Company, Inc. and its subsidiary:(DE)
Randalls Beverage Company, Inc. (TX)
Randalls Investments, Inc. (DE)
Safeway #0638 Exchange, LLC (OR)
Safeway Australia Holdings, Inc. (DE)
Safeway Canada Holdings, Inc. and its subsidiary: (DE)
Safeway New Canada, Inc. and its subsidiary: (DE)
CSL IT Services ULC (formerly Canada Safeway Limited) and its
subsidiaries: (British Columbia)
0984093 B.C. Unlimited Liability Company (British Columbia)
3
SCHEDULE OF SUBSIDIARIES (Continued)
0984354 B.C. Unlimited Liability Company (formerly Canada
Safeway Liquor Stores ULC) (British Columbia)
0984470 B.C. Unlimited Liability Company (formerly Safeway
Ontario Finance ULC) (British Columbia)
Safeway Corporate, Inc. and its subsidiaries: (DE)
Safeway Stores 67, Inc. (DE)
Safeway Stores 68, Inc. (DE)
Safeway Stores 69, Inc. (DE)
Safeway Stores 70, Inc. (DE)
Safeway Dallas, Inc. and its subsidiaries: (DE)
Avia Partners, Inc. (DE)
Safeway Stores 78, Inc. (DE)
Safeway Stores 79, Inc. (DE)
Safeway Stores 80, Inc. (DE)
Safeway Stores 82, Inc. (DE)
Safeway Stores 85, Inc. (DE)
Safeway Stores 86, Inc. (DE)
Safeway Stores 87, Inc. (DE)
Safeway Stores 88, Inc. (DE)
Safeway Stores 89, Inc. (DE)
Safeway Stores 90, Inc. (DE)
Safeway Stores 91, Inc. (DE)
Safeway Stores 92, Inc. (DE)
Safeway Stores 96, Inc. (DE)
Safeway Stores 97, Inc. (DE)
Safeway Stores 98, Inc. (DE)
Safeway Denver, Inc. and its subsidiaries: (DE)
Safeway Stores 44, Inc. (DE)
Safeway Stores 45, Inc. (DE)
Safeway Stores 46, Inc. (DE)
Safeway Stores 47, Inc. (DE)
Safeway Stores 48, Inc. (DE)
Safeway Stores 49, Inc. (DE)
Safeway Stores 50, Inc. (DE)
Safeway Gift Cards, LLC (AZ)
Safeway Global Sourcing Holdings Ltd. and its subsidiaries: (BVI)
Safeway Global Sourcing Limited (Hong Kong)
Safeway Global Sourcing (Macao Commercial Offshore) Limited (Macau)
Safeway Holdings I, LLC and its subsidiary: (DE)
Groceryworks.com, LLC and its subsidiary: (DE)
Groceryworks.com Operating Company, LLC (DE)
Safeway Leasing, Inc. (DE)
Safeway Philtech Holdings, Inc. and its subsidiary: (DE)
Safeway Philtech Inc. (Philippines)
Safeway Richmond, Inc. and its subsidiary: (DE)
Safeway Stores 58, Inc. and its subsidiary: (DE)
4
SCHEDULE OF SUBSIDIARIES (Continued)
Safelease, Inc. (DE)
Safeway Select Gift Source, Inc. (DE)
Safeway Southern California, Inc. and its subsidiaries: (DE)
Safeway Stores 18, Inc. (DE)
Safeway Stores 26, Inc. (DE)
Safeway Stores 28, Inc. (DE)
Safeway Stores 31, Inc. (DE)
The Vons Companies, Inc. (MI)
Safeway Stores 42, Inc. (DE)
Safeway Stores 43, Inc. (DE)
Safeway Stores 99, Inc. (DE)
Safeway Supply, Inc. and its subsidiaries: (DE)
Consolidated Procurement Services, Inc. (DE)
Safeway Stores 71, Inc. (DE)
Safeway Stores 72, Inc. (DE)
Safeway Stores 73, Inc. (DE)
Safeway Stores 74, Inc. (DE)
Safeway Stores 75, Inc. (DE)
Safeway Stores 76, Inc. (DE)
Safeway Stores 77, Inc. (DE)
Safeway Trucking, Inc. (DE)
Saturn Development I, Inc. (DE)
Saturn Development LLC (DE)
SRG, Inc. (DE)
SSI AK Holdings, Inc. and its subsidiary: (DE)
Carr-Gottstein Foods Co. and its subsidiaries: (DE)
AOL Express, Inc. (AK)
APR Forwarders, Inc. (AK)
Stoneridge Holdings, LLC and its subsidiary: (DE)
Safeway Health Inc. (DE)
Strategic Global Sourcing, LLC (DE)
Taylor Properties, Inc. (DE)
Vons Sherman Oaks, LLC (OR)
NAI Holdings LLC and its subsidiary: (DE)
New Albertsons, Inc. and its subsidiaries: (OH)
ABS Finance Co., Inc. (DE)
ABS Insurance Ltd. (Bermuda)
American Stores Company, LLC and its subsidiaries: (DE)
American Drug Stores LLC and its subsidiary: (DE)
American Partners, L.P. (IN)
American Procurement and Logistics Company LLC and its subsidiary: (DE)
APLC Procurement, Inc. (UT)
ASC Media Services, Inc. and its subsidiary: (UT)
U.S. Satellite Corporation (UT)
ASP Realty, Inc. (DE)
Beryl American Corporation (VT)
5
SCHEDULE OF SUBSIDIARIES (Continued)
Jewel Companies, Inc. and its subsidiaries: (DE)
Acme Markets, Inc. and its subsidiary: (DE)
Jewel Food Stores, Inc. and its subsidiary (OH)
Jetco Properties, Inc. (DE)
Lucky Stores LLC (OH)
Scolaris Stores LLC (CA)
NAI Saturn Eastern LLC (DE)
SSM Holdings Company and its subsidiaries: (DE)
Shaws Supermarkets, Inc. and its subsidiaries: (MA)
28 Pond Street Realty, LLC (NH)
300 Main Street Realty, LLC (NH)
360 Chauncy Street Realty Trust (MA)
675 Randolph Realty Trust (MA)
693 Randolph Avenue LLC (MA)
739 Realty Trust (MA)
861 Edgell Road LLC (MA)
99 Water Street LLC (MA)
Adrian Realty Trust (MA)
Border Street Realty Trust (MA)
BP Realty, LLC (MA)
CH Project LLC (MA)
Clifford W. Perham, Inc. (ME)
Gorham Markets, LLC (NH)
Hayward Street Investment Trust and its subsidiaries: (MA)
BSS Realty Trust (MA)
DLS Realty Trust (MA)
Heath Street, LLC (MA)
HNHP Realty, LLC (NH)
K&J Realty Trust (MA)
Keene Realty Trust (NH)
LRT Realty Trust (MA)
Mashpee Realty LLC (MA)
Michaels Realty Trust and its subsidiary: (MA)
EP Realty LLC (MA)
Milford Realty LLC (MA)
MK Investments LLC (MA)
PNHP Realty LLC (NH)
Shaw Equipment Corporation (MA)
Shaws Realty Co. and its subsidiaries: (ME)
Arles, LLC (NH)
Shaws Realty Trust and its subsidiary: (MA)
Galway Realty Trust (MA)
SNH Realty, LLC (MA)
SRA REALTY LLC (MA)
WP Properties, LLC (RI)
Star Markets Holdings, Inc. and its subsidiary: (MA)
6
SCHEDULE OF SUBSIDIARIES (Continued)
Star Markets Company, Inc. (MA)
Wildcat Acquisition Holdings LLC and its subsidiary: (DE)
Vons REIT, Inc. and its subsidiary: (DE)
Wildcat Markets Opco LLC (DE)
7
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-205546 of our report dated March 3, 2015 relating to the consolidated financial statements of Safeway Inc. appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte & Touche LLP
San Francisco, California
August 25, 2015
EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-205546 of our report dated July 7, 2015 (August 25, 2015 as to the change in the Companys method of accounting for the presentation of debt issuance costs described in Note 1 and as to the effects of the restatement described in Note 2) relating to the consolidated financial statements of AB Acquisition LLC appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte & Touche LLP
Boise, Idaho
August 25, 2015
EXHIBIT 23.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-205546 of our report dated July 7, 2015 relating to the balance sheet of Albertsons Companies, Inc. appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte & Touche LLP
Boise, Idaho
August 25, 2015
EXHIBIT 23.5
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Albertsons Companies, Inc.:
We consent to the use of our report dated February 7, 2014, with respect to the combined balance sheets of the New Albertsons Business of SUPERVALU INC. and subsidiaries as of February 21, 2013 and February 23, 2012, and the related combined statements of operations and comprehensive income (loss), parent company deficit, and cash flows for each of the fiscal years in the three-year period ended February 21, 2013, included herein and to the reference to our firm under the heading Experts in the prospectus.
/s/ KPMG LLP
Boise, Idaho
August 25, 2015
EXHIBIT 23.6
Consent of Independent Auditor
We consent to the use in this Amendment No. 1 to the Registration Statement (No. 333-205546) on Form S-1 of Albertsons Companies, Inc. of our report dated April 4, 2014, relating to our audit of the consolidated financial statements of United Supermarkets, L.L.C. as of December 28, 2013 and January 26, 2013, and for the eleven-month period ended December 28, 2013 and the year ended January 26, 2013, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference of our firm under the caption Experts in such Prospectus.
/s/ McGladrey, LLP
Dallas, Texas
August 25, 2015
EXHIBIT 23.7
CONSENT OF CUSHMAN & WAKEFIELD, INC.
We hereby consent to the use of our name in this Registration Statement of Albertsons Companies, Inc. (Registration No. 333-
205546) on Form S-1, as amended (the Registration Statement), and to the references to information contained in Cushman &
Wakefield, Inc. appraisals wherever appearing in the Registration Statement.
/s/ George J. Rago |
Name: George J. Rago |
Title: Executive Managing Director |
Cushman & Wakefield, Inc.
New York, New York 10104
August 26, 2015