20-F 1 d20f.htm ANNUAL REPORT ON FORM 20F Annual Report on Form 20F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 20-F

 


(Mark One)

 

¨ Registration Statement pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

or

 

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 1, 2006

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

or

 

¨ Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 0-18898

 


Koninklijke Ahold N.V.

(Exact name of Registrant as specified in its charter)

Royal Ahold

(Translation of Registrant’s name into English)

 


The Netherlands

(Jurisdiction of incorporation or organization)

 


Piet Heinkade 167 – 173, 1019 GM Amsterdam, The Netherlands

(Address of principal executive offices)

 


Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common shares at a par value of EUR 0.25 each, represented by American Depositary Shares

  New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

  None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

  None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

Cumulative preferred financing shares at a par value of EUR 0.25 per share

  369,217,164

Common shares at a par value of EUR 0.25 per share

  1,555,312,608

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes ¨    No  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 



Table of Contents

The information required by Form 20-F is contained in the following 2005 Annual Report to Shareholders of Koninklijke Ahold N.V. (the “Company”) prepared in accordance with Dutch regulations, except as otherwise provided herein. Cross references between the Form 20-F requirements and the corresponding pages of the 2005 Annual Report to Shareholders are set out in the “Cross-reference to Form 20-F” section of the 2005 Annual Report to Shareholders.


Table of Contents

LOGO


Table of Contents

 

Life is about making choices.

We make it easy for our customers to choose the best. The best products, the best quality, the best prices, and the best choices for a healthy lifestyle.

Our profile

Ahold is an international group of quality supermarkets and foodservice operators based in the United States and Europe. We provide an easy, convenient and appealing shopping experience through continuous customer focus. We are committed to offering our customers the best value, the highest quality and healthy choices, while building value for our shareholders.

Our strong retail and foodservice brands ensure we are optimally placed to answer our customers’ local needs. At the same time, our brands benefit from group synergies that allow us to operate in a simple, responsible and efficient way.

Our people love being in the food business and they make the difference as we strive to be the leader in all our markets. Our aim is to continuously grow, in part by innovating products, services and store formats.


Table of Contents

Contents

 

General information    2
Financial highlights    3
Letter to our shareholders    7
Our strategy    8
Our responsibilities    11
Board and management    14
Supervisory Board report    19
Remuneration    23
Corporate governance    28
Internal control    36
Risk factors    39
Business overview    46
Management’s discussion & analysis    53
Financial statements    85
Investor relations    221
Additional information    226
Cross-reference to Form 20-F    236
Forward-looking statements notice    238

 

AHOLD ANNUAL REPORT 2005

   1


Table of Contents

General information

 

INTRODUCTION

Koninklijke Ahold N.V. is a public limited liability company registered in the Netherlands with listings of shares or depositary shares on the Amsterdam, New York and Zurich stock exchanges.

 

This is Ahold’s annual report for the financial year ended January 1, 2006 in accordance with Dutch regulations. It also forms a substantial part of our Form 20-F, which will be filed with the U.S. Securities and Exchange Commission (the “SEC”). Cross-references to the Form 20-F are set out in the “Cross-reference to Form 20-F” section included in this annual report.

In this annual report, “we,” “us,” “our,” the “Company,” and “Ahold” refer to Koninklijke Ahold N.V. together with its consolidated subsidiaries, unless the context indicates otherwise. We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (the “EU”) and have provided a reconciliation to accounting principles generally accepted in the U.S. (“US GAAP”).

In accordance with Rule 3-09 of Regulation S-X, separate financial statements for ICA AB (“ICA”) are filed with the SEC as exhibit 15.1 to our annual report on Form 20-F.

This annual report includes forward-looking statements that involve risks and uncertainties that are discussed in more detail in the “Forward-looking statements notice” section.

FINANCIAL YEAR REPORTING

Our financial year consists of 52 or 53 weeks and ends on the Sunday nearest to December 31 of each calendar year, with each subsequent financial year beginning on the following Monday. Our financial year-end dates for the past five financial years were:

·   January 1, 2006,
·   January 2, 2005,
·   December 28, 2003,
·   December 29, 2002 and
·   December 30, 2001.

Each of these years included 52 weeks, except for 2004, which had 53 weeks. For Ahold and those subsidiaries with a 53-week financial year in 2004, the results of operations for 2004 were affected by the inclusion of the additional one-week period in 2004 compared to the other four financial years.

Our subsidiaries in Central Europe and our treasury center in Geneva, Switzerland, as well as our former subsidiaries in Spain and South America, use a calendar year-end.

CURRENCIES

We are domiciled in the Netherlands, which is one of the member states of the EU that has adopted the euro (“EUR”) as its currency. Accordingly, we have adopted the euro as our reporting currency. As a significant portion of our business is based in the U.S., exchange rate fluctuations between the euro and the U.S. dollar (“dollar” or “USD”) are among the factors that have influenced year-to-year comparability of our consolidated results of operations and financial position.

USE OF NON-GAAP FINANCIAL MEASURES

In certain instances, we present our results of operations in local currencies, which we believe provides a better insight into the operating performance of our foreign subsidiaries.

We use certain other non-GAAP financial measures in this annual report. These financial measures are not prepared in accordance with IFRS or US GAAP. These non-GAAP financial measures should not be viewed as alternatives to the equivalent IFRS or US GAAP measures and should be considered in addition to, but not as substitutes for, the most directly comparable IFRS or US GAAP measures.


 

2


Table of Contents

Financial highlights

 

SELECTED FINANCIAL DATA

The selected financial data below should be read in conjunction with our consolidated financial statements included in this annual report. The selected financial data as of January 1, 2006 and January 2, 2005 and for the two years then ended have been derived from these consolidated financial statements. The SEC has adopted amendments to Form 20-F related to the first-time adoption of IFRS. These amendments allow us to provide only one year of comparative IFRS financial data. The selected financial data as of December 28, 2003, December 29, 2002 and December 30, 2001 and for the three years then ended have been derived from our consolidated financial statements not included in this annual report and are included in the selected financial data below under US GAAP only.

IFRS differs in certain material respects from US GAAP. We have included an explanation of the principal differences between IFRS and US GAAP relevant to us in Note 37 to our consolidated financial statements included in this annual report.

For information about significant accounting policies, acquisitions and non-current assets held for sale and discontinued operations affecting the periods presented, see the “Management’s discussion & analysis” section as well as Notes 3, 4 and 12 to our consolidated financial statements included in this annual report. For information on the changes in equity, see Note 23 to our consolidated financial statements.

Until 2004, we prepared our consolidated financial statements under generally accepted accounting principles in the Netherlands (“Dutch GAAP”). As required by a EU regulation, from 2005 onwards our consolidated financial statements are prepared in accordance with IFRS as adopted by the EU. All standards issued by the International Accounting Standards Board (the “IASB”) effective for 2005 and all interpretations issued by the International Financial Reporting Interpretations Committee (the “IFRIC”) effective for 2005 have been endorsed by the EU. Reconciliations between Dutch GAAP and IFRS and explanatory narratives are included in Note 36 to the consolidated financial statements, as required by IFRS 1 “First-time Adoption of International Financial Reporting Standards.”

 

IFRS consolidated statements of operations data

 

       

Euros in millions, except margin

and per share data

   2005          2004

Net sales

   44,496        44,610

Operating income

   248        923

Operating margin

   0.6%        2.1%

Income (loss) from continuing operations

   (38 )      633

Income from discontinued operations

   197        265

Net income

   159        898

Net income attributable to common shareholders

   133        885

Income (loss) from continuing operations per common share:

       

Basic

   (0.04 )      0.40

Diluted

   (0.04 )      0.40

Income from discontinued operations per common share:

       

Basic

   0.13        0.17

Diluted

   0.13        0.17

Net income attributable to common shareholders per share:

       

Basic

   0.09        0.57

Diluted

   0.09          0.57

 

AHOLD ANNUAL REPORT 2005

   3


Table of Contents

> Financial highlights

 

US GAAP consolidated statements of operations data

 

                   

Euros in millions, except per share data

   2005          2004 1          2003          2002          2001  

Net sales

   44,100        43,872        45,030        50,438        44,563  

Operating income

   266        808        995        1,226        1,304  

Income (loss) from continuing operations

   (7 )      373        182        74        (265 )

Income (loss) from discontinued operations

   (2 )      (276 )      (771 )      (1,827 )      89  

Income (loss) before cumulative effect of changes in accounting principles

   (9 )      97        (589 )      (1,753 )      (176 )

Net income (loss)

   (9 )      89        (689 )      (4,345 )      (196 )

Income (loss) from continuing operations per common share:

                      

Basic

   (0.03 )      0.21        0.14        0.04        (0.33 )

Diluted

   (0.03 )      0.21        0.14        0.04        (0.33 )

Income (loss) from discontinued operations per common share:

                      

Basic

   0.00        (0.17 )      (0.75 )      (1.83 )      0.10  

Diluted

   0.00        (0.17 )      (0.75 )      (1.83 )      0.10  

Cumulative effect of changes in accounting principles per common share:

                      

Basic

   0.00        (0.01 )      (0.10 )      (2.59 )      (0.02 )

Diluted

   0.00        (0.01 )      (0.10 )      (2.59 )      (0.02 )

Net income (loss) per common share:

                      

Basic

   (0.03 )      0.03        (0.71 )      (4.38 )      (0.25 )

Diluted

   (0.03 )        0.03          (0.71 )        (4.38 )        (0.25 )
1 As restated.

IFRS consolidated balance sheets data

 

Euros in millions, except share data

   January 1,
2006
       January 2,
2005

Total assets

   20,005      21,374

Equity attributable to common shareholders of Ahold

   4,651      3,888

Total share capital

   13,811      13,805

Weighted average number of common shares (in thousands):

       

Basic

   1,554,713      1,553,007

Diluted

   1,554,713        1,553,240

US GAAP consolidated balance sheets data

 

Euros in millions, except share data

   January 1,
2006
       January 2,
2005 1
       December 28,
2003
       December 29,
2002
       December 30,
2001

Total assets

   26,352      26,898      30,126      32,420      40,010

Shareholders’ equity

   10,050      8,748      9,497      8,496      15,566

Weighted average number of common shares (in thousands):

                      

Basic

   1,554,713      1,553,007      1,024,465      1,001,347      926,736

Diluted

   1,554,713        1,553,603        1,024,632        1,002,301        926,736
1 As restated.

 

4


Table of Contents

 

Other financial information

 

         

Euros in millions, except share and employee data

       2005          2004  

IFRS consolidated statements of cash flows data

         

Net cash from operating activities

     1,897        2,193  

Net cash from investing activities

     159        (164 )

Net cash from financing activities

     (3,193 )      (2,004 )

Share data (in thousands)

         

Common shares outstanding at year-end

     1,555,313        1,554,263  

Data per common share

         

Dividends

             

Share price at Euronext

  high    7.45        7.40  

Share price at Euronext

  low    5.69        5.04  

Share price at Euronext

  at year-end    6.33        5.70  

Number of employees 1

         

Number of employees at year-end in FTE

     167,801        206,441  

Average number of employees in FTE

       168,568          231,003  

 

1 Consolidated, excluding joint ventures and associates, including discontinued operations.

 

Exchange rates

The following table sets forth, for the years indicated, certain information concerning the exchange rate of the U.S. dollar relative to the euro, expressed in U.S. dollar per euro based on the rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”):

 

                 
   Year        Period end        Average        High        Low

2001

     0.8836      0.8950      0.9535      0.8370

2002

     1.0438      0.9441      1.0438      0.8594

2003

     1.2429      1.1299      1.2597      1.0361

2004

     1.3538      1.2487      1.3625      1.1801

2005

       1.1842        1.2449        1.3476        1.1667

The rates used in the preparation of our consolidated financial statements may vary in certain minor respects from the noon buying rate.

The following table sets forth the high and low noon buying rates of the U.S. dollar against the euro for each of the last six months. The noon buying rate of the U.S. dollar against the euro as of March 31, 2006 was USD 1.2139 = EUR 1.

 

 

 

       
     High        Low

October 2005

   1.2148      1.1914

November 2005

   1.2067      1.1667

December 2005

   1.2041      1.1699

January 2006

   1.2287      1,1980

February 2006

   1.2100      1.1860

March 2006

   1.2197        1.1886

Fluctuations in the exchange rates between the U.S. dollar and the euro have affected the U.S. dollar equivalent of the euro prices of our common shares on the Official Segment of Euronext Amsterdam N.V.’s stock market (“Euronext Amsterdam” or “Euronext”) and, as a result, are likely to have affected the market price of our American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts (“ADRs”), listed on the New York Stock Exchange (the “NYSE”). Such fluctuations will also affect the U.S. dollar amounts received by holders of our ADSs on conversion by The Bank of New York, as depositary (the “Depositary”), of cash dividends, if any, paid in euros on the common shares represented by the ADSs.


 

AHOLD ANNUAL REPORT 2005

   5


Table of Contents

LOGO


Table of Contents

Letter to our shareholders

 

DEAR SHAREHOLDER,

I am delighted to welcome you to our Annual Report 2005. In the pages that follow, we set out Ahold’s progress over the past year, share with you our strategy for the future, and highlight the achievements of our 247,000 employees around the world.

 

The achievements we present in this report are a testament to our colleagues taking concepts that might sound abstract – “delighting customers” or “easy in, easy shop, easy out” – and bringing them to life in their daily work. With a business spanning 3,455 stores and 126 foodservice outlets across the United States and Europe, we are proud of the fact that our customers experience high standards of service all day, every day of the year.

Many readers will be aware that in 2005 we completed the majority of our Road to Recovery strategy, including the EUR 3.1 billion divestment program and our significant reduction in net debt. We are a much healthier company today as a result. In January 2006, we welcomed John Rishton as our new Chief Financial Officer.

We had a number of other accomplishments in 2005. You can read more about our achievements and future strategy in the following sections, but I would like to point out a few notable developments here.

A significant milestone for us was the USD 1.1 billion (EUR 929 million) settlement of the securities class action brought against Ahold in 2003, subject to court approval. It is the last of our outstanding material litigations with significant financial exposure from that time.

We unveiled in November 2005 a new long-term strategy for U.S. Foodservice. The strategy splits U.S. Foodservice into two operating companies, Broadline and Multi-Unit, enabling the business to serve the needs of its very different customer types more effectively.

During the year, our successful value repositioning at Albert Heijn and ICA further improved our market share and growth. Our Stop & Shop/Giant-Landover arena is launching its own value improvement program in 2006. We expect this, together with store reinvestment and cost reduction initiatives already underway, will steadily enhance our market position in the coming years.

Nevertheless, 2005 has been a difficult year with mixed performance in our key business arenas. We continue to

experience strong competitive pressures in our retail operations, with considerable challenges at the Stop & Shop/Giant-Landover arena. Tops, in particular in northeast Ohio, and the Central Europe Arena continue to underperform. The financial targets we originally set for retail in 2003 have become increasingly challenging. Competitive and operating cost pressures have been greater than expected and the turnaround at certain businesses has been slower than planned. Based on the retail trends we have seen for the year to date, we expect our retail net sales growth this year to be between 2.5% and 3.0% (at constant exchange rates, and excluding divestments made in 2005). In addition, we expect that our retail operating margin will be between 4.0% and 4.5% in 2006. Our overall priority remains to drive top line growth and achieve a 5% retail operating margin. U.S. Foodservice targets remain unchanged.

The achievements of 2005 are now enabling us to focus fully on managing our business for the future. In 2006, our focus will be on operational and value improvement, a comprehensive review of underperforming assets, and a reduction of corporate overhead. Our market leadership positions and restored financial health will help us to accelerate the implementation of our strategy.

Our journey continues. I am confident that our businesses have both the determination and the skills to achieve our goals in doing what is right for the customer and increasing shareholder value. I believe that our strategy, our market leadership positions, and the commitment of our employees are what sets Ahold apart and makes it a company in which we are all proud to invest.

On behalf of the Corporate Executive Board, I extend to you my best wishes.

LOGO

Anders C. Moberg

President & Chief Executive Officer

Amsterdam, the Netherlands, March 28, 2006


 

AHOLD ANNUAL REPORT 2005

   7


Table of Contents

Our strategy

 

ROAD TO RECOVERY 2003-2005

In 2003, we announced a three-year financing plan and strategy to restore the value of our company. The plan focused on four key areas: restoring our financial health; re-engineering our food retail business; recovering the value of U.S. Foodservice; and reinforcing accountability, controls and corporate governance.

 

Restoring our financial health

Since November 2003, we have taken numerous steps to strengthen our financial position and flexibility. We raised approximately EUR 2.9 billion in net equity proceeds, reduced gross debt by approximately EUR 5.8 billion, negotiated a new, unsecured syndicated EUR 2 billion credit facility with more favorable terms and conditions than the prior facility, and completed divestments for cash consideration and assumed debt totaling EUR 3.1 billion. As a result of our efforts, we have improved our liquidity, strengthened our balance sheet and better positioned ourselves for the future by divesting non-core and underperforming assets.

Our overall financial recovery is on track. We closed 2005 with EUR 2.2 billion total cash balances and we reduced gross debt by 22.7% (EUR 2.3 billion) during 2005. The lower average outstanding debt balances, lower average cost of debt and lower banking fees contributed to lower net interest expense in 2005. Our financial health is steadily improving and we remain committed to meeting what we understand to be the criteria for investment grade rating from the two applicable rating agencies.

Re-engineering our retail business

We have reorganized our food retail companies into arenas to integrate back office functions. In this way, we can achieve economies of scale while continuing to operate using local brands, pricing and product assortment. We have also reinvested in many of our stores to maintain and improve our market position.

Our objective for our companies is for them to have or be capable of achieving a sustainable and profitable number one or number two position in their respective markets within three to five years.

Recovering the value of U.S. Foodservice

The three key steps we are taking to recover the value of U.S. Foodservice are: improving internal controls and corporate governance; restoring profitability and cash flow;

and pursuing profitable sales growth. We have made significant progress and implemented a number of initiatives and changes at U.S. Foodservice to clarify accountability, improve our internal controls and strengthen our corporate governance. In 2004, we implemented a plan focusing on organizational, operational and system improvements as well as procurement enhancements at U.S. Foodservice in order to restore profitability and cash flow. In 2005, we continued executing this plan, resulting in improved operating income at U.S. Foodservice, and in November of the same year announced a new long-term strategy.

Reinforcing accountability, controls and corporate governance

As part of our Road to Recovery strategy we have implemented many initiatives and changes to clarify accountability, improve internal controls and strengthen corporate governance. We have concluded that as of the end of the period covered by this Annual Report, the two material weaknesses reported in our 2004 Annual Report no longer exist. For additional information, see “Corporate governance” and “Internal control”.

2006 AND ONWARD

We have defined a growth strategy for 2006 and onward based on core values that our operating companies share and core capabilities that we are improving. Our core values are rooted in Ahold’s heritage and reflect our ambitions for the future. Increasing the focus on our core capabilities will help us build upon what we do best and differentiate us from the competition.

We have launched a company-wide initiative to become a ‘learning organization.’ This will support the improvement of our core capabilities and help us to work together as one team. Our goal is not only to develop our skills, but also to ensure we have the best processes, tools and innovative solutions in place to run our business in the simplest and most efficient manner possible.


 

8


Table of Contents

 

OUR VALUES

Act customer. Customers are our lifeblood. We make every day easier for them, bringing innovative and interesting shopping experiences.

Engaged associates. We value our diversity and are committed to developing our people and giving them opportunities to grow (internally, we refer to our employees as ‘associates’ reflecting their role as partners in achieving our objectives and serving our customers).

Integrity always. We act openly and honestly. We say what we mean and we do what we say.

One team. We are greater than the sum of our parts. We cooperate to leverage our capabilities, scale, strengths and knowledge.

Innovative mindset. We constantly challenge ourselves to find better ways and better results.

Passion for our business. We love being in the food business. We set high standards and are never satisfied in our search for excellence.

DEVELOPING OUR CORE CAPABILITIES

Applied customer insight. We work to understand consumer needs better and faster than our competitors.

Superior category management. We strive to be the best at maximizing sales growth and shelf profitability because we provide customers with the right balance of value, choice and quality within any given product category.

Strategic sourcing. We want to enhance our influence over the value chain as a product moves from producer to customer.

End-to-end supply chain. We are working to leverage our scale and to maximize efficiency in the delivery of products from the time they leave the supplier to the moment they reach our shelves.

Excellent store operations. We strive to provide an easy, convenient and appealing shopping experience through continuous customer focus and best-in-class operational efficiency.

OUR BUSINESS MODEL

The strategies of our companies are based on one shared business model. It is designed to enable our group of

companies to apply relentless efficiency and simplicity to everything we do. By working as one team we benefit from group synergies and innovation that serve to further reduce costs. Improving our efficiencies and lowering our cost base enable us to invest in providing our customers better value for money and an easier shopping experience.

The intention is to drive our volume of sales to generate cash that can be invested in new stores, new services and innovation. Cash generated can also be used for acquisitions in both the supermarket and foodservice businesses to build our position in certain markets. The overall goal is to make our offering more appealing to customers, improve our bottom line, and create value for shareholders.

Our value repositioning programs at Albert Heijn and ICA – and soon to be launched at Stop & Shop/Giant-Landover – are based on this business model and have succeeded in further enhancing our market share and growth.

OVERVIEW OF OUR RETAIL STRATEGY

Our customers’ needs define what we do. We make it easy for them to make the best choices for themselves and those they care about.

Our common set of values and core capabilities will help us act as one company and capitalize on our scale, scope and expertise. At the same time, our businesses maintain strong individual identities to best serve customers at a local level.

We are looking for consolidation opportunities in our operations and are increasingly streamlining processes. Being highly skilled in category management and understanding our customers enables us to provide a more targeted range and assortment of products and services in a cost-efficient and convenient way.

We have several group-wide initiatives in place, some of which involve both our retail and U.S. Foodservice businesses.

Through next generation sourcing we take a more global approach to sourcing and more closely link it to category management. We are reinventing the value chain to eliminate inefficiencies and lower cost of goods. This entails a detailed, critical look at costs in the chain that runs from raw materials to the finished products on our store shelves.

Our group-wide initiative in general merchandise is designed to build our sales through an integrated approach and make us more competitive in this category.


 

AHOLD ANNUAL REPORT 2005

   9


Table of Contents

> Our strategy

 

In addition, we are building a standard set of retail systems to streamline infrastructure and reduce overall IT costs. We have started by implementing a global IT outsourcing program and realigning our IT structure internally. These changes will help integrate the function globally, leverage our resources and improve support to our operating companies.

Our retail strategy is supported by our company-wide ambition to build a learning organization that encourages knowledge exchange to leverage our expertise wherever possible.

Initiatives like value repositioning, optimizing the supply chain, developing new store formats and improving private label penetration are supporting the execution of our business model in our retail arenas.

In 2005, competitive and operating cost pressures in our retail markets were greater than expected and the turnaround at some of our businesses was slower than planned. The financial targets we originally set for retail in 2003 have become increasingly challenging. Based on the retail trends we have seen so far in 2006, we expect our retail net sales growth this year to be between 2.5% and 3.0% (at constant exchange rates and excluding divestments made in 2005). In addition, we expect that our retail operating margin will be between 4.0% and 4.5% in 2006. Our overall priority remains to drive top line growth and achieve a 5% retail operating margin.

OVERVIEW OF OUR U.S. FOODSERVICE STRATEGY

In November 2005, we announced a new long-term strategy for U.S. Foodservice. The strategy divides our U.S. Foodservice business into two customer-focused operating companies starting in 2006 to meet the needs of different types of customers.

The Broadline company is the growth engine and generates the bulk of sales turnover. It provides a wide range of food and related products and services to customers such as independent restaurants, healthcare providers, and the hospitality industry. We are focusing on geographical areas that offer superior potential for profitable growth and increasing the penetration of our private brands. We have set up a ‘company within a company,’ Monarch Foods, to consolidate and manage our strongest brands. We also plan to make acquisitions to build scale in areas where we are not a leading competitor and to enhance our position in areas where we are.

 

The Multi-Unit company provides food and related products to large chain restaurants. Its primary focus is on efficient distribution rather than on value-added services. Creating a specialized multi-unit company gives us a clear opportunity to make this part of the business profitable.

We are also taking a close look at sourcing to reduce overall supply chain costs by optimizing distribution logistics and reducing working capital requirements. As part of efforts to improve competitive positioning, U.S. Foodservice has reduced overhead expenses and launched the ‘Quality, Service, Trust’ marketing campaign.

We expect that U.S. Foodservice’s operating margin in U.S. dollars before impairment of goodwill will exceed 1.7% no later than 2006.


 

10


Table of Contents

Our responsibilities

 

IMPROVING THE QUALITY OF LIFE, TODAY AND TOMORROW

Corporate social responsibility is rooted in our group values. We believe in taking responsibility for our impact on society and the earth. It makes good common sense to do so – it is important to customers, employees and other stakeholders and helps us to run our business more efficiently.

 

We are committed to improving the quality of life of our customers, employees and the communities we serve. We do this by:

·   Managing our business in a responsible, ethical and transparent way.
·   Giving customers safe, healthy foods produced under responsible conditions.
·   Being a great place to work where employees are treated fairly and can have a fulfilling career.
·   Minimizing the negative, and maximizing the positive, social and environmental impact of our supermarket, foodservice and logistics operations.
·   Being a proactive corporate citizen through dialogue with key stakeholders, and by building strong relationships in those communities where we do business.

SAFE, HEALTHY AND RESPONSIBLE FOODS

All of our customers expect their food to be safe. Providing safe products in all of our markets is a fundamental, non-negotiable priority.

Increasingly, people are looking for healthy choices and products produced in a responsible manner. We therefore offer an organic assortment across all of our retail markets. And in light of increased fish consumption and over-fishing, our companies in the United States, Sweden and the Netherlands have developed initiatives to help create sustainable fisheries.

In addition, we undertake activities that aim to advance the position of suppliers in the developing world. The Ahold Sustainable Trade Development program has brought fair trade and organic products from Africa to be sold in ICA and Albert Heijn stores. The Ahold Coffee Company supplies Utz Kapeh certified responsible coffee for the corporate brands of Ahold retailers in the Czech Republic, the Netherlands, Norway, Sweden and the United States. In 2005 Ahold joined the Business Social Compliance Initiative, a European alliance of 50 retailers and importers with the aim

to improve labor conditions among the workers of their suppliers in high risk countries.

MANAGING ENVIRONMENTAL IMPACT

Our companies are committed to limiting the negative environmental impacts of our supermarket, foodservice and logistics operations. We are working hard to reduce waste and energy usage, to minimize the use of ozone-depleting substances and to make distribution of products to our stores and foodservice customers more efficient.

Our U.S. supermarkets, Albert Heijn and ICA identify stores with unusually high energy consumption and perform detailed energy analyses and take corrective measures. To increase efficiencies, we use continuous replenishment systems, which integrate store ordering systems with those of distribution centers and suppliers. We also aim to reduce negative environmental impacts associated with distribution through optimal truck utilization and safe and efficient driving. For example, in order to minimize emissions and reduce costs we maximize the volume of products we deliver to stores per truck.

Reducing energy usage and waste not only lessens our impact on the environment, it also helps keep our cost base down. This is good for our business, the environment and our customers.

COMMUNITY INVOLVEMENT

Our operating companies are committed to their individual markets by directly participating in community events, sponsoring charitable causes and organizing fundraising activities that are important to the communities they serve. Charitable giving is especially important to our operating companies in the United States.

In 2005, our Stop & Shop/Giant-Landover arena continued to play a significant role in supporting charitable organizations such as Dana Farber, the Jimmy Fund, the


 

AHOLD ANNUAL REPORT 2005

   11


Table of Contents

> Our responsibilities

 

Sloan Kettering Institute, and the Children’s Cancer Foundation. Stop & Shop raised USD 6 million for the Jimmy Fund to help children with cancer and search for a cure and Giant Food contributed more than USD 6 million in cash, goods and services to support charitable and community organizations.

Our Giant-Carlisle/Tops arena contributed the largest sum of charitable donations in its history in 2005, totaling more than USD 21.4 million in combined cash and product contributions. This included USD 10.3 million in product and customer donations for local food banks across Pennsylvania, New York, northeast Ohio, Maryland, Virginia and West Virginia, as well as contributions for Children’s Miracle Network hospitals and local non-profit groups.

We also contributed to the Hurricane Katrina relief effort in 2005. Ahold donated USD 1 million to the effort, in addition to other fundraising activities undertaken at our U.S. companies. U.S. Foodservice donated food, water, the use of refrigerated trucks and other equipment, and its employees made deliveries to dozens of Gulf Coast health care facilities, helping them remain fully operational during the crisis.

DELIGHTING CUSTOMERS

Our vision

Our customers want shopping to be an efficient, pleasant and relaxed experience. They place a high priority on value for money, they care about food safety and responsibly-produced food, and they also want convenience, service, a relevant selection and guidance so that they can feel good about the choices they make.

Life is about making choices.

Our mission

We make it easy for our customers to choose the best for themselves and the people they care about.

We do this through our strong local brands and by putting the customer at the heart of every decision. We strive to stand out from the competition by providing the best products in a relevant range, the best quality, the best prices, and the best choices for a healthy lifestyle – all in the simplest way possible.

Listening to our customers’ needs

We listen carefully to our customers, applying the insights we gain from them to meet their different needs and wishes. We are continually developing our store formats and we use in-depth customer research, new technology, and innovative

ideas to create next generation supermarkets that are in tune with local customer expectations.

We believe that healthy living is important. Our local brands offer value, high quality, and healthy choices. We do this in a simple and responsible way – by providing nutritional labeling on our private brand products, for example – so that customers can make informed and confident choices.

Doing the right thing

We do the right thing for our customers by showing passion and expertise in every aspect of our business. We continually share knowledge between our businesses so that we can make things as simple as possible and provide the best offering.

Doing the right thing is about offering choices that are best suited to customer needs. It is not about the broadest possible assortment, but about enabling customers to choose the best value for their money. It is also about understanding our customers’ lives and needs and making their experience with us a good one.

HEALTHY LIVING

We make it easy to choose the best

Every Ahold company is committed to making it easy for customers to choose healthy options. We are sharing knowledge and initiatives globally to ensure we offer healthy lifestyle choices in a simple and inspiring way. Our aim is to have a positive impact on the health of customers in the markets we serve.

The Ahold Healthy Living Team, set up in 2004, launches healthy living programs and ensures we share expertise across our operating companies. We are cooperating with universities and other bodies, such as the World Health Organization, to ensure we achieve our ambition of providing customers with healthy choices based on scientific research and good social practice.

While our supermarket companies have always offered a broad range of healthy products, we are striving to improve our product assortment even further. We want to give customers ever-healthier alternatives and provide expert advice and innovative shopping experiences.

Helping customers make nutritious choices

In the Netherlands, Albert Heijn stores have introduced the new Healthy Choice Clover symbol on private brand products, making it easier for customers to identify healthy options. Launched in 2005, the symbol now appears on


 

12


Table of Contents

 

more than 1,100 products. The company aims to provide healthy, responsible and tasty products in all main food and drinks categories.

Also in 2005, ICA launched the Gott liv range, another initiative designed to provide customers with clear information on levels of fat, sugar, salt, and fiber in food. Gott liv has rapidly become one of the largest private brand ranges in Sweden, making healthy food a simple, affordable choice for ICA customers.

Giant-Carlisle’s new store in Camp Hill, Pennsylvania, offers a ground-breaking approach to health and wellness. The store has full-time nutritionists on hand to answer customer questions and a health food department – Nature’s Promise Marketplace – that stocks more than 3,400 natural and organic products. The newly-launched Nature’s Promise range can also be found at our other stores in the United States. The Camp Hill store also includes a cooking school where customers can learn how to prepare healthy meals and a community center, where local partners provide exercise classes and health education services.

In addition, Ahold’s U.S. retailers are supporting the Department of Agriculture’s My Pyramid program, an interactive guidance system that helps customers choose and prepare healthier food. Store offerings include a brochure with recipes, menu plans and shopping lists, in-store radio announcements, and a Stop & Shop weekly circular.

Healthy eating for children

U.S. Foodservice is contributing to the promotion of health and well-being by partnering with restaurants, schools and hospitals to help develop healthy menu options.

In Hypernova stores in Slovakia and the Czech Republic, Ahold Central Europe has launched Healthy 5, a program of learning activities for children. Developed with the support of the World Health Organization, the project aims to inform and inspire schoolchildren about the need to eat five portions of fruit and vegetables every day.

Taken together, these initiatives, and many more, underline our growing role in encouraging a healthy lifestyle for our current, and future, customers.

OUR PEOPLE

We employ approximately 247,000 people, most of whom have direct contact with our customers. Internally, we refer to our employees as ‘associates’ reflecting their role as partners in achieving our objectives and serving our

customers. Their expertise, knowledge of the business, and commitment are key to Ahold’s success.

Culture

We aim to attract and retain the best talent and create an environment that encourages innovation. Our core values provide the basis for how we work together. These values are helping us build a strong culture and guide decision-making and the way we handle dilemmas. For example, we have included these in the way we manage the performance criteria of our employees and plan their careers.

Careers

One of our priorities is to develop talent within the company through challenging assignments, targeted training, and rewards based on performance. The majority of our vacancies are filled by internal promotion. We recruit externally to bring in additional skills, perspectives and experience.

Our management development practices, at all levels, encourage employees to grow within the company. Career progression is based on an employees’ capability, performance and behavior consistent with our core values. We focus on developing staff to ensure we have the right management potential to meet our future needs, with particular emphasis on areas that are strategically important.

Learning and diversity

We value diversity and are committed to developing our people and giving them opportunities to grow. This is essential for Ahold to compete in the ever-changing food retail and foodservice environment. We have launched a company-wide initiative to become a ‘learning organization’. We are also increasing the number of international assignments for employees to broaden their perspectives, unify the organization, and share best practices. We are putting processes and systems in place that increase collaboration throughout our company. Training and development programs across Ahold are being aligned to develop our core capabilities as a competitive advantage for the group.


 

AHOLD ANNUAL REPORT 2005

   13


Table of Contents

Board and management

As of March 28, 2006

 

LOGO

 

SUPERVISORY BOARD

 

1 Rene Dahan, Chairman

Chairman of the Selection and Appointment Committee

 

2 Derk Doijer

Chairman Remuneration Committee

 

3 Myra Hart

 

4 Jan Hommen, Vice-Chairman

Chairman of the Audit Committee

 

5 Karen de Segundo

 

6 Stephanie Shern

 

CORPORATE EXECUTIVE BOARD

 

7 Anders Moberg 1

President and Chief Executive Officer

 

8 John Rishton 1, 2
   Acting Executive Vice President and Chief Financial Officer

 

9 Peter Wakkie 1
   Executive Vice President and Chief Corporate Governance Counsel

 


1 Member of Ahold Leadership Team.
2 Subject to appointment at General Meeting of Shareholders, May 18, 2006.
3 In February 2006, it was announced that Marc Smith is to retire within several months.
4 Unconsolidated joint venture.

 

14


Table of Contents

 

LOGO

 

KEY CORPORATE OFFICERS   AHOLD LEADERSHIP TEAM

10  Joop Brakenhoff

Internal Audit

 

16  Kenneth Bengtsson

President and CEO, ICA AB 4

11  Arthur Brouwer 1

Business Support

 

17  Lawrence Benjamin

President and CEO U.S. Foodservice

12  Jim Lawler 1

Human Resources

 

18  Jacquot Boelen

President and CEO, Central Europe Arena

13  Dave McNally

Information Technology

 

19  Dick Boer

President and CEO, Albert Heijn Arena

14  Kimberly Ross

Treasury and Tax

 

20  Anthony Schiano

President and CEO, Giant-Carlisle/Tops Arena

15  Joost Sliepenbeek

Accounting and Reporting

 

21  Marc Smith 3

President and CEO, Stop & Shop Arena/Giant-Landover Arena

 

AHOLD ANNUAL REPORT 2005

   15


Table of Contents

> Board and management

 

CORPORATE EXECUTIVE BOARD

Anders Moberg 1

President and Chief Executive Officer

Anders Moberg (March 21, 1950) is a Swedish national. He assumed the position of acting CEO on May 5, 2003. On September 4, 2003, our shareholders appointed him to the Corporate Executive Board in the position of President and CEO. Mr. Moberg is the former CEO and president of IKEA Group and he was formerly division president-international at Home Depot in the United States. Currently, Mr. Moberg is chairman of the supervisory board of Clas Ohlson AB and a member of the supervisory boards of Velux A/S and DFDS A/S.

John Rishton 1, 2

Acting Executive Vice President and Chief Financial Officer

John Rishton (February 21, 1958) is a British national. He assumed the position of acting Executive Vice President and CFO on January 2, 2006. Mr. Rishton is former CFO of British Airways PLC. He has also worked for Ford Europe in various international executive positions. The Supervisory Board will nominate Mr. Rishton for appointment to the Corporate Executive Board at the Annual General Meeting of Shareholders on May 18, 2006.

Peter Wakkie 1

Executive Vice President and Chief Corporate Governance Counsel

Peter Wakkie (June 22, 1948) is a Dutch national. Mr. Wakkie joined Ahold as acting Executive Vice President and Chief Corporate Governance Counsel on October 15, 2003. That position was formalized when our shareholders appointed him a member of the Corporate Executive Board on November 26, 2003. Prior to joining Ahold, he was a partner at law firm De Brauw Blackstone Westbroek, which he joined in 1972, specializing in mergers and acquisitions and corporate litigation. He became a partner of the firm in 1979 and was managing partner from 1997 to 2001. Mr. Wakkie is a member of the supervisory boards of the Albert Heijn Vaste Klanten Fonds, Schuitema N.V. and Wolters Kluwer N.V.

 

KEY CORPORATE OFFICERS

Internal Audit

Joop Brakenhoff

Senior Vice President and Chief Internal Audit Officer, Ahold

Joop Brakenhoff (July 2, 1965) is a Dutch national. He joined Ahold in June 2002 in the position of Vice President Internal Audit Europe. In February 2004, he was appointed Vice President Accounting. In February 2005 he was appointed Vice President Internal Control. From February 2005 until September 2005 Mr. Brakenhoff combined the Vice President Accounting and the Vice President Internal Control function. In September 2005 he was appointed to his current position of Senior Vice President and Chief Internal Audit Officer. Prior to joining Ahold, Mr. Brakenhoff held various management positions at KPMG before joining the Heerema Group in 1994 and the Burg Industries Group two years later as group controller and as from 1998 as CFO.

Business Support

Arthur Brouwer 1

Senior Vice President and Chief Business Support Officer, Ahold

Arthur Brouwer (September 27, 1961) is a Dutch national. He joined Ahold in 1992 as Vice President of Management Development and Organization and was promoted to Senior Vice President of Management Development and Organization in October 1997. In 2000, he was also appointed Chief Support Officer of Ahold’s European Competence Center. He was appointed Chief Business Support Officer effective October 1, 2003. Prior to joining Ahold, Mr. Brouwer held the position of manager of Human Resources Planning and Development at Mercedes-Benz Nederland B.V.

Human Resources

Jim Lawler 1

Senior Vice President and Chief Human Resources Officer, Ahold

Jim Lawler (December 20, 1958) is a U.S. national. He joined Ahold in August 1999 as Executive Vice President of Human Resources for Giant-Landover. In November 2001, he became Executive Vice President of Human Resources for Ahold U.S.A. In November 2003, he assumed his current role of Senior Vice President and Chief Human Resources Officer. Prior to joining Ahold, Mr. Lawler held the position of senior vice president of Human Resources in Rexam PLC’s Coated Films and Papers sector and a variety of executive human resource positions at PepsiCo and Nordson Corporation.


 

16


Table of Contents

 

Information Technology

Dave McNally

Senior Vice President and Chief Information Officer, Ahold

Dave McNally (December 24, 1954) is a U.S. national. He joined Ahold in 2005 in the position of Chief Information Officer, EVP Business Process for U.S. Foodservice. In September 2005 he was appointed to his current position of Senior Vice President and Chief Information Officer. Prior to joining Ahold, Mr. McNally held the position of senior director at AlixPartners LLC where he ran the IT Turnaround Services practice. It was in this capacity that he served as the interim Chief Information Officer for U.S. Foodservice from February 2004.

Treasury and Tax

Kimberly Ross

Senior Vice President and Chief Treasury and Tax Officer, Ahold

Kimberly Ross (May 5, 1965) is a U.S. national. She joined Ahold in September 2001 as Assistant Treasurer. In April 2002, she became Vice President and Group Treasurer and was promoted to Senior Vice President and Group Treasurer in January 2004. She was appointed Senior Vice President and Chief Treasury and Tax Officer on April 1, 2005. Prior to joining Ahold, Mrs. Ross held the position of senior manager at Ernst & Young in New York and director of Corporate Finance for the Americas at Joseph E. Seagram & Sons Inc. Mrs. Ross also held a number of other management positions at Joseph E. Seagram & Sons Inc. from 1995 through 2001 as well as at Anchor Glass from 1992 to 1995.

 

Accounting and Reporting

Joost Sliepenbeek

Senior Vice President and Chief Accounting Officer, Ahold

Joost Sliepenbeek (December 4, 1963) is a Dutch national. He joined Ahold in 1994 in the position of Director Mergers and Acquisitions. Subsequently, he was Controller of GVA, now Deli XL, and from April 1999 to July 2003, he served as Executive Vice President and CFO of Albert Heijn. He was appointed Senior Vice President Controller in July 2003. As of April 2004, he was appointed Senior Vice President and Chief Accounting Officer. Mr. Sliepenbeek served as CFO ad interim between September 1, 2005 and January 2, 2006. Prior to joining Ahold, Mr. Sliepenbeek worked as an investment manager for Gilde Investment Management and as a consultant in the Financial Management Practice of KPMG Consulting. He is a member of the supervisory board of the Albert Heijn Vaste Klanten Fonds and Schuitema N.V.

RETAIL

Marc Smith 1, 3

President and CEO, Stop & Shop/Giant-Landover Arena

Anthony Schiano 1

President and CEO, Giant-Carlisle/Tops Arena

Dick Boer 1

President and CEO, Albert Heijn Arena

Jacquot Boelen 1

President and CEO, Central Europe Arena

Jan Brouwer

President and CEO, Schuitema N.V.

Kenneth Bengtsson 1

President and CEO, ICA AB 4

Pedro Soares dos Santos

President and CEO, Jerónimo Martins Retail 4

FOODSERVICE

Lawrence Benjamin 1

President and CEO, U.S. Foodservice

 


1 Member of the Ahold Leadership Team.
2 Subject to appointment at the annual General Meeting of Shareholders on May 18, 2006.
3 In February 2006, we announced that Marc Smith is to retire within several months.
4 Unconsolidated joint venture or associate.

 

AHOLD ANNUAL REPORT 2005

   17


Table of Contents

> Board and management

 

SUPERVISORY BOARD

Rene Dahan, Chairman

Chairman of the Selection and Appointment Committee

Rene Dahan (August 26, 1941) is a Dutch national. He was first appointed to the Supervisory Board on June 2, 2004, and his term runs until 2008. Mr. Dahan is former executive vice president and director of Exxon Mobil Corporation. He is a member of the supervisory boards of VNU N.V., TNT N.V., and Aegon N.V. as well as member of the international advisory board of the Guggenheim group in New York, United States. Mr. Dahan is a member of the international advisory board of the Instituto de Empresa, Madrid, Spain.

Jan H.M. Hommen, Vice-Chairman

Chairman of the Audit Committee

Jan Hommen (April 29, 1943) is a Dutch national. He was first appointed to the Supervisory Board on May 13, 2003, and his term runs until 2007. Mr. Hommen is former CFO and vice chairman of the board of management of Royal Philips Electronics N.V. He is chairman of the supervisory board of TNT N.V., chairman of the board of Reed Elsevier N.V., and member of the supervisory board of ING Groep N.V. Mr. Hommen is chairman of the supervisory board of the Academic Hospital Maastricht and chairman of the board of directors of MedQuist Inc. which is approximately 70.9% owned by Royal Philips Electronics N.V.

Karen de Segundo

Karen de Segundo (December 12, 1946) is a Dutch national. She was first appointed to the Supervisory Board on June 2, 2004, and her term runs until 2008. Mrs. de Segundo is former CEO of Shell International Renewables and president of Shell Hydrogen and prior to that CEO of Shell International Gas & Power. She is a member of the board of Jaakko Pöyry Group Oyj and director of Lonmin Plc and of Merrill Lynch New Energy Technology Plc.

Derk C. Doijer

Chairman of the Remuneration Committee

Derk Doijer (October 9, 1949) is a Dutch national. He was first appointed to the Supervisory Board on May 18, 2005, and his term runs until 2009. Mr. Doijer is a former member of the executive board of directors of SHV Holdings N.V. and, prior to that, held several executive positions in the Netherlands and South America. He is non-executive chairman of the board of Van der Sluijs Group Holding B.V., a member of the supervisory board of Corio N.V. and a member of the investment committee of NPM Capital N.V.

 

Myra M. Hart

Myra Hart (August 5, 1940) is a U.S. national. She was first appointed to the Supervisory Board on May 18, 2005, and her term runs until 2009. She is an academic (professor of entrepreneurship) by profession. She holds the MBA Class of 1961 Chair of Entrepreneurship at Harvard Business School. Prior to joining Harvard in 1995, Professor Hart was on the founding team of Staples the Office Superstore, serving as vice president of Growth and Development from launch through initial public offering. She is a member of the board of Office Depot, Intellivid, Nina McLemore and eCornell. Professor Hart is a trustee of Cornell University, a director of the Center for Women’s Business Research and a member of the Committee of 200.

Stephanie M. Shern

Stephanie Shern (January 7, 1948) is a U.S. national. She was first appointed to the Supervisory Board on May 18, 2005, and her term runs until 2009. Mrs. Shern was with Ernst & Young for over 30 years, most recently as vice chairman and global director of Retail and Consumer Products and a member of Ernst & Young’s U.S. management committee. She is the lead Director of GameStop and a member of the board and chair of the audit committee of GameStop and Scotts Miracle-Gro. She is also a member of the board of Sprint Nextel Corporation and a member of the advisory board of Pennsylvania State University, School of Business.


 

18


Table of Contents

Supervisory Board report

 

In accordance with Dutch law and our Articles of Association the Supervisory Board is an independent corporate body responsible for supervising the management of the Corporate Executive Board and the general course of affairs of the Company and the enterprise connected with it. In addition, the Supervisory Board assists the Corporate Executive Board with advice. The Supervisory Board is guided by the interests of the Company and the enterprise connected with it and must take into account the relevant interests of all those involved in the Company. The Supervisory Board is responsible for assessing its own performance.

 

Major decisions of the Corporate Executive Board require the approval of the Supervisory Board, including:

·   issuing shares and acquisitions, redemptions, repurchases of our shares and any reduction in our issued and outstanding share capital;
·   allocating duties within the Corporate Executive Board and the adoption or amendment of the charter of the Corporate Executive Board;
·   significant changes in the identity or the nature of the Company or its enterprise.

Further the Corporate Executive Board must submit for approval to the Supervisory Board:

·   the operational and financial objectives of the Company;
·   the strategy designed to achieve those objectives; and
·   the parameters to be applied in relation to the strategy, for example in respect of financial ratios.

ACTIVITIES OF THE SUPERVISORY BOARD

The Supervisory Board meets at least six times a year. In practice six times a year two days are scheduled during which one or two Supervisory Board meetings and one Audit Committee meeting are held. At least at three of these occasions a remuneration Committee meeting and a Selection and Appointment Committee meeting are scheduled. In addition the Supervisory Board meets once a year before the annual General Meeting of Shareholders and if necessary further meetings or conference calls are held. Twice a year the meetings are held in the United States at one of our U.S. companies. The intention is to also hold a meeting in at least one other arena each year.

Most Supervisory Board meetings are attended by the members of the Corporate Executive Board. The Supervisory

Board may also hold meetings with the CEO only or private meetings with Supervisory Board members only. Once a year in a private meeting the Supervisory Board assesses its own performance, that of its committees and its individual members, as well as the performance of the Corporate Executive Board and its individual members. If appropriate, the outcome is discussed with the CEO and the other members of the Corporate Executive Board. When necessary, the Chairman and other members of the Supervisory Board have contact with the CEO and other members of the Corporate Executive Board outside the scheduled meetings of the Supervisory Board.

In 2005 the Supervisory Board held fourteen meetings, of which thirteen took place on six occasions of two subsequent days. Two Supervisory Board meetings were held in Charlotte, North Carolina during a two day visit in June, one of which was dedicated to an update and review of U.S. Foodservice. Two meetings were held at Stop & Shop in Quincy, Massachusetts in October, one of which was dedicated to an update and review of our U.S. retail companies. In another meeting there was a specific update on the repositioning program at Albert Heijn. The Supervisory Board is regularly updated and consulted on the general status of the affairs of the Company. In addition to the regular updates on strategy and related topics, one of the Supervisory Board meetings in August was dedicated to the Ahold group strategy.

The Supervisory Board focused on the execution and progress of the Road to Recovery strategy. Approval was given to the reorganization of U.S. Foodservice into two operating companies, each focused on a specific customer segment. One for the “broadline” business and one for the “multi-unit” business. (See “Management’s discussion &


 

AHOLD ANNUAL REPORT 2005

   19


Table of Contents

> Supervisory Board report

 

analysis” in this annual report for a further description of the strategy.) Other topics discussed were IT strategy, IT outsourcing agreements and next generation sourcing.

The Supervisory Board focused on the execution and progress of the Road to Recovery strategy. Approval was given to the reorganization of U.S. Foodservice into two operating companies, each focused on a specific customer segment. One for the “broadline” business and one for the “multi-unit” business. (See “Management’s discussion & analysis” in this annual report for a further description of the strategy.) Other topics discussed were IT strategy, IT outsourcing agreements and next generation sourcing.

The Supervisory Board was regularly updated on the major legal proceedings and held a special meeting to approve the settlement in the securities class action. Mainly through the Audit Committee, regular updates were provided on the operation of the internal control and risk management systems and corporate governance with a focus on compliance with the Dutch Corporate Governance Code and the project to comply with the requirements of Section 404 of the Sarbanes Oxley Act as of December 31, 2006. Reports from the whistleblower procedure and the necessary follow-up were addressed. The quarterly results and press releases were discussed and the budget 2006 was approved. The agenda for the annual General Meeting of Shareholders on May 18, 2005 as well as the annual report 2004 were approved.

The Supervisory Board discussed management development, succession and remuneration policy, as well as the individual compensation of Corporate Executive Board members. Nominations for new Supervisory Board members appointed on May 18, 2005 were approved. The nomination of the CFO and a new Supervisory Board member for appointment at the annual General Meeting of Shareholders on May 18, 2006 were approved.

One private meeting was dedicated to self-assessment and assessment of the performance of the Corporate Executive Board and its individual members. As part of the self-assessment the profile and composition of the Supervisory Board and its committees were discussed.

No Supervisory Board member was frequently absent from the meetings. The Supervisory Board confirms that as of March 28, 2006 all Supervisory Board members are independent within the meaning of provision III.2.2 of the Dutch Corporate Governance Code and the applicable U.S. securities regulations and NYSE listing standards.

 

CHANGES TO THE COMPOSITION OF THE SUPERVISORY BOARD

There were several changes to the composition of our Supervisory Board in 2005.

Dr. Cynthia Schneider and Lodewijk de Vink retired at the General Meeting of Shareholders on May 18, 2005, which marked the end of their respective terms.

As announced in August 2004, Karel Vuursteen retired as member of the Supervisory Board at the General Meeting of Shareholders on May 18, 2005 because of personal circumstances.

The Supervisory Board is grateful for the dedication and wisdom with which these members have fulfilled their tasks in the years they served in the Supervisory Board.

Derk Doijer was appointed to the Supervisory Board at the General Meeting of Shareholders on May 18, 2005.

He is serving as Chairman of the Remuneration Committee and member of the Audit Committee.

Professor Myra Hart was appointed to the Supervisory Board as of May 18, 2005. She is a member of the Remuneration Committee and the Selection and Appointment Committee.

Stephanie Shern was appointed to the Supervisory Board as of May 18, 2005. She is a member of the Audit Committee and the Remuneration Committee.

Benno Hoogendoorn was appointed to the Supervisory Board as of May 18, 2005. The Supervisory Board regrets that Benno Hoogendoorn, for medical reasons, resigned on September 29, 2005 as member of the Supervisory Board, member of the Selection and Appointment Committee and Chairman of the Remuneration Committee.

INDUCTION

The members that joined the Supervisory Board in 2005 attended a full-day induction program at our offices in Zaandam or Amsterdam. Senior management briefed the members of the Supervisory Board on their responsibilities as members of the Supervisory Board and the financial, legal and reporting affairs of the Company and its businesses. Members of the Supervisory Board visited several arenas and other parts of the business during the year.


 

20


Table of Contents

 

REMUNERATION

The remuneration of the members of the Supervisory Board is determined by the General Meeting of Shareholders and currently the annual remuneration is as follows:

 

Chairman Supervisory Board

   EUR    55,000

Vice Chairman Supervisory Board

   EUR    47,500

Member Supervisory Board

   EUR    40,000

Chairman Audit Committee

   EUR    10,000

Member Audit Committee

   EUR    8,000

Chairman Remuneration Committee, or

     

Selection and Appointment Committee

   EUR    5,000

Member Remuneration Committee, or

     

Selection and Appointment Committee

   EUR    3,000

In addition, for each meeting of the Supervisory Board and the Audit Committee, each member receives an attendance fee of EUR 1,250, or EUR 3,000 in case the meeting is held in a location that requires intercontinental travel from the residence of a member.

For detailed information on the individual remuneration of Supervisory Board members, see Note 8 to our consolidated financial statements included in this annual report.

 

COMMITTEES OF THE SUPERVISORY BOARD

The Supervisory Board has established three permanent committees, the composition of which is reflected in the following table.

 

             

Supervisory

Board

       Audit
Committee
       Remuneration
Committee
       Selection and
Appointment
Committee

Rene Dahan

              

Chairman

          Member      Chairman

Jan Hommen

              

Vice-Chairman

     Chairman          

Karen de Segundo

     Member           Member

Derk Doijer

     Member      Chairman     

Myra Hart

          Member      Member

Stephanie
Shern

       Member        Member         

 

RETIREMENT AND REAPPOINTMENT SCHEDULE

 

                 

Name

       Date of birth        Date of initial appointment        Date of possible
reappointment(s)
       Last possible date of
retirement

Jan Hommen

     April 29, 1943      May 13, 2003      2007      2015

Rene Dahan

     August 26, 1941      June 2, 2004      2008      2016

Karen de Segundo

     December 12, 1946      June 2, 2004      2008      2016

Derk Doijer

     October 9, 1949      May 18, 2005      2009      2017

Myra Hart

     August 5, 1940      May 18, 2005      2009      2017

Stephanie Shern

       January 7, 1948        May 18, 2005        2009        2017

 

AHOLD ANNUAL REPORT 2005

   21


Table of Contents

> Supervisory Board report

 

Audit Committee

The Audit Committee assists the Supervisory Board in its responsibilities to oversee our financing, our consolidated financial statements, the financial reporting process and the system of internal business controls and risk management. The Audit Committee has six meetings per year. In addition, the Audit Committee has conference calls before the release of each quarterly trading statement. If necessary other Audit Committee meetings are called. The members of the Corporate Executive Board, the Chief Accounting Officer, the Chief Internal Audit Officer and the external auditor are invited to the Audit Committee meetings. Other members of senior staff are invited when the Audit Committee finds it necessary or appropriate.

In 2005 the Audit Committee had six meetings, one before each quarterly results release and two other meetings. In addition four conference calls were held prior to the release of each quarterly trading statement. Four other conference calls were held on matters relating to the closing of the 2004 accounts and one on the solicitations to sell notes announced on October 11, 2005. At the end of the regular meetings, the Audit Committee had several individual meetings with the CEO, CFO, interim CFO, the Chief Internal Audit Officer and the external auditor.

The Audit Committee considered the quarterly trading statements and results release. The Audit Committee reviewed the annual report 2004 and recommended it for approval to the Supervisory Board. The Audit Committee received regular updates on internal controls and the progress on the project to comply with the requirements of Section 404 of the Sarbanes Oxley Act as of December 31, 2006. The Audit Committee closely monitored the Company’s efforts to improve and strengthen its internal controls, including with respect to the two material weaknesses and other internal control issues which were reported in the 2004 annual report. The 2004 material weaknesses related to accounting for income tax provisions and to U.S. GAAP financial statement reconciliation process and no longer exist as of the end of the period covered by this annual report. Every quarter a report from the whistleblower procedure was provided to the Audit Committee and discussed with the Corporate Executive Board in the meetings. Regularly the Audit Committee was informed on litigation and the related exposure. The Audit Committee was updated on IT whereby information strategy, information architecture, outsourcing, information management governance and information security were addressed. The Audit Committee assessed the independence and performance of the external auditor and for that purpose pre-approved the fees for audit and permitted non-audit services to be performed by the external auditors as

negotiated by the Corporate Executive Board. It reviewed the internal audit plan. The Audit Committee approved the solicitations to sell notes announced on October 11, 2005. In December the Audit Committee considered the budget for 2006. The Audit Committee also reviewed the charter for the Audit Committee and concluded that it was adequate.

The composition of the Audit Committee changed during 2005, as Lodewijk de Vink and Rene Dahan resigned from the Audit Committee and Derk Doijer and Stephanie Shern were appointed to the Audit Committee in May 2005.

REMUNERATION COMMITTEE

The Remuneration Committee met nine times in 2005. The CEO was invited to all of these meetings. For a report on remuneration and the activities of the Remuneration Committee, see the “Remuneration” section of this annual report.

SELECTION AND APPOINTMENT COMMITTEE

The Selection and Appointment Committee met seven times in 2005 and its main focus was the selection of a new CFO and replacements of the members of the Supervisory Board who retired in 2005. The Selection and Appointment Committee was further engaged in a search for an additional Supervisory Board member and in the 2006 Management Development Plan.

In May 2005, Dr. Cynthia Schneider retired from the Selection and Appointment Committee. Dr. Myra Hart and Benno Hoogendoorn were appointed to the Selection and Appointment Committee. Benno Hoogendoorn resigned from the Selection and Appointment Committee on September 29, 2005 due to medical reasons.

This annual report and the 2005 consolidated financial statements, audited by Deloitte Accountants B.V., have been presented to the Supervisory Board. The consolidated financial statements were discussed with the Audit Committee in the presence of the Corporate Executive Board and the external auditor. The Supervisory Board endorses this annual report. The Supervisory Board recommends that the General Meeting of Shareholders adopts the 2005 consolidated financial statements included in this annual report.

Supervisory Board

Amsterdam, the Netherlands, March 28, 2006


 

22


Table of Contents

Remuneration

 

REMUNERATION COMMITTEE

The responsibilities of the Remuneration Committee include:

·   preparing proposals for the Supervisory Board concerning the remuneration policies for the Corporate Executive Board to be adopted by the General Meeting of Shareholders;
·   preparing proposals concerning the remuneration of individual members of the Corporate Executive Board; and
·   to be informed and to give an opinion on the level and structure of compensation for senior personnel other than members of the Corporate Executive Board.

The Remuneration Committee has four members. During 2005 the composition of the Remuneration Committee changed. Until May 18, 2005, the members were Karel Vuursteen, Chairman and Rene Dahan and Dr. Cynthia Schneider. Karel Vuursteen and Dr. Cynthia Schneider resigned from the Supervisory Board and, accordingly, from the Remuneration Committee as of May 18, 2005. At present, the members of the Remuneration Committee are Derk Doijer, Chairman, Rene Dahan, Dr. Myra Hart and Stephanie Shern, all of whom are members of the Supervisory Board. (As of May 18, 2005 Benno Hoogendoorn was appointed Chairman and he resigned as of September 29, 2005. As of October 25, 2005 Derk Doijer was appointed Chairman).

In 2005, the Remuneration Committee met nine times. The CEO was invited to all of these meetings but did not attend all meetings. The secretary of the Remuneration Committee is from our Group Support Office Human Resources Department.

The Remuneration Committee utilizes external and internal advisers from time to time for advice and information. In 2005 external advisers were hired to provide professional advice regarding our remuneration policy, remuneration market practices, and short and long-term incentive plans and practices. The Supervisory Board determines the remuneration of the individual members of the Corporate Executive Board within the limits of our remuneration policy. Our remuneration policy, in accordance with the Dutch Corporate Governance Code was adopted at the General Meeting of Shareholders on March 3, 2004.

In 2005, the remuneration of Anders Moberg, Hannu Ryöppönen (Mr. Ryöppönen resigned from the Corporate Executive Board effective August 31, 2005) and Mr. Theo de Raad (resigned from the Corporate Executive Board effective January 7, 2005), differed from the remuneration policy with regard to base salary and/or short-term bonus, because of preexisting contractual arrangements.

 

See Notes 8 and 9 to the consolidated financial statements included in the annual report for details on employment agreements, individual remuneration and pensions for members of our Corporate Executive Board.

ADDITIONAL CONDITIONS

In addition to the remuneration allocated to Corporate Executive Board members, as set out in the remuneration policy below, a number of additional arrangements apply. These additional arrangements, such as expense allowances, medical insurance and accident insurance, are in line with practice in the Netherlands and the United States.

As from January 1, 2004, the term of the employment agreement for newly appointed members of the Corporate Executive Board has been set at four years. If the Company terminates the employment agreement of any such newly appointed member, the severance payment is in principle limited to one year’s base salary.

APPLICATION OF POLICY IN 2005

According to section 3.4 of the remuneration policy the targets for the bonus of the members of the Corporate Executive Board in financial year 2005 are 70% based on a financial criterion (economic value added or “EVA” improvement) and 30% based on personal performance criteria as set by the Supervisory Board. The Supervisory Board has determined the personal targets for each member of the Corporate Executive Board.

THE REMUNERATION POLICY

 

1. General
1.1 The objective of the Company’s remuneration policy is to provide remuneration in a form that:
  top managers can be recruited and retained as a member of the Corporate Executive Board of a major international company; and
  rewards performance consistent with the Ahold strategy.
1.2 According to our Articles of Association, the Supervisory Board proposes and the General Meeting of Shareholders adopts the general remuneration policy to be allocated to Corporate Executive Board members. The Supervisory Board makes this proposal after having obtained the advice and recommendation of the Remuneration Committee. External advisers will on occasion be utilized to provide advice and information to the Remuneration Committee to assist in the development of the policy proposals.

 

AHOLD ANNUAL REPORT 2005

   23


Table of Contents

> Remuneration

 

1.3 Within the limits of the general remuneration policy as adopted by the General Meeting of Shareholders, the Supervisory Board determines the remuneration of individual members of the Corporate Executive Board.

 

2. Remuneration structure
2.1 The remuneration structure is divided into (i) Total Cash (consisting of base salary and bonus) and (ii) long-term incentives consisting of stock options and a share-plan, and (iii) pension. These three elements will be further addressed below.
2.2 The Remuneration Committee considers the remuneration structure regularly to ensure it meets the objectives of the remuneration policy.
2.3 In determining an individual’s remuneration within the general remuneration policy, the Supervisory Board will take into account factors such as the required competencies, skills and performance of the individual concerned and the specific role and responsibilities of the relevant position.
2.4 To ensure the competitiveness of the overall remuneration provided to the Corporate Executive Board, the remuneration levels are benchmarked annually against a peer group of companies. Reference for compensation (base salary, target bonus, long-term incentives, and pension) is the Dutch market for Corporate Executive Board members of the leading companies quoted on the Euronext Amsterdam. For this purpose, market data of two external service providers specialized in executive pay are used. Leading AEX companies are defined on the basis of world-wide annual sales exceeding EUR 10 billion and total employees world-wide in excess of 30,000. For 2004 and 2005 the Remuneration Committee and the Supervisory Board assessed the competitiveness of the remuneration levels of the Corporate Executive Board against the following peer group:

-   Royal Dutch Shell N.V.

-   ING Group N.V.

-   FORTIS N.V.

-   Unilever N.V.

-   ABN AMRO Holding N.V.

-   Royal Philips Electronics N.V.

-   Aegon N.V.

-   AKZO Nobel N.V.

-   Royal KPN N.V.

-   TNT N.V.

 

3. Total cash compensation
3.1 The reference for “at target Total Cash” (base salary and at target bonus) is the Dutch market for Corporate Executive Board members of the top AEX companies. The “at target Total Cash” will be benchmarked
 

annually against the aforementioned market(s).

3.2 It is the policy of the Company to set “at target Total Cash” for members of the Corporate Executive Board between the 60th and 75th percentile of the relevant reference market. This is deemed essential to attract and retain management of the appropriate caliber in this highly competitive international retail market.
3.3 The “Road to Recovery” strategy as announced on November 7, 2003 is the cornerstone in the efforts to rebuild Ahold’s position as a company that delivers value to its stakeholders. In light of this strategy, the general remuneration policy emphasizes variable performance related compensation. Because of the importance of a remuneration which is substantially based on performance of Ahold and the individual board member, it is considered desirable that the bonus represents a higher proportion of Total Cash than is typically the case among the companies in the defined reference market.
3.4 A Corporate Executive Board member’s bonus can range from 0 to 125% 1 of the individual’s base salary, depending on performance. Performance “at target” will yield a bonus pay out at 100% of the Corporate Executive Board member’s base salary. 70% of the at target bonus will be based on a financial criterion and 30% will be based on one or two measurable personal targets.

The selected financial criterion is economic value added (“EVA”) improvement. EVA measures the Company’s economic value added or economic profit, defined as Net Operating Profits After Tax (“NOPAT”) minus the cost of capital. EVA is a comprehensive measure of ongoing operating performance and includes an explicit charge for invested capital. EVA supports the primary objective of the Company to create long-term value and rewards consistent value creation over a long-term horizon. The Company does not disclose the required performance levels of the financial and personal criteria, as these qualify as commercially sensitive information.

The personal targets may vary per individual Corporate Executive Board member and may differ year by year. The attainment of personal targets is assessed by the Supervisory Board. The Supervisory Board insists and ensures that personal targets are stretching and realistic.2

 


1 In the case of the CEO, up to 250% based on employment contract.
2 The performance criteria listed above apply also to existing employment contracts.

 

24


Table of Contents

 

3.5 In the event a non-Dutch national is appointed to the Corporate Executive Board and the board member will reside and work outside of the Netherlands, the Supervisory Board may award Total Cash that also takes account of the relevant local reference market.

 

4. Long-term incentives
4.1 Long-term incentives are intended to reinforce sustainable performance consistent with the Ahold strategy; and to align (more closely) the interests of executives with those of the shareholder.
4.2 Corporate Executive Board members are eligible to participate in two long-term incentive plans: stock options and a conditional share plan.
4.3 The Ahold stock option plan provides for the right to purchase Company stock at a predetermined price during a predefined period of time. Options will be granted annually. The exercise price equals the closing market price of the Company’s stock at Euronext Amsterdam on the last stock exchange trading day prior to the grant date.

50% of the granted options will have a term of five years and 50% of the granted options will have a term of ten years. The vesting of the stock option grants made in 2005 to the Corporate Executive Board members are subject to performance criteria at vesting. Both five year term and ten year term options will be exercisable after three years under the condition that the performance criteria have been met.

The performance criterion is the average EVA improvement versus targeted improvement over the three financial years prior to vesting. The vested amount of options will range from 80% to 120% of the targeted number of options depending on performance against the vesting criteria. When performance against the vesting criteria is below 80% of target, zero options will vest.

The maximum number of options, calculated at the vesting level of 120%, will be: 121,500 for the CEO; and 90,000 for the other Corporate Executive Board members.

4.4 Corporate Executive Board members are eligible to participate in the Ahold performance share plan 2004 – 2006. This is a performance stock plan based upon Ahold’s Total Shareholder Return (“TSR”) relative to that of a selected group of companies in Ahold’s core business (the peer group) measured over the years 2004 – 2006. TSR measures all the gains (share price growth and dividends) shareholders receive over a certain period of time.

 

The Supervisory Board has determined that TSR performance will be compared to the following peer group:

-   Sysco Corporation

-   Wal-Mart Stores, Inc.

-   Safeway, Inc.

-   Albertson’s, Inc.

-   Kroger and Co

-   Casino S.A.

-   Metro A.G.

-   Carrefour S.A.

-   Tesco Plc.

Based on this peer group Ahold will be ranked on its total return to shareholders. External specialists will determine the ranking and hence the number of shares that will vest after the three-year performance period. The determination of the final ranking will be audited by the Company accountant.

The number of shares that will vest depends on the ranking of Ahold within the peer group. There will be no shares that vest below the sixth position of the peer group of ten companies (including Ahold). For the third position the target number of shares (100%) conditionally granted will vest. The maximum number of shares is 150% of the target number of the shares conditionally granted. Should Ahold reach the first position within the peer group, this maximum number of shares will vest.

 

COMPANY RANKING    Vested
shares

Ranking 10, 9, 8 or 7

   0 %

Ranking 6

   25 %

Ranking 5

   50 %

Ranking 4

   75 %

Ranking 3

   100 %

Ranking 2

   125 %

Ranking 1

   150 %

Corporate Executive Board members will be required to retain shares acquired under this plan for a period of at least three years after shares are acquired, or until the end of employment if this period is shorter than the three years retaining period. The Corporate Executive Board members shall, however, not be prohibited from selling shares adequate to cover taxes due at grant.

In evaluating its long-term incentive plans the Company is assisted by external advisors.


 

AHOLD ANNUAL REPORT 2005

   25


Table of Contents

> Remuneration

 

5. Pension 1
5.1 For Dutch Corporate Executive Board members, the Dutch Pension Scheme for the Corporate Executive Board (Pensioenregeling Raad van Bestuur Ahold) will apply. The main features of this Pension Scheme are:
  - Retirement age 60;
  - Level of pension benefits amounts to 60% of final base pay (based on 30 years of service);
  - The pension accrual rate is 2% per year of service; and
  - Contributions to be paid by the Corporate Executive Board member based on a percentage of base salary.

 

5.2 For non-Dutch Corporate Executive Board members, the pension scheme will be based on the individual situation and taking into account the pension practices in the home country, the existing pension scheme at the date of hire, age and the possibilities to apply the Pensioenregeling Raad van Bestuur Ahold. In general the target level of the pension is 60% final base pay (in a situation of full service).

 

6. Other contract terms
6.1 Loans

The Company does not provide loans to members of the Corporate Executive Board. There are no current loans outstanding.

NEW REMUNERATION POLICY 2006 2

In the second half of 2005, the remuneration policy of Ahold was reviewed in view of the complexity of the existing policy, evolving market practices and changes in corporate governance requirements. The Supervisory Board made the recommendation to change the 2004 remuneration policy to come to a more simple and transparent system, reinforcing a performance-oriented culture focused on criteria relevant to Ahold’s strategy. Compared to the prior policy, the basic objectives have not changed whereas the strategy and vehicles used have.

MAIN CHANGES

The primary changes to the policy include a new peer group for benchmarking, the introduction of “Total Direct Compensation” instead of “Total Cash Compensation” as the basis for comparison with the relevant peer group, new performance measures for the annual cash incentive and a new long-term incentive plan replacing the existing stock option and performance share grant programs.

 

New reference peer group

The new peer group used to assess the competitiveness of the overall remuneration provided to the Corporate Executive Board reflects the geographical areas in which we operate and of the markets most relevant with respect to the recruitment and retention of top management for the Company. The peer group is comprised of the following companies:

Wal-Mart Stores, Inc.
Carrefour S.A.
Metro A.G.
Tesco PLC
Costco Wholesale Corporation
The Kroger Co.
Target Corporation
Safeway Inc.
Sysco Corporation
Delhaize Brothers and Co. (Delhaize Group)
Staples, Inc.

Introduction of Total Direct Compensation for benchmarking

The basis elements of the overall remuneration provided to our Corporate Executive Board members are (1) a base salary, (2) an annual cash incentive calculated as a percentage of the base salary and determined by comparing performance against specific objectives (3) a long-term incentive plan based on conditional share grants with employment and performance criteria and (4) a pension.

Whereas the prior policy used “Total Cash Compensation” (consisting of base salary plus annual cash incentive at target level) as a reference when comparing to the peer group, the new policy uses a more complete measure “Total Direct Compensation” (consisting of base salary plus annual cash incentive at target level plus the long term incentive at target level projected on an annual value basis) when comparing to the reference peer group. It is the Supervisory Board’s view that including the long-term incentive component in benchmarking is essential to properly assess the value of the total remuneration package, and to ensure a proper balance between a short-term and longer term focus.

When comparing remuneration levels against the new peer group, the composition (risk profile) of the existing remuneration, will be taken into account. The target Total Direct Compensation levels will be reached by designated target levels of the mid- and long-term incentive component.

 


1 Due to changes in the pension law in The Netherlands the pension scheme for the Corporate Executive Board will be reviewed over the course of 2006.
2 The new remuneration policy will be submitted for shareholder approval at the annual General Meeting of Shareholders on May 18, 2006.

 

26


Table of Contents

 

The target Total Direct Compensation will typically be at the 50th percentile. In special cases the levels might move towards the 75th percentile. In the case of any adjustment, a conservative (step-by-step) approach will be followed, taking into account the composition of existing remuneration (risk profile).

Annual cash incentive plan

To further align the annual cash incentive program with our Company strategy, the Supervisory Board had decided to no longer use EVA as one of the performance measures used in the annual cash incentive plan. The new program will use three equally weighted measures:, net sales growth, operating margin and RoNA (“Return on Net Assets”). Our target for the annual cash incentive payout as a percent of base salary remains at 100%, contingent on full achievement of objectives, with a cap at 125% of the base salary except where pre-existing contractual arrangements exist.3 The Company does not disclose the required performance levels of the criteria, as these are considered commercially sensitive information.

Long-term incentive plan

The new remuneration policy eliminates the use of stock options as an equity reward method. Beginning in 2006, Ahold shares will instead be granted through a mid-term (three-year) and a long-term (five-year) conditional share grant program:

Mid-term incentive

For Corporate Executive Board members, one half of the conditional shares granted will vest after three years continued employment (with a mandatory holding period of two years following the vesting).

Long-term incentive

The other half of the conditional shares granted will vest after a performance period of five years. During this period, performance will be measured against the Total Shareholder Return (TSR, share price growth and dividends) of the same peer group used to benchmark the Corporate Executive Board remuneration levels. The number of shares that will vest depends on the ranking of Ahold within the peer group. No shares will vest below the seventh position of the peer group consisting of twelve companies (including Ahold). The maximum number of shares that can vest is 150% of the target number of the conditional shares granted. Should Ahold reach the first position within the peer group, this maximum number of shares will vest.

 

The following table describes the percentage of conditional shares that will vest depending on the ranking of Ahold within the peer group:

 

COMPANY RANKING    Vested
shares

Ranking 1

   150 %

Ranking 2

   130 %

Ranking 3

   110 %

Ranking 4

   90 %

Ranking 5

   70 %

Ranking 6

   50 %

Ranking 7

   25 %

Ranking 8, 9, 10, 11, 12

   0 %

Performance factor determining grant levels

Target grant values for each Corporate Executive Board member are determined by the Supervisory Board. The grant level at target, taking into account the individual Executive Board member’s base salary and annual incentive at target, will provide a Total Direct Compensation in line with the stated policy level.

The actual number of shares granted in any given year is determined by applying the performance multiple of the annual incentive criteria for the preceding year against the targeted grant level. For example, if the annual incentive multiple for a given year was 0.8 and the at target grant level was EUR 100.000, the granted value will be 0.8 x EUR 100.000 = EUR 80.000. The average share price during the six months preceding the date of grant will be used to determine the number of shares to be granted. In case, the annual incentive multiplier is zero, 50% of the grant value at target will be granted through the TSR performance related component.

 


3 Currently, only Mr. Moberg has a pre-existing contract which differs from these targets.

 

AHOLD ANNUAL REPORT 2005

   27


Table of Contents

Corporate governance

 

Koninklijke Ahold N.V. is the parent company of the Ahold group. It was founded in 1887 and incorporated as a limited liability company under Dutch law on April 29, 1920. Our shares or depositary shares are listed on Euronext Amsterdam, the NYSE and the Zürich Stock Exchange. For a list of our significant subsidiaries, see Note 38 to our consolidated financial statements included in this annual report.

As a Dutch listed company we are required to comply with the Dutch Corporate Governance Code of December 9, 2003 (the “Dutch Corporate Governance Code”) either by applying its provisions or explaining why we deviate from any provision. Our shareholders gave their consent to all the proposed changes aimed at compliance with the Dutch Corporate Governance Code during an Extraordinary General Meeting of Shareholders on March 3, 2004. As a result of our listing on the NYSE we are required to comply with applicable U.S. securities regulations and the listing standards of the NYSE to the extent they apply to non-U.S. companies. As a Dutch company governed by Dutch law, we follow corporate governance practices that may differ from the practices followed by U.S. domestic companies under NYSE listing standards. A summary of the significant differences in corporate governance practices that we follow under Dutch law and NYSE listing standards followed by U.S. domestic companies is published in the corporate governance section of our website at www.ahold.com.

 

Our Articles of Association set forth certain aspects governing our organization and corporate governance. The current text of our Articles of Association is available at the Trade Register of the Chamber of Commerce and Industry for Amsterdam and on our website at www.ahold.com.

As part of our Road to Recovery strategy, we have put in place a stronger and more transparent corporate governance and organizational structure. We continue to seek ways to improve our corporate governance by measuring ourselves against international best practice, primarily in the Netherlands and United States.

The following diagram shows the boards, committees and teams that govern Ahold and its businesses.


 

LOGO

 

28


Table of Contents

 

CORPORATE EXECUTIVE BOARD

We are managed by our Corporate Executive Board, which is supervised by the Supervisory Board. The Corporate Executive Board as a whole is responsible for our management and the general affairs of Ahold.

Composition

Our Articles of Association provide that the Corporate Executive Board must consist of at least three members and that in the event of a vacancy the remaining members or the sole remaining member will conduct the management of the Company. As of September 1, 2005 the Corporate Executive Board consists of two members, being Anders Moberg, President and CEO and Peter Wakkie, Executive Vice President and Chief Corporate Governance Counsel. In accordance with the Articles of Association the Supervisory Board and the Corporate Executive Board have made provisions to fill the vacancy. The Corporate Executive Board appointed Joost Sliepenbeek, Ahold’s Chief Accounting Officer, as CFO ad interim from September 1, 2005 until January 2, 2006. On September 26, 2005 we announced that the Supervisory Board will nominate John Rishton for appointment to the Corporate Executive Board at the annual General Meeting of Shareholders on May 18, 2006. John Rishton began serving as Ahold’s Acting Executive Vice President and CFO on January 2, 2006.

Appointment

Corporate Executive Board members are appointed for a term of four years and may be reappointed for additional terms not exceeding four years. The Supervisory Board makes proposals to appoint, suspend, or dismiss a Corporate Executive Board member, and such proposals are adopted by an absolute majority of votes cast by the General Meeting of Shareholders. If another party makes the proposal, an absolute majority of votes cast, representing at least one-third of the issued share capital, is required to appoint, suspend or dismiss a Corporate Executive Board member.

 

If this qualified majority is not achieved but a majority of the votes exercised was in favor of the proposal, then a second meeting will be held. In the second meeting, only a majority of votes exercised, regardless of the number of shares represented at the meeting is required to adopt the proposal appoint, suspend or dismiss a Corporate Executive Board member.

Conflict of Interest

Each member of the Corporate Executive Board shall immediately report any potential conflict of interest to the chairman of the Supervisory Board and to the other members of the Corporate Executive Board. A member of the Corporate Executive Board with such conflict or potential conflict of interest must provide the chairman of the Supervisory Board and the other members of the Corporate Executive Board with all relevant information. The chairman of the Supervisory Board will determine whether there is a conflict of interest. If a member of the Corporate Executive Board has a conflict of interest with the Company, such member shall not participate in the discussions and/or decision making process on a subject or transaction in relation to which such member has a conflict of interest. The chairman of the Supervisory Board shall arrange for such transactions to be disclosed in the annual report. There were no conflicts of interest in 2005.

Remuneration

The General Meeting of Shareholders on March 3, 2004 adopted our remuneration policy for Corporate Executive Board members. Details on this policy and the proposed changes thereto can be found in the “Remuneration” section of this annual report.

For detailed information on the individual remuneration of Corporate Executive Board members, see Note 8 and Note 9 to our consolidated financial statements included in this annual report.


 

RETIREMENT AND REAPPOINTMENT SCHEDULE

 

                          
                 

Name

       Date of birth        Date of initial
appointment
       Date of possible
reappointment(s)
       Date of
retirement

Mr. Anders Moberg

     March 21, 1950      September 4, 2003      2008     

Mr. Peter Wakkie

       June 22, 1948        November 26, 2003        not applicable        2008

 

AHOLD ANNUAL REPORT 2005

   29


Table of Contents

> Corporate governance

 

The charter for the Corporate Executive Board can be found in the corporate governance section of our website at www. ahold.com.

DISCLOSURE AND COMPLIANCE COMMITTEE

The Disclosure and Compliance Committee oversees the collection and analysis of financial and non-financial information, both for us and for our consolidated subsidiaries. The Committee works to ensure that this information is complete and accurate. The Committee checks this information prior to its inclusion in periodic SEC reports, annual reports and disclosures made to the public or the financial community throughout the year. Three subcommittees, one co-ordinating the annual report process, a second overseeing our internal and external websites and a third monitoring our global information security, assist the Disclosure and Compliance Committee. The Committee also assists the Corporate Executive Board in ensuring that Ahold has effective policies and procedures in place to promote compliance with applicable laws, regulations and Ahold’s Global Code of Professional Conduct and Ethics.

Ahold’s Global Code of Professional Conduct and Ethics is available in the corporate governance section of our website at www.ahold.com and applies to all of our employees above a certain job grade level, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions.

AHOLD LEADERSHIP TEAM

The Ahold Leadership Team aligns group strategy and operational initiatives and advises the Corporate Executive Board in these areas. The members of the Corporate Executive Board, the CEOs of the Stop & Shop/Giant-Landover, Giant-Carlisle/Tops, Albert Heijn and Central Europe arenas, ICA AB and U.S. Foodservice, as well as our Chief Business Support Officer and our Chief Human Resources Officer, are all members of the Ahold Leadership Team.

SUPERVISORY BOARD

The Supervisory Board is responsible for supervising the policy of the Corporate Executive Board, the general course of affairs of the Company and the enterprise connected with it. The Supervisory Board is guided by the interests of the Company and the enterprise connected with it, and must take into account the relevant interests of all those involved in the Company.

The Supervisory Board is responsible for its own performance.

 

Our Articles of Association require the approval of the Supervisory Board for certain major resolutions proposed to be taken by our Corporate Executive Board, including:

·   issuing shares;
·   acquisitions, redemptions, repurchases of our shares and any reduction in our issued and outstanding capital;
·   allocating duties within the Corporate Executive Board and the adoption or amendment of the charter of the Corporate Executive Board; and
·   significant changes in the identity or the nature of the Company or its enterprise.

Appointment

Our Supervisory Board determines the number of its own members. Following a proposal made by the Supervisory Board to appoint, suspend or dismiss a Supervisory Board member, an absolute majority of votes cast at the General Meeting of Shareholders is required to approve such a proposal. If another party makes the proposal, an absolute majority of votes cast, representing at least one-third of the issued share capital, is required to appoint, suspend or dismiss a Supervisory Board member. If this qualified majority is not achieved but a majority of the votes exercised was in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes exercised, regardless of the number of shares represented at the meeting is required to adopt the proposal to appoint, suspend or dismiss a Supervisory Board member.

A Supervisory Board member is appointed for a four-year term and is eligible for reappointment. However, a Supervisory Board member may not serve for more than 12 years.

The composition of our Supervisory Board must be such that the combined experience, expertise and independence of its members best enables the Supervisory Board to carry out its responsibilities. As we are an international retailer, the charter of the Supervisory Board provides that the composition of the Supervisory Board should preferably reflect knowledge of European and American market conditions, financial institutions and corporate governance.

If a Supervisory Board member is concurrently a member of another company’s supervisory board, the charter of our Supervisory Board states that the main duties arising from and/or the number and nature of the memberships on any other company’s supervisory board must not conflict or interfere with that person’s duties as a member of our Supervisory Board. The same applies to the number of non-Ahold supervisory board memberships that person may hold.


 

30


Table of Contents

 

Independence of Supervisory Board members

The Supervisory Board has decided that the members of the Supervisory Board must be independent as defined by the Dutch Corporate Governance Code. However, the Supervisory Board charter allows for no more than one member not to be independent as defined by the Dutch Corporate Governance Code.

Conflict of Interest

Each member of the Supervisory Board shall immediately report any potential conflict of interest to the chairman of the Supervisory Board. The member of the Supervisory Board with such conflict or potential conflict of interest shall provide the chairman of the Supervisory Board with all relevant information. The chairman of the Supervisory Board will determine whether there is a conflict of interest. If a member of the Supervisory Board has a conflict of interest with the Company, such member shall not participate in the discussions and/or decision making process on a subject or transaction in relation to which such member has a conflict of interest. In accordance with provision III.6.3 of the Dutch Corporate Governance Code we report that in 2005 Jan Hommen did not take part in the discussions and abstained from voting on any matter related to the sale of three shopping centers in Central Europe to ING Real Estate in view of his membership of the supervisory board of ING Groep N.V. and provisions III.6.1 through III.6.3 were complied with. No other conflicts of interest occurred in 2005.

Committees of the Supervisory Board

The Supervisory Board has established the following committees:

Audit Committee

Among other things, the Audit Committee is responsible for pre-approving all audit and permitted non-audit services and for reviewing our overall risk management and control environment, financial reporting arrangements and standards of business conduct. The Supervisory Board has determined that Jan Hommen and Stephanie Shern are the “Audit Committee Financial Experts” within the meaning of the Dutch Corporate Governance Code and as defined in Item 16a of Form 20-F. The Supervisory Board has determined that each member of the Audit Committee is “independent” as set forth in Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as required by Section 303A.06 of the NYSE Listed Company Manual.

Selection and Appointment Committee

The Selection and Appointment Committee makes recommendations to the Supervisory Board regarding

candidates for service on the Corporate Executive Board and the Supervisory Board.

Remuneration Committee

The Remuneration Committee reviews executive remuneration and recommends remuneration policies for the Corporate Executive Board to be adopted by the General Meeting of Shareholders. For a report on remuneration and the activities of the Remuneration Committee, see the “Remuneration” section of this annual report.

The following charters can be found in the corporate governance section of our website at www.ahold.com: the Supervisory Board charter, the Audit Committee charter, the Remuneration Committee charter and the Selection and Appointment Committee charter.

SHARES AND SHAREHOLDERS’ RIGHTS

For details on the number of outstanding shares, see Note 23 to our consolidated financial statements included in this annual report. For details on listings, share performance, and dividend policy with respect to our common shares, see the “Investor relations” section of this annual report.

Issue of additional shares and pre-emptive rights

Shares may be issued pursuant to a resolution of the General Meeting of Shareholders upon a proposal of the Corporate Executive Board and subject to the approval of the Supervisory Board. The General Meeting of Shareholders may delegate by resolution this authority to the Corporate Executive Board for a period not exceeding five years. A resolution of the General Meeting of Shareholders to issue shares or to authorize the Corporate Executive Board to do so is subject also to the approval of each class of shares whose rights would be adversely affected by the proposed issuance or delegation. The General Meeting of Shareholders has delegated this authority to the Corporate Executive Board, subject to the approval of the Supervisory Board through November 18, 2006 with respect to the issuance and/or granting of rights to acquire common shares up to a maximum of 10% of the outstanding common shares to be increased by up to 10% in case of mergers or acquisitions.

Holders of common shares have a pre-emptive right to purchase common shares upon the issue of new common shares in proportion to the aggregate amount of their existing holdings of our common shares. According to our Articles of Association, this pre-emptive right does not apply in respect of any issuance of shares to employees of Ahold. The General Meeting of Shareholders may resolve to restrict or exclude pre-emptive rights. The General Meeting of


 

AHOLD ANNUAL REPORT 2005

   31


Table of Contents

> Corporate governance

 

Shareholders may also designate by resolution the Corporate Executive Board for a period not exceeding five years as the corporate body authorized to restrict or exclude pre-emptive rights. An absolute majority of votes cast in the General Meeting of Shareholders is required to adopt a resolution to restrict or exclude rights or to delegate this authority to the Corporate Executive Board, provided that at least one-half of the issued and outstanding share capital is represented at such meeting. A majority of at least two-thirds of the votes cast is required if less than one-half of the issued and outstanding share capital is represented.

The General Meeting of Shareholders has delegated the authority to restrict or exclude the pre-emptive rights of holders of common shares upon the issuance of common shares and/or upon the granting of rights to subscribe for common shares to the Corporate Executive Board through November 18, 2006.

General Meeting of Shareholders

Our shareholders exercise their rights through annual and extraordinary General Meetings of Shareholders. These meetings must be held in the Netherlands, and specifically in the municipalities of Zaanstad, Amsterdam, the Hague, Rotterdam, Utrecht, Amersfoort or Haarlemmermeer. Each year, no later than June 30, we are required to convene an annual General Meeting of Shareholders. Additional extraordinary General Meetings of Shareholders may be convened at any time by the Supervisory Board, the Corporate Executive Board or by one or more shareholders representing at least 10% of our issued and outstanding share capital. The agenda for the annual General Meeting of Shareholders must contain certain matters as specified in our Articles of Association and under Dutch law. This includes, among other things, the adoption of our annual consolidated financial statements. Shareholders are entitled to propose items to be put on the agenda of the General Meeting of Shareholders provided they hold at least 1% of the issued and outstanding share capital or the shares held by them represent a market value of at least EUR 50 million. Adoption of such a proposal requires a majority of votes cast at the General Meeting of Shareholders representing at least one-third of the issued shares. If this qualified majority is not achieved but a majority of the votes exercised was in favor of the proposal, then a second meeting may be held. In the second meeting, only a majority of votes exercised, regardless of the number of shares represented at the meeting (unless the law provides otherwise), is required to adopt the decision. Proposals for matters to be included in the agenda for the General Meeting of Shareholders must be submitted at least 60 days before the meeting. We may, however, refrain from including a matter on the agenda if this would prejudice our vital interests. The General Meeting of Shareholders also is

entitled to approve important decisions regarding the identity or the character of Ahold including major acquisitions and divestments.

The Corporate Executive Board may set a record date to determine that a person may attend and exercise the rights relating to a General Meeting of Shareholders. Shareholders registered at that date are entitled to attend and to exercise the rights of shareholders in respect of such General Meeting of Shareholders, regardless of a sale of shares after the record date. Shareholders may be represented by written proxy.

Ahold is one of the companies participating in the Shareholder Communication Channel (“Stichting Communicatiekanaal Aandeelhouders”). We have used the Shareholder Communication Channel to distribute the agenda for the annual General Meeting of Shareholders and a voting instruction form that allows shareholders to grant power to an independent proxy holder, either by email or through the internet.

Holders of ADRs will receive notice from the Depositary for our ADR facility whenever it receives notice of a General Meeting of Shareholders or solicitation of consents or proxies of holders of common shares. The Depositary will provide a statement that the owners of ADRs on the record date will be entitled to instruct the Depositary as to the exercise of any voting rights represented by the common shares underlying their ADRs. If the Depositary does not receive instructions from any owner, the Depositary will deem the owner to have instructed the Depositary to give a discretionary proxy to a person designated by us for these common shares.

Voting rights

Subject to certain exceptions provided by Dutch law or our Articles of Association, resolutions are passed by a majority of the votes cast. A resolution to amend the Articles of Association that would change the rights vested in the holders of a particular class of shares requires the prior approval of a meeting of that particular class. A resolution to dissolve the Company may be adopted by the General Meeting of Shareholders following a proposal of the Corporate Executive Board made with the approval of the Supervisory Board. Any proposed resolution to wind up the Company must be disclosed in the notice calling the General Meeting of Shareholders at which that proposal is to be considered.

No votes may be cast at a General Meeting of Shareholders in respect of shares that are held by us or any of our subsidiaries. These shares are not taken into account for the


 

32


Table of Contents

 

purpose of determining how many shareholders are voting and are represented, or how much of the share capital is represented at a General Meeting of Shareholders. There are no limitations, either under Dutch law or in our Articles of Association, on the right of non-residents of the Netherlands or foreign owners to hold or vote our common shares.

Each of our common shares is entitled to one vote. Holders of depositary receipts with respect to our cumulative preferred financing shares may attend the General Meeting of Shareholders. The voting rights on the underlying shares may be exercised by Stichting Administratiekantoor Preferente Financierings Aandelen Ahold (the “Administratiekantoor”), a foundation organized under the laws of the Netherlands in the manner described in Note 28 to our consolidated financial statements included in this annual report.

Repurchase by Ahold of its own shares

We may acquire fully paid shares of any class in our capital for no consideration at any time or, subject to certain provisions of Dutch law and our Articles of Association, if:

1. our shareholders’ equity less the payment required to make the acquisition does not fall below the sum of paid-in and called-up capital and any reserves required by Dutch law or our Articles of Association; and
2. we and our subsidiaries would thereafter not hold shares with an aggregate nominal value exceeding 10% of our issued share capital.

Any shares held by us or our subsidiaries in our own capital may not be voted. An acquisition by us of shares in our capital of any class must be approved by resolution of our Corporate Executive Board, subject to the approval of our Supervisory Board. Shares in our own capital may only be acquired if the General Meeting of Shareholders has authorized our Corporate Executive Board to do so. Such authority may apply for a maximum period of 18 months and must specify the number of shares that may be acquired, the manner in which shares may be acquired and the price limits within which shares may be acquired. No such authority is required for the acquisition by us of fully paid shares in our own capital for the purpose of transferring these shares to our employees or employees of a group company pursuant to our share plans or option plans, provided the shares are quoted in the official price list of a stock exchange. Our Corporate Executive Board has been authorized to acquire shares through November 18, 2006, subject to the approval of our Supervisory Board. As of the date of this annual report, we have not acquired any shares under this authorization.

 

Cumulative preferred financing shares

All outstanding cumulative preferred financing shares have been issued to the Administratiekantoor. The purpose of the Administratiekantoor is, among other things, to acquire and hold cumulative preferred financing shares against the issue of depositary receipts, as well as to exercise all voting rights attached to these shares. Holders of depositary receipts can obtain proxies from the Administratiekantoor. Pursuant to its articles of association, the board of the Administratiekantoor consists of three members: one A member, one B member and one C member.

The A member is appointed by the general meeting of depositary receipt holders, the B member is appointed by the Company and the C member is appointed by a joint resolution of the A member and the B member. As of March 28, 2006, the members of the board of the Administratiekantoor were:

 

Member A:

   J.H. Ubas, Chairman

Member B:

   W.A. Koudijs

Member C:

   C.W.H. Brüggemann

We pay a mandatory annual dividend on our cumulative preferred financing shares, which is calculated in accordance with the provisions of article 39.4 of our Articles of Association. For further details on our cumulative preferred financing shares and the voting rights attached thereto, see Note 28 to our consolidated financial statements included in this annual report.

Cumulative preferred shares

No cumulative preferred shares are currently outstanding. We entered into an option agreement with Stichting Ahold Continuïteit (“SAC”) designed to exercise influence with respect to a potential change in control over us. SAC is a Dutch foundation whose statutory purpose is to enhance our continuity, independence and identity in case of a hostile takeover attempt. As of March 28, 2006, the members of the board of SAC were:

 

     

Name

      

Principal or former occupation

N.J. Westdijk, Chairman

     Former CEO of Royal Pakhoed N.V.

M. Arentsen

     Former CFO of CSM N.V.

G.H.N.L. van Woerkom

     Chairman of ANWB

W.G. van Hassel

       Former lawyer/former chairman Dutch Bar Association

The members of the Corporate Executive Board and the members of the board of SAC declare that they are jointly of the opinion that SAC is independent of the Company as


 

AHOLD ANNUAL REPORT 2005

   33


Table of Contents

> Corporate governance

 

required by the General Rules for the Euronext Amsterdam Stock Market. For details on our cumulative preferred shares, see Note 23 to our consolidated financial statements included in this annual report.

Major shareholders

We are not directly or indirectly owned or controlled by another corporation or by any government. Except as described under “Cumulative preferred shares” above, we do not know of any arrangements that may, at a subsequent date, result in a change in our control.

Significant ownership of voting shares

Pursuant to the Dutch Disclosure Act, any person or legal entity who, directly or indirectly, acquires or disposes of an interest in our capital or voting rights must immediately give written notice to us and, by means of a standard form, to the Netherlands Authority for the Financial Markets (“Autoriteit Financiële Markten”) (the “AFM”), if, as a result of that acquisition or disposal, the percentage of capital interest or voting rights held by that person or legal entity falls within a different percentage range than the percentage range applicable to the capital interest or voting rights which that person or legal entity held prior to the acquisition or disposal. There is no obligation to notify us of a change if the interest remains within one of the ranges specified below, or the change is not a result of an action by the investor. The table below shows percentage ranges referred to in the Disclosure Act. In addition local rules may apply to investors.

Percentage ranges applying to Dutch statutory disclosure requirements

 


DISCLOSURE ACT 1996

 

     0%   <   5%   

(no notification required)

     5%   <   10%   
   10%   <   25%   
   25%   <   50%   
   50%   <   66.7%   
66.7% or more         

As of March 28, 2006, except as discussed below, we do not know of any record-owners of more than 5% of any class of capital interest and/or the related voting rights. All of the issued and outstanding cumulative preferred financing shares are held by the Administratiekantoor.

The Administratiekantoor issued corresponding depositary receipts to four investors.

 

We have reviewed public notifications on record with the AFM. We have also reviewed the public filings with the SEC. The following filings were made:

·   DeltaFort Beleggingen I B.V. is registered to have notified the AFM that as per December 17, 2003 it held a capital interest of 9.5% and an interest in voting rights of 0.78%.
·   Capital Research & Management filed a Schedule 13G with the SEC, dated February 10, 2006, showing that it owned 140 million, or 9.0%, of our common shares as per December 30, 2005.
·   Brandes Investment Partners, L.P. filed a Schedule 13G with the SEC, dated February 14, 2006, showing that it owned 213.7 million or 13.7% of our common shares as per December 31, 2005.

Further provisions of our Articles of Association

Below we set out two further provisions of our Articles of Association with respect to the objects of Ahold and provisions on the dissolution and liquidation of Ahold.

Description of the objects of Ahold

Our objectives pursuant to article 2 of our Articles of Association are “to promote or join others in promoting companies and enterprises, to participate in companies and enterprises, to finance including the giving of guarantees and acting as surety for the benefit of third parties as security for liabilities of companies and enterprises with which the Company is joined in a group or in which the Company owns an interest or with which the Company collaborates in any other way, to conduct the management of and to operate companies engaged in the wholesale and retail trade in consumer and utility products and companies that produce such products, to operate restaurants and companies engaged in rendering public services, including all acts and things which relate or may be conducive thereto in the broadest sense, as well as to promote, to participate in, to conduct the management of and, as the case may be, to operate businesses of any other kind.”

Liquidation

In the event of our dissolution and liquidation, the surplus assets remaining after satisfaction of all our debts will be distributed in accordance with the provisions of Dutch law and our Articles of Association in the following order:

1. to the holders of cumulative preferred shares, the nominal amount or the amount paid thereon, if lower, as well as any dividends in arrears and dividends over the current dividend period until the date of payment of liquidation proceeds;
2.

to the holders of cumulative preferred financing shares, the nominal amount and share premium paid on these shares, as well as any dividends in arrears and

 


34


Table of Contents

 

 

dividends over the current dividend period until the date of payment of liquidation proceeds;

3. to the holders of common shares, the nominal amount of these shares, as well as their proportional share in the common shares share premium account; and
4. holders of the 120 outstanding founders’ certificates will receive 10% of the balance remaining after the distributions mentioned above have been made and after the amounts of the general reserves and profit reserves created since December 31, 1961 have been deducted in accordance with our Articles of Association.

The balance remaining after all of the above distributions shall be for the benefit of the holders of our common shares in proportion to the aggregate nominal value of common shares held by each of them.

Auditor

The General Meeting of Shareholders appoints the external auditor. The Audit Committee recommends the external auditor to be proposed for approval by the General Meeting of Shareholders. In addition, the Audit Committee evaluates and, where appropriate, recommends the replacement of the external auditors. The Audit Committee also pre-approves the fees for audit and permitted non-audit services to be performed by the external auditors as negotiated by the Corporate Executive Board. The Audit Committee shall not approve the engagement of the external auditors to render non-audit services prohibited by applicable laws and regulations or that would compromise their independence.

On June 2, 2004, the General Meeting of Shareholders appointed Deloitte Accountants B.V. as external auditor for the Company for the fiscal years 2004 and 2005.

 

COMPLIANCE WITH DUTCH CORPORATE GOVERNANCE CODE

We apply all of the relevant provisions of the Dutch Corporate Governance Code, with the following exceptions:

·   We require Corporate Executive Board members to keep shares obtained under a long-term incentive plan for three years after vesting, instead of the five years recommended by the Dutch Corporate Governance Code in best practice principle II.2.3. This exception is included in the remuneration policy adopted by the General Meeting of Shareholders on March 3, 2004.
·   The Vice-Chairman of our Supervisory Board, Jan Hommen, has accepted chairmanships and memberships of supervisory boards of several Dutch listed companies. Following the calculation method of the Dutch Corporate Governance Code in best practice principle III.3.4, he is deemed to hold six memberships instead of the recommended maximum of five. This exception is caused by unforeseen circumstances and Mr. Hommen will resolve this in due course.

 

AHOLD ANNUAL REPORT 2005

   35


Table of Contents

Internal control

 

AHOLD BUSINESS CONTROL FRAMEWORK

Ahold’s internal controls are designed to provide reasonable assurance that the Company’s objectives are achieved. We are replacing a decentralized set of internal controls with a consistent, one-company system. Ahold takes a structured and consistent approach to internal control by aligning strategy, policies, procedures, instructions, guidelines and processes, people and technology, for the purpose of identifying, evaluating and managing the uncertainties that the Company faces.

 

For this purpose, Ahold is in the process of implementing a single, enterprise-wide Ahold Business Control Framework (“ABC Framework”). The ABC Framework will encompass internal control policies, procedures, instructions and guidelines for all Ahold group companies.

The ABC Framework is based on the recommendations of the Committee of Sponsoring Organizations of the Treadway Commission (COSO – Internal Control Integrated Framework). The aim of these recommendations is to provide a reasonable level of assurance concerning internal control. It should be noted that in line with the COSO framework, also the ABC Framework’s level of assurance does not provide certainty as to the realization of objectives, nor can it prevent all inaccuracies, errors, instances of fraud or non-compliance with laws and regulations.

The transition process to convert to one-company controls initially focuses on financial reporting controls. With respect to financial reporting Ahold has developed uniform control standards applicable to all of our arenas. These cover a variety of financial control and reporting topics such as financial closing process, property, plant and equipment and lease accounting, capital investments and disposals, contracts and agreements, vendor allowances and the compliance with our accounting manual. The ABC Framework will gradually be extended with one-company policies and controls over operational and strategic processes and internal controls over compliance with laws and regulations, based on the right balance between one-company system controls and the necessary flexibility to support and control local operational excellence, customer driven innovation and achieve compliance with relevant local laws and regulations.

In 2005 Ahold continued the project that was started in 2004 to prepare for compliance with the requirements of

Section 404 of the Sarbanes-Oxley Act (the “Sarbanes Oxley Act” or “Sox”). We have performed various procedures for the preparation for the SOx 404 evaluations that we will be required to complete for the first time as of December 31, 2006. During 2005, we have made significant progress in the preparation of design documentation and testing of operating effectiveness of internal controls over financial reporting. On the other hand, it should be noted that the status of SOx activities by the end of 2005 varies per arena, and certain required aspects for the SOx 404 evaluation have yet to be completed. The Corporate Executive Board expects that the control deficiencies identified through this process in 2005 can be solved timely through the current remediation program.

Monitoring

Ahold uses a comprehensive business planning and performance review process to monitor its performance. This consists of a coherent set of instruments, which cover adoption of strategy, budgeting and reporting of current and projected results. Business performance is assessed with respect to both financial and non-financial targets.

Following formal internal control requirements, the Sarbanes-Oxley Act in the U.S. and the Dutch Corporate Governance Code, Ahold carried out an extensive exercise on the design, documentation and functioning of processes related to financial reporting. Each quarter, management is required to confirm by means of a letter of representation that compliance is maintained with, among others, Ahold’s Global Code of Professional Conduct and Ethics, fraud prevention and detection procedures, control standards and disclosure requirements.

Management is responsible for managing risks associated with business activities and for compliance with relevant local laws and regulations, following normal reporting lines


 

36


Table of Contents

 

to senior management. Authority limits for arena and operating company management have been established. This system requires relevant management levels to obtain approval from a higher level of authority for a number of matters and provides appropriate information to senior management.

The Disclosure and Compliance Committee assists the CEO and CFO in fulfilling their responsibilities to ensure that Ahold makes timely and accurate disclosures.

The Disclosure and Compliance Committee meets, reviews, discusses and reports quarterly on disclosure related issues. The objective is to ensure that all disclosures made by Ahold are accurate, complete and timely and fairly present the financial condition and the results of operations in all material aspects.

Internal Audit at Ahold helps ensure that the integrity and effectiveness of Ahold’s system of control is maintained and continuously improved through risk-based, regular objective, independent and critical evaluations. Internal Audit monitors the internal controls of Ahold to provide the Corporate Executive Board and the Supervisory Board, through its Audit Committee, with reasonable assurance on the reliability of financial reporting, compliance with relevant law and regulations, safeguarding of resources and effectiveness and efficiency of operations. Also, Internal Audit monitors the effectiveness of associated corrective actions, through follow-up on specific previous audit reports and review of the effectiveness of Management Internal Control Reports and similar monitoring instruments.

Ahold has implemented an internal control issue monitoring process which tracks the progress and remediation status of internal control issues. This relates to improvements in operational, compliance and financial controls, identified by both internal and external sources. In this process, audit findings from internal and external audit, as well as issues brought forward by management via the letters of representation, are summarized and the progress and remediation status are reported each period.

Changes in controls over financial reporting

During the course of the closing and the annual audit of our 2004 financial statements two material weaknesses and a number of reportable conditions under the interim standards of the U.S. Public Company Accounting Oversight Board, as well as other internal control issues were identified. The 2004 material weaknesses related to our accounting for income tax provisions and to our US GAAP financial statement reconciliation process.

 

We have committed, and will continue to commit, considerable resources to our efforts to improve and strengthen our internal controls. We believe we have taken and are taking adequate steps to strengthen our internal controls.

We have concluded that as of the end of the period covered by this annual report the above mentioned material weaknesses no longer exist.

Evaluation of disclosure controls and procedures

As of the end of the period covered by this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s CEO and the Company’s CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, pursuant to Rule 13a-15 promulgated under the Exchange Act.

Disclosure controls and procedures are those designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to ensure that the information is accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives.

Based on the evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Ahold in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms.

Compliance with provision II.1.4 of the Dutch Corporate Governance Code

Except as indicated in the section “Corporate governance – Compliance with Dutch Corporate Governance Code” of this Annual Report, we apply all of the relevant provisions of the Dutch Corporate Governance Code. Provision II.1.4 of this code requires management to assess the adequacy of the internal risk management and control systems.

The concept of internal risk management and control systems as used in the Dutch Corporate Governance Code varies significantly from the concept of disclosure controls


 

AHOLD ANNUAL REPORT 2005

   37


Table of Contents

> Internal control

 

and procedures under the Exchange Act and the related SEC rules referred to above.

Based on our evaluation of the operation of our internal risk management and internal control systems, the Corporate Executive Board is of the opinion that the internal controls over financial reporting provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies. Also, the Corporate Executive Board is of the opinion that there are no indications that the internal risk management and internal control systems have not operated properly in the year under review or will not operate properly in the current year. This evaluation and the current status have been discussed with the external auditor, the Audit Committee and the full Supervisory Board.

As regards risks other than financial reporting risks, including operational/strategic and legislative/regulatory risks, reference is made to the most important risk factors inherent in our businesses and our objectives as listed in the “Risk Factors” section and to the preceding paragraphs on “Ahold Business Control Framework” and “Monitoring” in this annual report.

In view of the above the Corporate Executive Board is of the opinion that it is in compliance with the requirements of provision II.1.4 of the Dutch Corporate Governance Code, taking into account the recommendation of the Corporate Governance Code Monitoring Committee on the application thereof. Since the internal controls over financial reporting throughout the organization are under review in light of our future obligations pursuant to Section 404 of the Sarbanes-Oxley Act, the opinion stated above by the Corporate Executive Board does not imply an assessment on those internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.


 

38


Table of Contents

Risk factors

 

The following discussion of risks relating to Ahold should be read carefully when evaluating our business, our prospects and the forward-looking statements contained in this annual report.

Any of the following risks could have a material adverse effect on our financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to. The risks described below are not the only ones we are facing. There may be additional risks we are currently unaware of, and these may be common to most companies. There may also be risks that we now believe are immaterial, but which may ultimately have a material adverse effect on our financial position, results of operations, liquidity and the actual outcome of matters that the forward-looking statements contained in this annual report refer to. For additional information regarding forward-looking statements, see “Forward-looking statements notice” included in this annual report.

RISKS RELATING TO PENDING INVESTIGATIONS AND LEGAL PROCEEDINGS

 


Results of pending investigations and legal proceedings could have a material adverse effect on our financial position, results of operations, liquidity and the prices of our common shares and ADSs.

 


Due to the events announced on February 24, 2003, our 2002 annual report included a restatement of our financial position and results for 2001 and 2000 in part because of accounting irregularities at one of our operating subsidiaries, U.S. Foodservice, and because certain of our joint ventures had been improperly consolidated. These events led to a number of investigations and legal proceedings. For a further discussion of these investigations and legal proceedings, see Note 35 to our consolidated financial statements included in this annual report.

In November 2005 we entered into an agreement to settle the securities class action entitled “In re Royal Ahold N.V. Securities & ERISA Litigation,” which arose out of the events announced on February 24, 2003. Under the terms of the settlement agreement, the lead plaintiffs agree to settle all claims against Ahold for the sum of USD 1.1 billon (EUR 937 million, including EUR 8 million as compensation to the Dutch Shareholders’ Association Vereniging van Effectenbezitters (the “VEB”) for facilitating the global

settlement). The settlement covers Ahold, our subsidiaries and affiliates, the individual defendants and the underwriters. The settlement agreement has been preliminarily approved and is subject to final court approval. If the court will not give its final approval of the settlement and if we are not able to defend ourselves successfully in any subsequent legal proceedings, it is possible that we will be required to pay a settlement amount or other payment which is higher than anticipated by the settlement agreement described above. Such events could have a material adverse effect on our financial position, results of operations, liquidity and the prices of our common shares and ADSs.

In November 2005 we also entered into an agreement to settle litigation with the VEB. Under the terms of this settlement agreement, the VEB has terminated certain legal proceedings relating to our annual accounts and has agreed not to pursue any further legal action in the inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeals.

For a further discussion of these settlements, see Note 35 to our consolidated financial statements included in this annual report.

We cannot predict when the remaining investigations or legal proceedings will be completed. It is possible that they could lead to criminal charges, civil enforcement proceedings, additional civil lawsuits, settlements, judgments and/or consent decrees either against us, our subsidiaries or both, and that, as a result, we will be required to pay substantial fines or damages, or to make other payments, consent to injunctions on future conduct, lose the ability to conduct business with government entities and with customers in the casino and gaming industries or suffer other penalties, each of which could have a material adverse effect on our financial position, results of operations, liquidity and the prices of our common shares and ADSs.

We are also involved in legal proceedings as a result of our divestments in 2003, 2004 and 2005 that, if decided unfavorably, in the aggregate could have a material adverse effect on our financial position, results of operations and


 

AHOLD ANNUAL REPORT 2005

   39


Table of Contents

> Risk factors

 

liquidity. For a further discussion of these legal proceedings, see Note 35 to our consolidated financial statements included in this annual report.

 


We may have indemnification obligations that could have a material adverse effect on our financial position, results of operations and liquidity.

 


We have indemnified various current and former directors, officers and employees, as well as those of some of our subsidiaries, for expenses they have incurred as a result of the pending and possible future investigations and legal proceedings discussed above and we expect to incur further expenses for indemnification of expenses and any possible fines, liabilities or fees that they may face, and to advance to or reimburse such persons for defense costs, including attorneys’ fees. Such indemnification obligations could ultimately have a material adverse effect on our financial position, results of operations and liquidity.

RISKS RELATING TO OUR INTERNAL CONTROLS

 


We may not be able to strengthen our internal controls.

 


In 2005, we continued the project initiated in 2004 to prepare for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, including documenting, reviewing and, in certain required aspects, improving our internal controls over financial reporting.

The status of Sarbanes-Oxley Act activities by the end of 2005 varies per arena and certain required aspects for the evaluation pursuant to Section 404 of the Sarbanes-Oxley Act have yet to be completed. We have taken and are taking steps to strengthen our internal controls. The process of ensuring compliance with Section 404 of the Sarbanes-Oxley Act may require significant costs and time to complete. For a further discussion regarding our internal controls, see “Internal control” in this annual report. Any failure to strengthen our internal controls could result in accounting errors or misstatements in our financial statements and could harm the reliability of our financial statements, which could in turn adversely affect investor confidence and the prices of our common shares and ADSs.

 

RISKS RELATING TO CURRENCY EXCHANGE AND INTEREST RATE FLUCTUATIONS

 


We are exposed to currency exchange and interest rate fluctuations, which could have a material adverse effect on our financial position, results of operations and liquidity.

 


Currency translation risk. We are exposed to foreign currency exchange translation risk because we operate businesses in a variety of countries in Europe and the United States. A substantial portion of our net sales, assets, liabilities and results of operations are denominated in foreign currencies, primarily the U.S. dollar. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating income and the assets and liabilities of our foreign subsidiaries into euros for inclusion in our consolidated financial statements.

Currency transaction risk. We are exposed to foreign currency exchange transaction risk, including lease payment obligations and firm purchase commitments denominated in foreign currencies. We attempt to manage our foreign currency exchange exposure by borrowing in local currency and entering into currency swaps, but we cannot eliminate such exposure and, therefore currency exchange rate movements can affect our transaction costs. Furthermore, if a particular currency becomes highly volatile, that could have a material adverse impact on our financial position, results of operations and liquidity.

Interest rate risk. We are also exposed to fluctuations in interest rates. As of January 1, 2006, approximately EUR 1.0 billion, or 22%, of our long-term borrowings (excluding our finance lease liabilities, financing obligations, and cumulative preferred financing shares, but including interest rate swaps) bear interest on a floating rate basis.

Accordingly, changes in interest rates can affect the cost of these interest-bearing borrowings. As a result, our financial position, results of operations and liquidity could be materially adversely affected by interest rate fluctuations. It is our policy to attempt to mitigate interest rate risk by financing a targeted percentage of our borrowings in fixed interest rate instruments and by the use of derivative financial instruments, such as interest rate swaps. Our attempts to manage our risk could result in our failure to realize savings, if interest rates fall.


 

40


Table of Contents

 

For additional discussion of our risk management, see “Management’s discussion & analysis–Risk management and use of financial instruments and derivatives” and Note 34 to our consolidated financial statements included in this annual report.

RISKS RELATING TO OUR STRATEGY

 


If we do not successfully carry out our strategies for our food retail and foodservice businesses, or if we are unable to realize expected cost savings, this could have a material adverse effect on our financial position, results of operations and liquidity.

 


For 2006 and onward, we have defined a growth strategy based on core values that our operating companies share and core capabilities that we are improving. In 2005, competitive and operating cost pressures in our retail markets were greater than expected and the turnaround at certain of our businesses was slower than planned. The financial targets we originally set for retail in 2003 have become increasingly challenging. Based on the retail trends we have seen so far in 2006, we expect our retail net sales growth in 2006 to be between 2.5% and 3.0% (assuming constant currency exchange rates and excluding divestments made in 2005). In addition, we expect that our retail operating margin will be between 4.0% and 4.5% in 2006. Our overall priority remains to drive net sales growth and achieve a retail operating margin of 5%. We may encounter difficulties or delays in implementing our strategic initiatives and we may not be able to achieve the expected retail net sales growth and retail operating margin. We may also incur unanticipated costs in implementing our strategy. We have planned certain levels of capital expenditures and launched several strategic initiatives for our food retail business. These include initiatives that we expect will allow us to realize gross cost savings aggregating approximately EUR 650 million by the end of 2006. However, we may not be able to reach the targeted levels or receive the expected benefits of these cost savings and capital expenditures. If we do not successfully carry out our strategy with respect to our food retail business, this could have a material adverse effect on our financial position, results of operations and liquidity.

U.S. Foodservice accounts for a substantial portion of our net sales. Although we are in the process of reorganizing U.S. Foodservice into two operating companies to restore its value and improve its profitability, our plan may not be successful. For further information about our plans and steps to reorganize U.S. Foodservice, see “Management’s discussion & analysis –Road to Recovery 2003-2005.”

 

We cannot assure you that we will be able to successfully complete these plans or that when they are complete U.S. Foodservice will satisfactorily improve its profitability. We may be unable to complete successfully all or many of U.S. Foodservice’s initiatives, including its reorganization, its implementation of a centralized supplier information system intended to track corporate-based vendor allowance programs, and its improvement of internal controls and its information systems, which could have a material adverse effect on our overall financial position, results of operations and liquidity. Moreover, based upon the charges already brought against former officers of U.S. Foodservice and in the event of any adverse developments in the pending investigations of U.S. Foodservice or its current or former officers, U.S. Foodservice could suffer a sudden and material loss of business among its customers or be restricted from pursuing new business from certain customers, particularly those customers that are governmental entities or in the casino and gaming industries.

RISKS RELATING TO OUR LIQUIDITY

 


Our level of debt could adversely affect our financial position, results of operations and liquidity and could restrict our ability to obtain additional financing in the future.

 


We have significantly reduced our debt as part of our Road to Recovery strategy. However, we continue to have substantial indebtedness and our total gross debt at the end of 2005 was approximately EUR 7.7 billion. In addition to the obligations recorded on our balance sheet, we also have various commitments and contingent liabilities that may result in significant future cash requirements. Although some of our debt instruments and other arrangements place conditions on our incurring further debt, we are not barred from doing so. To the extent we incur incremental debt, our leverage risk will increase. Our significant level of debt could adversely affect our business in a number of ways, including but not limited to, the following:

·   because we must dedicate a substantial portion of our cash flow from operations to the payment of interest and principal on our debt, we have less cash available for other purposes;
·   our ability to obtain additional debt financing may be limited and the terms on which such financing is obtained may be negatively affected; or
·  

we may be placed at a competitive disadvantage by our limited flexibility to react to changes in the industry and economic conditions and our financial resources may be diverted away from the expansion and improvement of our business. As a result, we could lose market share and

 


AHOLD ANNUAL REPORT 2005

   41


Table of Contents

> Risk factors

 

 

experience lower sales, which may have a material adverse effect on our financial position, results of operations and liquidity.

For additional information on our liquidity and leverage risk, see “Management’s discussion & analysis – Liquidity and capital resources” and Note 26 to our consolidated financial statements included in this annual report.

 


Downgrading of our credit ratings could adversely impact our ability to finance our business.

 


Relating to the events in early 2003, Moody’s Investors Services (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) downgraded our credit ratings to below investment grade ratings. As part of our strategy to restore our financial health, we are focused on working towards meeting the applicable investment grade ratings criteria. During 2004 and 2005, both Moody’s and S&P upgraded our credit ratings, but such credit ratings remain below investment grade. While none of our material credit facilities or other debt instruments contain direct events of default that are triggered by credit rating downgrades, a downgrade of our long-term debt rating by either Moody’s or S&P could raise liquidity concerns, reduce our flexibility in accessing a broad array of funding sources and increase our costs of borrowing, which could result in our inability to secure new financing or affect our ability to make payments on outstanding debt instruments and comply with other existing obligations, any of which could have a material adverse effect on our financial position, results of operations and liquidity. In addition, we cannot assure you that we will be able to meet the applicable investment grade rating criteria, particularly if our operating strategy and objectives are not successful. For a further discussion of our credit ratings, see “Management’s discussion & analysis–Liquidity and capital resources” and Note 26 to our consolidated financial statements included in this annual report.

Our current insurance coverage may not be adequate, and insurance premiums and letters of credit and cash collateral requirements for third-party coverage may increase, and we may not be able to obtain insurance or maintain our existing insurance at acceptable rates, or at all.

The third-party insurance companies that provide the fronting insurance that is part of our self-insurance programs as described later in this annual report require us to provide cash collateral or letters of credit. In some circumstances, we are required to replace our self-insurance programs with high deductible programs from third-party insurers at a high cost. Although we currently are able to provide sufficient letters of credit for our insurance

requirements, our future letter of credit requirements for our insurance and other cash collateral needs may increase significantly. In this event, we will need to obtain additional financing sources and any cash collateral we provide will not be available to fund our liquidity needs. It is possible that we may not be able to maintain adequate insurance coverage against liabilities that we incur in our business through our self-insurance and high deductible programs or, if necessary, purchase commercial insurance to replace these programs. Our insurance premiums to third-party insurers may also increase in the future and we may not be able to obtain similar levels of insurance on reasonable terms or at all. The inadequacy or loss of our insurance coverage, or the continued payment of higher premiums, could have a material adverse effect on our financial position, results of operations and liquidity.

For additional information regarding our self-insurance coverage, see “Management’s discussion & analysis – Off-balance sheet arrangements – Contingent liabilities” and Note 25 to our consolidated financial statements included in this annual report.

RISKS RELATING TO TAX LIABILITIES

 


We may face tax liabilities in the future, including as a result of audits of our tax returns.

 


Because we operate in a number of countries in Europe and in the U.S., our operating income is subject to taxation in differing jurisdictions and at differing tax rates. We seek to organize our affairs in a tax efficient and balanced manner, taking into account the applicable regulations of the jurisdictions in which we operate. As a result of our multi-jurisdictional operations, we are exposed to a number of different tax risks, including tax risks related to: income tax, value added tax, payroll tax, social security tax, customs and excise duties, sales and use tax, franchise tax, ad valorem tax, U.S. state tax, withholding tax requirements, tax treaty interpretation, tax credits, permanent establishments, transfer pricing on internal deliveries of goods and services (including benefit tests and requirements to prove the arm’s length character of internal transactions), loss carryforwards, multi-jurisdictional double taxation, acquisitions, dispositions, reorganizations, internal restructurings, and real and personal property transfer taxes.

The tax authorities in the jurisdictions in which we operate may audit our tax returns and may disagree with the positions taken in those returns. An adverse outcome resulting from any settlement or future examination of our tax returns may subject us to additional tax liabilities and


 

42


Table of Contents

 

may adversely affect our effective tax rate which could have a material adverse effect on our financial position, results of operations and liquidity. In addition, any examination by the tax authorities could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

RISKS RELATING TO OUR INDUSTRY AND

BUSINESS

 


We are a low margin business and our operating income is sensitive to price fluctuations.

 


Our retail and foodservice businesses are characterized by relatively high inventory turnover with relatively low profit margins. We make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our absolute levels of profit will go down during periods of food price deflation, particularly in our foodservice business, even though our gross profit percentage may remain relatively constant. Additionally, our foodservice business profit levels may go down in periods of food price inflation if we are not able to pass along to our customers in a timely manner cost increases from our vendors. In addition, our retail and foodservice businesses could be adversely affected by other factors, including inventory control, competitive price pressures, severe weather conditions, unexpected increases in fuel or other transportation related costs, volatility in food commodity prices and difficulties in collecting accounts receivable. Any of these factors may adversely affect our financial position, results of operations and liquidity.

We are subject to intense and increasing competition and industry consolidation. If we are unable to compete successfully, our financial position, results of operations and liquidity will be adversely affected.

We continue to experience intense competition in our retail trade business from other grocery retailers, discount retailers such as Wal-Mart in the U.S., and other competitors such as supercenters and club, warehouse and drug stores. Our foodservice business in the U.S. similarly faces intense competition from competitors including Sysco, regional distributors, specialty distributors and local market distribution companies. Consolidation in the food retail and foodservice industries due to increasing competition from larger companies is likely to continue. Our ability to maintain our current position is dependent upon our ability to compete in these industries through various means such as price promotions, continued reduction of operating expenses where the cost savings are reinvested in our value

and customer offerings and, in the case of our food retail business, store expansions. A number of our retail operations have started price repositioning programs designed to halt or prevent market share loss, increase market share and/or to increase the ultimate levels of profit. A successful price repositioning program requires careful and well-timed management of a number of complex factors, including efficient inventory management, negotiations with vendors of national and private label products to reduce prices without reducing quality, cutting staffing costs without compromising the quality of service and effective communication of new prices to shoppers. We cannot assure you that these programs will be successful or that our competitors will not counteract and engage in price competition against us. Any of these factors, or any combination of them, could have a material adverse effect on our financial position, results of operations and liquidity.

In addition, our reduced capital expenditure program could restrict our ability to compete and could lead to a loss of market share in our key markets in the U.S. and the Netherlands. The food retail and foodservice industries are also highly sensitive to changes in customer behavior. As discussed above, our significant level of debt limits our flexibility to react to changes.

While we believe there are opportunities for sustained and profitable growth, unanticipated actions of competitors and increasing competition in the food retail and foodservice industries could continue to negatively affect our financial position, results of operations and liquidity.

 


We face risks relating to our IT outsourcing initiatives.

 


In November 2005, we signed several major IT outsourcing agreements relating to various IT services in the U.S. and the Netherlands. In connection with these IT outsourcing initiatives, it is possible that we may encounter unforeseen technical complexities that we may be unable to resolve, or that the resolution of such complexities may lead to delays in the implementation of these initiatives. Our management may be required to devote more attention than anticipated to matters related to these outsourcing initiatives, including matters related to internal controls and financial reporting. Any of these risks may cause us to incur unanticipated costs and may prevent us from obtaining the expected benefits and cost savings of the IT outsourcing initiatives, or from obtaining such benefits and savings as soon as we expect.

Our failure to implement these IT outsourcing initiatives in a timely and cost efficient manner could have a material adverse effect on our financial position, results of operations and liquidity.


 

AHOLD ANNUAL REPORT 2005

   43


Table of Contents

> Risk factors

 


We face risks related to our union or collective bargaining agreements.

 


As of January 1, 2006, approximately 94,000 employees in our U.S. retail operating companies and approximately 5,000 employees in our U.S. Foodservice operating companies were represented by unions. Collective bargaining agreements covering approximately 11% of our total U.S. retail employees either expired in September 2005 or will expire at various dates during 2006. We are continuing to honor the terms of one expired agreement on a week-to-week basis and are simultaneously negotiating one or several replacement agreements. Collective bargaining agreements covering approximately 6% of our total U.S. Foodservice employees either have expired in 2005 or will expire at various dates during 2006. A number of these expired agreements have already been replaced, while a majority are still being negotiated.

During 2005 most of our relevant collective bargaining agreements relating to our Dutch operations were renewed without industrial actions. Most of our collective bargaining agreements for our employees in the Netherlands expire in April 2007. The collective bargaining agreement covering the majority of our distribution employees will expire in April 2006 and will have to be renewed. We expect to commence the negotiation process with the relevant trade unions in April 2006.

Furthermore, although only a minority of our employees in the Czech Republic are union members, all of our employees in the Czech Republic are covered by a collective bargaining agreement that expires at the end of 2007. A very small minority of our employees in Slovakia are union members.

For additional information, see “Additional information – Labor relations – Union relations and works council.”

Although we consider our relations with the relevant trade unions stable, failure of our operating companies to effectively renegotiate these agreements could result in work stoppages. We may not be able to resolve any issues in a timely manner and our contingency plans may not be sufficient to avoid an impact on our business. A work stoppage due to failure of one or more of our operating companies to renegotiate a collective bargaining agreement, or otherwise, could have a material adverse effect on our financial position, results of operations and liquidity.

 


We face risks related to health care and pension funding requirements.

 


Decreasing interest rates, poor performance of the stock markets and rising cost of health care benefits may cause us to record significant charges related to our existing pension plans and benefit plans.

Adverse stock market developments may negatively affect the assets of our pension funds and decreasing interest rates may cause lower discount rates and increase our pension liabilities. This will lead to higher pension charges, pension premiums and contributions payable. We have a number of defined benefit pension plans, covering a substantial number of our employees in the Netherlands and in the U.S. Pension expenses for defined benefit plans in 2005 were EUR 17 million lower than in 2004. Our contributions to our Dutch defined benefit plans in 2005 were EUR 14 million lower than in 2004 and our contributions to our U.S. defined benefit plans in 2005 were EUR 212 million higher than in 2004. In 2005 a one-time contribution of USD 288 million (EUR 236 million) was made to decrease the unfunded status of several U.S. pension plans. While our contributions for our U.S. defined benefit plans are expected to decrease from EUR 289 million in 2005 to EUR 40 million in 2006, our contributions for our Dutch defined benefit plans are expected to increase from EUR 118 million in 2005 to EUR 157 million in 2006.

Certain of our employees in the U.S. are covered by multi-employer plans, which have a total unfunded liability of EUR 22,409 million as of January 1, 2004 (the latest year for which information is available). We estimate our proportionate share of the total unfunded liability of these plans at EUR 637 million. These unfunded liabilities are not recognized on our consolidated balance sheets because sufficient information is generally not available and the financial statements of these plans are not based on the same accounting standards according to which our consolidated financial statements are prepared. The unfunded liabilities of these plans may result in increased future payments by us and the other participating employers. Our risk of such increased contributions may be greater if any of the participating employers in an underfunded multi-employer plan withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with the participants of the plan.

For additional information, see Note 24 to our consolidated financial statements included in this annual report.


 

44


Table of Contents

 

If we are unable at any time to meet any required funding obligations for some of our U.S. pension plans, or if the Pension Benefit Guaranty Corporation (the “PBGC”) concludes that, as the insurer of certain U.S. plan benefits, its risk may increase unreasonably if the plans continue, under the U.S. Employee Retirement Income Security Act of 1974 (“ERISA”) the PBGC could terminate the plans and place liens on material amounts of our assets. Our pension plans that cover our Dutch retail operations are governed by the Dutch Central Bank (De Nederlandsche Bank or “DNB”). DNB may require us to make additional contributions to our pension plans to meet the minimum funding requirements as applied by DNB.

In addition, health care costs have risen significantly in recent years and this trend is expected to continue. We may be required to expend significantly higher amounts to fund employee health care plans in the future. Significant increases in health care and pension funding requirements could have a material adverse effect on our financial position, results of operations and liquidity.

 


We may not be able to retain or attract personnel who are integral to the success of our business.

 


We face many challenges and risks, including the possibility that we might not successfully implement our operating strategy and objectives, as a result of which there is a risk that personnel who are integral to the success of our business will leave, disrupting our ability to achieve short- and long-term goals. Although we have an equity-based compensation plan and have retention agreements with key employees and directors, we cannot assure you that these measures will be effective to retain or attract key employees and directors, which could materially hinder our ability to successfully execute our operating strategy and objectives and thus have a material adverse effect on our financial position, results of operations and liquidity.

 


We face risks related to food safety.

 


The supply chain of growing, packaging and transporting food from producers to retailers requires sourcing from different suppliers worldwide. Although our food safety policy covers the complete supply chain, from farm and production level to our own operations, we may still face food safety problems, including disruptions to our supply chain caused by food-borne illnesses, or injuries caused by food tampering or poor sanitary conditions. Instances of food safety problems, real or perceived, whether at our food retail stores or our foodservice facilities or those of our competitors, could adversely affect the price and availability of the affected food product and cause customers to shift

their preferences and may also result in product liability claims and negative publicity about us or the food industry in general, which could adversely affect our sales and our results of operations.

 


Our business is subject to environmental liability risks and regulations.

 


Our businesses are governed by environmental laws and regulations in all the countries where we do business. These laws and regulations also govern the discharge, storage, handling and disposal of hazardous or toxic substances. If stricter laws are passed or applicable environmental laws are more strictly enforced, we may incur additional expenditures. Our failure to comply with any environmental, health or safety requirements, or any increase in the cost of such compliance, could have a material adverse effect on our financial position, results of operations and liquidity.

 


Ahold is a Dutch company and a foreign private issuer and compared to a U.S. domestic issuer we are subject to different principles of law, different disclosure standards and different corporate governance standards that may limit the rights of shareholders, the information available to holders of our ADRs and the transparency and independence of our Company.

 


As a consequence of our incorporation in the Netherlands, our corporate affairs are governed by Dutch corporate law. Principles of Dutch law relating to certain matters, including the fiduciary duties of management and the rights of shareholders, may differ from those that would apply if we were incorporated in a jurisdiction within the U.S. As a foreign private issuer, although we are subject to the periodic reporting requirements under the Exchange Act, the disclosure required of foreign private issuers under the Exchange Act is more limited than disclosure required of U.S. domestic issuers. As a result, there may be less publicly available information about us than is regularly published by or about other public companies in the U.S. and such information may be made available later than that of U.S. domestic issuers. As a foreign private issuer, we are also exempt from some of the corporate governance requirements of the NYSE that are applicable to U.S. domestic companies listed on the NYSE. For more information related to the corporate governance requirements that apply to Ahold, see “Corporate governance” in this annual report. In addition, certain of the SEC’s rules implementing the Sarbanes-Oxley Act provide foreign private issuers with longer compliance transition periods.


 

AHOLD ANNUAL REPORT 2005

   45


Table of Contents

Business overview

 

BUSINESS SEGMENTS

Our principal business is the operation through subsidiaries and joint ventures of

food retail trade stores and foodservice activities in the U.S. and Europe. Our retail business accounted for approximately 67% of our consolidated net sales in 2005.

 

Our operations in the U.S. represented approximately 74% of our consolidated net sales in 2005. In addition to our principal activities, some subsidiaries finance, develop and manage store sites and shopping centers primarily to support our retail operations. For a list of our significant subsidiaries, see the information in Note 38 to our consolidated financial statements included in this annual report.

FOOD RETAIL BUSINESS

We have organized most of our food retail business into arenas, which operate supermarkets under local brand names. In addition, Schuitema N.V., which is a consolidated subsidiary, is part of our food retail business in the Netherlands. Our retail sales consist of retail chain consumer sales, sales to franchise stores and sales to associated stores. Franchise stores typically operate under the same format as, and are not distinguishable from, Ahold-operated stores. Franchisees generally purchase merchandise from us, pay a franchise fee and receive various support services, including management support and training, marketing support and administrative assistance. Operators of associated stores generally pay us fees but operate as independent retailers and may use various store formats. These stores also have more flexibility in terms of product lines and pricing, but we provide them with support services. Our retail business generally experiences an increase in net sales in the fourth quarter of each year, primarily as a result of the holiday season.

 

Stop & Shop/Giant-Landover Arena

This arena, headquartered in Quincy, Massachusetts, is comprised primarily of the following entities:

·   The Stop & Shop Supermarket Company LLC (“Stop & Shop”), acquired in 1996, which has a market area consisting of Massachusetts, Connecticut, Rhode Island, New Jersey, New York and New Hampshire.
·   Giant of Maryland LLC (“Giant-Landover”), acquired in 1998, which has a market area consisting of Maryland, Virginia, Delaware and the District of Columbia.
·   Peapod, LLC (“Peapod”), acquired in 2000-2001, which provides an Internet-based home shopping and grocery delivery service as an integrated service of the Stop & Shop/Giant-Landover Arena, along with service to the metropolitan areas of Chicago, Illinois and Milwaukee, Wisconsin.

This arena operated the following retail locations as of January 1, 2006:

 

       
     Square
meters 1
       Stores

Stop & Shop supermarkets

   800 - 4,600      69

Stop & Shop superstores    

   2,200 - 5,300      307

Giant-Landover supermarkets2

   1,000 - 4,700      187

Stand-alone pharmacies    

   150 - 1,800      10

Total 3, 4

        573
               

 

1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 Giant-Landover also operates in Delaware under the name “Super G” to distinguish itself from Giant-Carlisle.
3 This does not include 163 retail locations subleased to third parties.
4 Of these stores, 36% were subject to finance leases, 42% were subject to operating leases and 22% were owned.

 

46


Table of Contents

 

This arena also operated the following other properties as of January 1, 2006:

 

   
     Number of
properties 1

Warehouses / distribution centers /

production facilities 2

   25

Offices 3

   14

Properties held for future development or sale /

not in use 4

   50

Properties under construction / development

   91

Residential properties 5

   12

Total 6, 7

   192
      
1 This includes facilities related to Peapod, Ahold Information Services (develops technology solutions and operated data processing centers for our U.S. operations), American Sales Company, The MollyAnna Company and properties held by Ahold Lease USA, Inc.
2 This includes two distribution centers that the arena sold in January and a dairy processing plant, which was sold in March 2006. This does not include 15 warerooms operated by Peapod within existing Stop & Shop store locations.
3 This includes the former Giant-Landover headquarters, which was underutilized as a result of the integration with Stop & Shop and which has been agreed to be sold during the first half of 2006.
4 These properties were not yet fully utilized as of January 1, 2006. The other properties in this table are fully utilized and have adequate capacity for our current foreseeable needs.
5 This includes eleven apartments and dormitory buildings that were rented or otherwise made available to the arena’s employees and officers at applicable market rent rates or on other comparable market terms to provide temporary living quarters in a cost-effective manner. The remaining apartment was rented or available to be rented to third parties at market rent rates.
6 Of these properties, 6% were subleased to third parties.
7 Of these properties, 2% were subject to finance leases, 30% were subject to operating leases and 68% were owned.

Giant-Carlisle/Tops Arena

This arena, headquartered in Carlisle, Pennsylvania, is comprised primarily of the following entities:

·   Giant Food Stores, LLC (“Giant-Carlisle”), acquired in 1981, which has a market area consisting of Pennsylvania, Maryland, Virginia and West Virginia.
·   Tops Markets, LLC (“Tops”), acquired in 1991, which has a market area consisting of northern New York, northeast Ohio and northern Pennsylvania.

 

This arena operated the following retail locations as of January 1, 2006:

 

       
     Square
meters 1
       Stores

Giant-Carlisle 2

   1,580 - 5,590      123

Tops 3

   510 - 6,880      139

Total 4, 5

        262
               
1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 Referred to as Giant-Carlisle to distinguish itself from Giant-Landover.
3 This does not include five franchise stores supplied by Tops.
4 This does not include four stores subleased to franchisees, 34 stores subleased to third parties and 17 stores not in use.
5 Of these stores, 57% were subject to finance leases, 27% were subject to operating leases and 16% were owned.

This arena also operated the following other properties as of January 1, 2006:

 

   
     Number of
properties

Warehouses / distribution centers /
production facilities

   2

Offices

   9

Properties held for future development or sale /
not in use 1

   27

Properties under construction / development

   9

Residential properties

  

Total 2

   47
      
1 These properties were not fully utilized as of January 1, 2006. Suitable dispositions are currently being sought. The other properties in this table are fully utilized and have adequate capacity for our current foreseeable needs.
2 Of these properties, 11% were subject to finance leases, 23% were subject to operating leases and 66% were owned.

Albert Heijn Arena

This arena, headquartered in Zaandam, the Netherlands, is comprised primarily of the following entities:

·   Albert Heijn B.V. (“Albert Heijn”), established in 1887, which operates food retail stores and has a market area consisting of the Netherlands. Albert Heijn also operates Albert, which provides an Internet-based home shopping and grocery delivery service as an integrated service of the Albert Heijn Arena.
·   Gall & Gall B.V. (“Gall & Gall”), acquired in 1974, which operates wine and liquor stores and has a market area consisting of the Netherlands.
·   Etos B.V. (“Etos”), acquired in 1974, which operates stores specializing in health and beauty care and, in certain stores, prescription drugs and has a market area consisting of the Netherlands.
·   Ahold Coffee Company B.V. (“ACC”), acquired in 1971, which supplies coffee mainly to Ahold’s subsidiaries.

 

AHOLD ANNUAL REPORT 2005

   47


Table of Contents

> Business overview

 

This arena operated the following retail locations as of January 1, 2006:

 

       
     Square
meters 1
       Stores

Albert Heijn 2

   100 - 4,000      499

Gall & Gall 3

   35 - 450      294

Etos 4

   35 - 850      201

Total 5, 6

        994
               

 

1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 This does not include 210 franchise stores supplied by Albert Heijn.
3 This does not include 213 franchise stores supplied by Gall & Gall.
4 This does not include 234 franchise stores supplied by Etos.
5 This does not include 440 stores subleased to franchisees, 282 stores subleased to third parties and 69 stores not in use.
6 Of these stores 85% were subject to operating leases and 15% were owned.

This arena also operated the following other properties as of January 1, 2006:

 

   
     Number of
properties

Warehouses / distribution centers /

production facilities

   20

Offices

   26

Properties held for future development or sale /

not in use 1

   53

Properties under construction / development

  

Residential properties 2

   167

Total 3, 4

   266
      

 

1 These properties were not fully utilized as of January 1, 2006. Suitable dispositions are currently being sought. The other properties in this table are fully utilized and have adequate capacity for our current foreseeable needs.
2 This includes ten apartments which were rented to our employees at applicable market rent rates. The remaining apartments were rented, or were available to be rented, to third parties at market rent rates.
3 Of these properties, 75% were subleased to franchisees or third parties.
4 Of these properties, 1% were subject to finance leases, 26% were subject to operating leases and 73% were owned.

 

Central Europe Arena

This arena, headquartered in Prague, the Czech Republic, is comprised primarily of the following entities:

·   Ahold Czech Republic, a.s. (“Ahold Czech Republic”), established in 1991, which has a market area consisting of the Czech Republic.
·   Ahold Polska Sp. z o.o. (“Ahold Polska”), established as a joint venture in 1995 and acquired fully in 1999, which has a market area consisting of Poland.
·   Ahold Retail Slovakia, k.s. (“Ahold Slovakia”), established in 2001, which has a market area consisting of Slovakia.

This arena operated supermarkets under the name “Albert” and hypermarkets and compact hypermarkets under the name “Hypernova,” operating the following retail locations as of December 31, 2005:

 

       
     Square
meters 1
       Stores

Ahold Czech Republic

   100 - 9,700      292

Ahold Polska 2

   300 - 4,300      183

Ahold Slovakia    

   750 - 10,000      24

Total 3, 4

        499
               

 

1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 This does not include three franchise stores supplied by Ahold Polska.
3 This does not include 15 stores subleased to third parties.
4 Of these stores, 14% were subject to finance leases, 63% were subject to operating leases and 23% were owned.

This arena also operated the following other properties as of January 1, 2006:

 

   
     Number of
properties

Warehouses / distribution centers /
production facilities

   8

Offices

   7

Properties held for future development or sale /
not in use 1, 2

   22

Properties under construction

  

Residential properties

  

Total 3, 4

   37
      

 

1 These properties were not fully utilized as of January 1, 2006. Suitable dispositions are currently being sought. The other properties in this table are fully utilized and have adequate capacity for our current foreseeable needs.
2 This includes three shopping centers that the Central Europe Arena sold in March 2006.
3 Of these properties, 3% were subleased to franchisees or third parties.
4 Of these properties, 3% were subject to finance leases, 54% were subject to operating leases and 43% were owned.

 

48


Table of Contents

 

Schuitema

Ahold acquired a 73.2% interest in Schuitema N.V. (“Schuitema”) in 1988. Schuitema, headquartered in Amersfoort, the Netherlands, is a consolidated subsidiary which is a retail and wholesale company that owns and operates supermarkets and also provides retail support services to independent retailers and associated stores operating under the trade name “C1000.” Schuitema has a market area consisting of the Netherlands.

Schuitema operated the following retail locations as of January 1, 2006:

 

       
     Square
meters 1
       Stores

Schuitema 2

   550 - 4,000      105

Total

        105
               

 

1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 This does not include 357 associated stores.

FOODSERVICE BUSINESS

U.S. Foodservice

U.S. Foodservice, headquartered in Columbia, Maryland, is the second-largest broadline foodservice distributor in the U.S. based on 2005 net sales. U.S. Foodservice provides its products and services to approximately 250,000 customers. We estimate the total foodservice market in the U.S. at approximately USD 160 billion per year in sales. This is a widespread and fragmented market with numerous smaller distributors on a local and regional level, as well as a limited number of national foodservice distributors. U.S. Foodservice’s operations cover a geographic area in which over 95% of the U.S. population resides.

U.S. Foodservice, acquired in 2000, focuses on supplying food and related products to:

·   “Broadline” customers, which includes independent restaurants, healthcare providers, hospitality customers, governmental entities, educational institutions and other foodservice customers.
·   “Multi-Unit” customers, which includes primarily national and regional casual dining and quick service restaurant chains.

No single customer accounted for more than 10% of U.S. Foodservice’s net sales in 2005.

 

U.S. Foodservice operated the following properties as of January 1, 2006:

 

   
     Number of
properties

Warehouses / distribution centers /

production facilities

   126

Offices / retail space

   39

Properties held for future development or sale /

not in use 1

   13

Properties subleased to third parties 2

   13

Other

   1

Total 3

   192
      
1 These properties were not fully utilized as of January 1, 2006. Suitable dispositions are currently being sought. The other properties in this table are fully utilized and have adequate capacity for our current foreseeable needs.
2 Of these properties, 38% related to warehouses / distribution centers / production facilities and 62% related to offices / retail space.
3 Of these properties, 2% were subject to finance leases, 54% were subject to operating leases and 44% were owned.

GROUP SUPPORT OFFICE

Our Group Support Office activities are primarily comprised of the following functions:

·   Ahold Group Support Office, which is our corporate headquarters in Amsterdam, the Netherlands and which has offices in Braintree, Massachusetts.
·   Ahold Finance Group (Suisse), located in Geneva, Switzerland, which primarily provides our treasury operations and related controlling and corporate functions.

The Group Support Office activities operated the following properties as of January 1, 2006:

 

   
     Number of
properties

Offices 1, 2

   4

Total 3

   4
      
1 The three corporate offices located in the Netherlands, Switzerland and the U.S. These properties are fully utilized and have adequate capacity for our current foreseeable needs.
2 This includes one distribution center/production facility which was transferred to our Albert Heijn Arena in January 2006.
3 Of these properties, 75% were subject to operating leases and 25% were owned.

 

AHOLD ANNUAL REPORT 2005

   49


Table of Contents

> Business overview

 

JOINT VENTURES AND ASSOCIATES

In addition to our consolidated subsidiaries, we also have interests in food retail and foodservice operations through our investments in joint ventures and associates. Our share in income of joint ventures and associates is included in our consolidated statements of operations. As of January 1, 2006, we had interests in two significant entities that we accounted for as unconsolidated joint ventures and associates: ICA AB and Jerónimo Martins Retail.

ICA AB

In April 2000, we acquired a 50% partnership interest in ICA AB (“ICA”), which in turn owns the ICA group. In November 2004, we increased our interest in ICA to 60%. The other 40% interest in ICA is held by Hakon Invest AB, a Swedish company listed on the Stockholm Stock Exchange. Under our shareholders agreement with Hakon Invest AB, our 60% shareholding interest in ICA does not entitle us to unilateral decision making authority over ICA, because the agreement provides that strategic, financial and operational decisions will be made only on the basis of mutual consent.

ICA is an integrated food retail and wholesale group, headquartered in Stockholm, Sweden. As of December 31, 2005, ICA served over 2,500 retailer-owned and company-operated supermarkets, neighborhood stores, hypermarkets and discount stores in Sweden, Norway and, through a joint venture, in the Baltic states. ICA also provides consumer financial services in Sweden through its bank.

ICA is comprised primarily of the following entities:

·   ICA Sverige AB (“ICA Sverige”), which is a wholesaler supplying retailer-owned stores and a limited number of company-operated stores under the “ICA” brand name in Sweden.
·   ICA Norge AS (“ICA Norge”), which operates company-owned stores and supplies both franchise and associated stores under the “ICA” and “RIMI” brand names in Norway.
·   ICA Meny AB (“ICA Meny”), which is a food supplier to restaurants, the catering sector and convenience stores in Sweden and in Norway. On February 22, 2006, ICA announced its intention to sell ICA Meny.
·   ICA Banken AB (“ICA Banken”), which is a bank that provides limited consumer financial services in Sweden.
·   Etos AB (“Etos”), which operates stores that sell health and beauty care products in Sweden, mainly in the Stockholm area.

 

ICA has two 50/50 joint ventures:

·   Rimi Baltic AB (“Rimi Baltic”), which is a joint venture with Kesko Livs Ab that operates discount stores, supermarkets and hypermarkets in Latvia, Estonia and Lithuania under various brand names.
·   Netto Marknad AB (“Netto”), which is a joint venture with Dansk Supermarked that operates discount stores in Sweden under the brand name “Netto.”

ICA operated the following retail locations as of December 31, 2005:

 

       
     Square meters 1        Stores

ICA Sverige 2, 3

   500 - 7,000      70

ICA Norge 4

   350 - 4,000      258

Total 5, 6

        328
               

 

1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 This does not include 1,355 associated stores supplied by ICA Sverige.
3 This does include eight Etos stores.
4 This does not include 147 associated stores and 489 franchise stores supplied by ICA Norge.
5 The relationship between the independent retailers and ICA is governed by various types of agreements, under which the retailer pays a specific fee and/or a fixed premium to the purchase price. In exchange, ICA provides the retailers with services, including, among others, marketing, format development and supply of goods. In addition, in some cases, the ICA group owns or has rights to the store locations, which it leases to the retailer.
6 This does not include the stores from ICA’s two joint ventures. Rimi Baltic operates over 170 stores and Netto over 70 stores.

JMR

In 1992, we became a 49% partner in Jerónimo Martins Retail (“JMR”) with Gestão de Empresas de Retalho, SGPS, S.A. JMR, headquartered in Lisbon, Portugal, owns Pingo Doce, a major supermarket chain, and the Feira Nova hypermarket chain, both in Portugal. Under the terms of our shareholders’ agreement, we share equal voting power in JMR with Gestão de Empresas de Retalho, SGPS, S.A.


 

50


Table of Contents

 

JMR operated the following retail locations as of December 31, 2005:

 

       
     Square meters 1        Stores

Pingo Doce 2

   240 - 2,000      192

Feira Nova    

   1,230 - 10,040      29

Recheio Cash & Carry 3

   525 - 2,900      2

Total

        223
               
1 The property data is presented in square meters, which may be converted to square feet by multiplying the number of square meters by 10.75.
2 This includes 13 stores operated by Lidosol which is owned by Funchalgest, SGPS, S.A, the latter a 50/50 joint venture between JMR, Gestão de Empresas de Retalho, SGPS, S.A. and Recheio Cash & Carry S.A.
3 Both Recheio Cash & Carry stores were operated through the Funchalgest joint venture.

SOURCES OF SUPPLIES

Our food retail and foodservice businesses purchase from over 10,000 independent sources and our businesses are not dependent on any individual supplier or supply contract. Our purchases fall into one of two categories: for-resale purchases and not-for-resale purchases. For-resale purchases are those where the products purchased are intended for resale to our customers. Not-for-resale purchases are those where the products and services purchased are not intended for resale to our customers. For-resale purchases make up the majority of our purchases. The for-resale sources of supply consist generally of corporations selling brand name, A-brand and private brand products, independent private brand suppliers and perishable goods vendors. Products are purchased at multiple levels within our organization, including at local operating companies and regional and continental (U.S. and European) purchasing organizations. We have been able to organize most of the retail purchasing at a regional and continental level.

ENVIRONMENTAL MATTERS

Our operations are governed by environmental laws and regulations in the countries in which we have operations, including those concerning the discharge, storage, handling and disposal of hazardous or toxic substances. We believe that we possess all of the material permits required for the conduct of our operations and that our current operations are in material compliance with all applicable environmental laws and regulations.

We use hazardous substances and generate hazardous wastes in some of our operations. Under the U.S. Federal Comprehensive Environmental Responsibility, Compensation and Liability Act (“CERCLA”) and similar state laws,

generators of hazardous wastes may be jointly and severally liable for the clean-up of releases of hazardous wastes from the facilities to which the generator sent those wastes for disposal. However, we are not aware of any asserted or threatened claims against us relating to any such offsite disposal location.

Clean-up of hazardous substances or petroleum releases to soil or groundwater is taking place at certain of our facilities. At other of our facilities, studies have shown that soil and groundwater have been impacted by gasoline or petroleum constituents. The relevant regulatory agencies have, however, not required remediation at those sites. In addition, certain of our facilities are located on premises that are currently or were formerly gasoline stations or other industrial sites at which contamination from prior operations may be located, but there have been no environmental investigations to determine the condition of those sites. Having reviewed the applicable law, the terms of indemnification agreements with the previous operators of the facilities or the terms of our leases with the property owners or our tenants, we believe that some of the clean-up costs associated with the facilities described in this paragraph will be allocated to prior owners or operators of those facilities or to the current owners or tenants of the properties upon which the facilities are located. We do not believe that any clean-up costs associated with those facilities that are allocated to us will materially impact our financial position.

GOVERNMENT REGULATION

U.S. regulations

As a marketer and distributor of food products in the U.S., we are subject to regulation by numerous federal, state and local regulatory agencies. At the federal level, we are subject to the Federal Food, Drug and Cosmetic Act, the Bioterrorism Act and regulations promulgated by the U.S. Food and Drug Administration (the “FDA”). The FDA regulates manufacturing and holding requirements for foods, over-the-counter drug products and pharmaceuticals, specifies the standards of identity for certain foods and prescribes the format and content of certain information required to appear on food product labels.

For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Country of Origin Labeling Act and regulations promulgated thereunder by the U.S. Department of Agriculture (the “USDA”). The USDA imposes standards for product quality and sanitation, including the inspection and labeling of meat and poultry


 

AHOLD ANNUAL REPORT 2005

   51


Table of Contents

> Business overview

 

products and the grading and commercial acceptance of produce shipments from our vendors.

Money order and wire transfer services offered by our stores are subject to regulations promulgated under the USA PATRIOT Act, which is administered by the U.S. Department of the Treasury. Our lottery, alcohol and tobacco sales and operations are regulated at the federal and state level.

We and our products are also subject to state and local regulation through such measures as the licensing of our facilities, enforcement by state and local health agencies of state and local standards for our products and facilities and regulation of our trade practices in connection with the sale of our products. Our advertising, weights and measures of products, as well as other marketing, labeling and consumer protection issues, are regulated by state agencies and state attorney general offices, which have jurisdiction over state consumer protection statutes and antitrust statutes.

Our pharmacy operations are subject to federal, state and local regulations and licensing, including state pharmacy boards, Medicaid and Medicare reimbursement regulations and third-party insurance regulations, as well as the Health Insurance Portability and Accountability Act and regulations promulgated by the U.S. Department of Health & Human Services. Our premises are generally inspected at least annually by federal and/or state authorities. These facilities are also subject to inspections and regulations issued pursuant to the Occupational Safety and Health Act by the U.S. Department of Labor, which require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents and to establish hazard communication programs to transmit information about the hazards of certain chemicals present in certain products we distribute.

We are also subject to regulation by numerous federal, state and local regulatory agencies. Our store operations and real estate operations are subject to zoning, environmental and building regulations, as well as laws that prohibit discrimination in employment on the basis of disability, including the Americans with Disabilities Act, and other laws relating to accessibility and the removal of barriers. Our workers’ compensation and workers’ compensation self-insurance are subject to regulation by state regulatory agencies. In addition, our captive insurance company, The MollyAnna Company (“MollyAnna”), which insures our operating companies for losses relating to self-insurance, is regulated by the Insurance Division of the State of Vermont. Because our securities are publicly traded in the U.S., we are also subject to the rules and regulations promulgated by

the SEC, including those promulgated under the Sarbanes-Oxley Act. In addition, we are subject to the provisions of the U.S. Foreign Corrupt Practices Act relating to the maintenance of books and records and antibribery.

Dutch regulations

As in other jurisdictions, we are subject to various legislative provisions in the Netherlands relating to our products, facilities, health and safety of our employees, antitrust matters, privacy matters, our relationship with franchisees, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and vendors, among others.

We are subject to Dutch zoning regulations, which restrict retailers from opening large retail outlets just outside of towns or in rural areas in order to protect retailers in town centers, thereby preserving the traditional retail structure in these towns. Similar regulations apply in certain other European countries in which we have operations.

As an employer in the Netherlands, we are subject to various labor laws that set employment practice standards for workers, including occupational health and safety standards.

The legislative provisions relating to privacy matters impose certain obligations on us and restrict us in the use of personal data (for example, in the use of customer data for, and obtained in the context of, customer loyalty programs or in direct marketing activities).

Regulations in other jurisdictions

We operate our business in the U.S and in a number of countries in Europe and accordingly, are subject to a wide variety of national and EU laws and regulations governing standards for our products and facilities, health and safety of our employees, currency conversions and repatriation, taxation of foreign earnings and earnings of expatriate personnel and use of local employees and vendors, among others. Within the EU, our business is also subject to and restricted by EU rules, including directives and regulations. To the extent these rules have “direct effect,” they must be applied by the authorities of the member states even if they have not yet been implemented in national law.

EU regulations set minimum standards that must be applied by all EU member states. In many cases, the authorities of the member states are free to set higher standards to the extent these apply equally to all products and producers from all EU member states.


 

52


Table of Contents

Management’s discussion & analysis

 

OVERVIEW

This section provides a discussion of matters we consider important for an understanding of our results of operations, financial position and liquidity as of and for our two most recent financial years.

 

In this section we will discuss in particular the following:

·   significant factors affecting our results of operations and financial position;
·   our results of operations on a consolidated basis and then on a business segment basis;
·   our liquidity and capital resources;
·   our contractual obligations;
·   our off-balance sheet arrangements;
·   our critical accounting policies and estimates;
·   future accounting changes; and
·   our risk management and use of financial instruments and derivatives.

We are an international group of food retail and foodservice companies that operate in the U.S. and Europe.

The following charts set forth information regarding our consolidated net sales by business area and by geographical area for 2005:

LOGO

 

The following market factors and trends affect us and our competitors in the markets where we operate:

·   Increased labor expense. The rate of increase for health care, pension and insurance costs in the U.S. is outpacing the rate of growth of food retail and foodservice industry sales.
·   Competition. The food retail industry in the U.S. and Europe remained extremely competitive in 2005. Promotional activity by traditional supermarket competitors remained at high levels throughout the year while competition with alternative retail formats continued to intensify in our markets. The food retail industry has relatively low profit margins in general. Increased price competition is putting additional pressure on already low profit margins. Conventional supermarkets are experiencing erosion of their markets because of customers shifting to alternative retail formats, natural and organic food, “food-away-from-home” and, in the U.S., fewer customer visits per year and lower average sales per transaction. The foodservice industry in the U.S. is also competitive, as competitors continue to make significant investments in improving operating efficiencies. We expect that these markets will continue to be competitive.
·   Foodservice industry growth. The foodservice market in the U.S. continues to experience a positive growth trend as consumer food purchases continue to shift toward “food-away-from-home.” Foodservice industry growth, however, is skewed toward growth in the less profitable multi-unit customer segment.
·   Pressure on foodservice profit margins. The rapid fluctuation of costs for foodservice resale products impacts profit margins when those fluctuations cannot be passed along to customers on a timely basis. In addition, increased pressure on pricing will continue from large customers and cooperative buying groups based upon their purchasing volume.
·  

Transportation cost increases. Profit margins and operating expenses are being pressured by increases in transportation costs, reflecting high fuel prices and increases in energy costs that exceed the rate of food price inflation. The increase in fuel costs has also eroded

 


AHOLD ANNUAL REPORT 2005

   53


Table of Contents

> Management’s discussion & analysis

 

 

the purchasing power of consumers which has had a negative impact on sales of food.

SIGNIFICANT FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION

Our results of operations and financial position have been impacted by the following significant factors relating specifically to our Company:

The agreements to settle the securities class action and litigation with the VEB

In November 2005, we entered into an agreement to settle the securities class action suits (the “Securities Class Action”) arising out of the events announced on February 24, 2003. Under the terms of the agreement, the lead plaintiffs agree to settle all claims against Ahold for the sum of USD 1.1 billion (EUR 937 million). This amount includes USD 9 million (EUR 8 million) as compensation to the VEB for facilitating the global settlement. The settlement covers Ahold, its subsidiaries and affiliates, the individual defendants and the underwriters. As a result of the settlement, we recorded a charge in operating income in 2005 of EUR 803 million, which includes insurance proceeds.

In January 2006, the U.S. District Court for the District of Maryland granted preliminary approval of our agreement with the lead plaintiffs to settle the Securities Class Action. The court also granted certification of the settlement class. The settlement is conditioned on final approval of the same court. With this settlement we have dealt with the last outstanding material litigation with significant financial exposure arising out of the events of 2003.

We also reached an agreement to settle the litigation with the VEB, pursuant to which VEB has terminated certain legal proceedings relating to our annual financial statements for the years 1998 through 2002.

For a further discussion of these settlements, see Note 35 to our consolidated financial statements included in this annual report.

The events of 2003

In our 2002 annual report, we restated our financial position and results of operations for 2001 and 2000 as a result of the events we announced on February 24, 2003. In response to these events, governmental and regulatory authorities initiated civil and criminal investigations into Ahold and some of our subsidiaries and former officers. Numerous civil lawsuits and legal proceedings also were filed in the U.S. and in the Netherlands naming Ahold and

certain of our current and former directors, officers and employees as defendants. For a further discussion of these investigations, legal proceedings and related settlement agreements, see Note 35 to our consolidated financial statements included in this annual report.

Additional factors affecting our results of operations and financial position

The additional week in 2004 also had a significant impact on our results of operations in 2005. Our 2005 results compared to 2004 were negatively affected by the fact that 2004 on a consolidated basis and for many of our operations consisted of 53 weeks, while 2005 consisted of 52 weeks. This is not applicable for Ahold’s operations in the Central Europe Arena and the joint ventures and associates. The financial year for these entities corresponds to the calendar year. For a discussion of our financial years, including year-end dates, see “General information” in this annual report. For a reconciliation of net sales excluding week 53 of 2004, see “Reconciliation of non-GAAP financial measures” below. Our retail business generally experiences an increase in net sales in the fourth quarter of each year (which in 2004 included week 53), primarily as a result of the holiday season.

The following discussions include “forward-looking statements” that involve risks and uncertainties that are discussed more fully in “Risk factors” and “Forward-looking statements notice.” Actual results could differ materially from future results expressed or implied by the forward-looking statements.

ROAD TO RECOVERY 2003 – 2005

In 2003, we announced a three-year financing plan and strategy to restore the value of our Company. The plan and strategy focused on four key areas: (1) restoring our financial health; (2) re-engineering our retail business; (3) recovering the value of U.S. Foodservice; and (4) reinforcing accountability, controls and corporate governance.

Restoring our financial health

Since November 2003, we have taken numerous steps to strengthen our financial position and flexibility. We raised approximately EUR 2.9 billion in net equity proceeds, reduced gross debt by approximately EUR 5.8 billion, negotiated a new, unsecured syndicated EUR 2 billion credit facility with more favorable terms and conditions than the prior facility, completed divestments for cash consideration and assumed debt totaling EUR 3.1 billion. As a result of our efforts, we have improved our liquidity, strengthened our balance sheet and better positioned ourselves for the future by divesting non-core and under-performing assets.


 

54


Table of Contents

 

Our overall financial recovery is on track. We closed 2005 with EUR 2.2 billion of total cash balances and we reduced gross debt by 22.7% (EUR 2.3 billion) during 2005. The lower average outstanding debt balances, lower average cost of debt and lower banking fees contributed to lower net interest expense in 2005 than 2004. Our financial health is steadily improving and we remain committed to meeting what we understand to be the criteria for investment grade rating from the two applicable rating agencies.

Improved liquidity and stronger balance sheet

The lower average outstanding debt balances, lower average cost of debt and lower banking fees contributed to lower net interest expense in 2005 than 2004. In June 2005, Ahold Finance USA redeemed its EUR 1.5 billion notes.

In October 2005, we successfully closed solicitations to sell selected outstanding notes of Ahold which decreased our indebtedness by approximately EUR 1 billion equivalent, which will further reduce our annualized net interest expense going forward. We also made a voluntary funding of EUR 236 million to our pension program in the U.S. These transactions all utilized available cash balances. Our improved liquidity position and stronger balance sheet enabled us in February 2005 to terminate our three-year revolving December 2003 credit facility (the “December 2003 Credit Facility”). In May 2005, Ahold signed a new five-year EUR 2 billion unsecured syndicated multi-currency credit facility (the “May 2005 Credit Facility”) with a syndicate of banks having more favorable terms and conditions than the December 2003 Credit Facility. The new credit facility is intended to be used for general corporate purposes and for the issuance of letters of credit and remained undrawn except for EUR 588 million (USD 696 million) utilized for letters of credit at the end of 2005. For further details and information, see Note 26 to our consolidated financial statements included in this annual report and “Liquidity and capital resources - Assessment of liquidity and capital resources.”

Divestment program

In 2003, we announced our intention to generate at least EUR 2.5 billion of gross proceeds by divesting non-core businesses and under-performing assets by the end of 2005. For these purposes, “gross proceeds” means cash consideration and assumed debt. We have succeeded in our mission and by the end of 2005, the aggregate gross proceeds from the divestments amounted to EUR 3.1 billion. Of this amount, EUR 1.6 billion was generated in 2005, EUR 1.1 billion in 2004 and EUR 0.4 billion in 2003 resulting in net cash from the divestment of consolidated subsidiaries of EUR 1,058 million in 2005, EUR 978 million in 2004 and EUR 284 million in 2003. We applied the cash received from our divestments to

reduce indebtedness and, in January 2006, to pay litigation claims. The tables below summarize the status of our divestment program through January 1, 2006.

Gross proceeds from divestment program 2003 through January 1, 2006:

 

   

Euros in millions

   Gross
proceeds

U.S.

  

Golden Gallon 2

   157

BI-LO and Bruno’s 1, 2

   822

Europe

  

Ahold Supermercados, Spain

   633

Deli XL, the Netherlands

   139

South America

  

Bompreço, Hipercard, Brazil 2

   410

Disco S.A., Argentina 2, 3

   198

Central America

  

CARHCO 2

   266

Other Divestment Activities 2

   474

Total

   3,099
      

 

1 The gross proceeds from the divestment of BI-LO and Bruno’s exclude contingent payments of approximately USD 100 million that we may receive. As of March 28, 2006, we have received approximately USD 69 million.
2 The amount was converted from USD (the transaction currency) to EUR using the exchange rate in effect when the transaction closed.
3 The gross proceeds from the divestment of Disco represents the final purchase amount that we received from escrow for the approximately 85% of the shares of Disco that we had transferred to Disco as of November 1, 2004. Pending the transfer of the remaining 15% stake, we do not have any voting power in Disco.

We incurred a gain on divestments of EUR 172 million in 2005 and a gain on divestments of EUR 238 million in 2004. For additional information, see Note 12 to our consolidated financial statements included in this annual report. Our divestments of these non-core and underperforming assets will have, in the aggregate, a positive impact on our operating income as a percentage of net sales in subsequent years.

Other divestments

Outside the scope of the divestment program discussed above, we are also in the process of disposing of assets that no longer meet our criteria for investment. These divestments form part of our ordinary business and include the divestments of U.S. Foodservice’s specialty distributor Sofco, 31 Tops stores located in eastern New York and the Adirondacks region, three shopping centers in Poland and the Czech Republic and two distribution facilities and one dairy processing plant in the U.S. For additional


 

AHOLD ANNUAL REPORT 2005

   55


Table of Contents

> Management’s discussion & analysis

 

information, see Note 12 to our consolidated financial statements included in this annual report.

Re-engineering our retail business

Arena organizational structure

We have reorganized our food retail companies into arenas to integrate back office functions and gain synergies. In this way, we can achieve economies of scale while continuing to operate using local brands, pricing and product assortment. We have also reinvested in many of our stores to maintain and improve our market position.

The arena structure promotes effective management and harmonization. The arena structure also allows us to more effectively take advantage of opportunities in the areas of sourcing, information technology, supply chain, store operations and operational alignment and thereby streamlining our infrastructure. Our U.S. arenas have centralized certain common functions into integrated support service organizations. Each arena is headed by a CEO, who reports directly to the Ahold President and CEO.

Retail portfolio strategy

Our strategy for our food retail business is to focus on format, location and competitive position. We are focused on the supermarket format in Europe and the U.S. Our objective for our companies is for them to have or to be capable of achieving a sustainable and profitable number one or number two position in their respective markets within three to five years. If we own assets that do not fit our criteria for store format, geographic region, market position, profitability and adequate returns on capital invested, our strategy has been to evaluate divestment opportunities. Following the completion of our divestment program, our retail portfolio strategy is focused on integration and concentrated, smaller “add-on” or “fill-in” acquisitions.

On August 1, 2005 we announced our plans to grow our business in key markets through selective acquisitions. On the same day we announced the acquisition of up to 67 stores from Julius Meinl a.s. in the Czech Republic. As of March 28, 2006, we have acquired 59 of these stores.

Improving our competitive position

In November 2003, we launched a program of strategic business cost saving initiatives aimed at improving our competitiveness. These initiatives are expected to lower costs related to sourcing, information technology, supply chain and store operations. Our arenas and operating companies share responsibility for the initiatives together with our Business Support Office (the “BSO”). The BSO, which was established in connection with the launch of the

cost savings program in 2003, facilitates the development of the various initiatives.

Through these initiatives, our goal is to achieve aggregate gross cost savings of approximately EUR 650 million by the end of 2006. We plan to reinvest a portion of these cost savings in strengthening our value and service proposition. We have incurred and will continue to incur significant one-time costs related to the 2003 cost savings program.

Recovering the value of U.S. Foodservice

We introduced a three-step program in 2003 to restore the value of U.S. Foodservice as part of our Road to Recovery strategy. The three steps are: (1) improving internal controls and corporate governance; (2) restoring profitability and cash flow; and (3) pursuing profitable sales growth. We have already made significant progress and have implemented a number of initiatives and changes at U.S. Foodservice to clarify accountability, improve our internal controls and strengthen our corporate governance. In 2004 we implemented a comprehensive plan focusing on organizational improvements, procurement enhancements, operational and system improvements at U.S. Foodservice in order to restore profitability and cash flow. In 2005, U.S. Foodservice continued to execute these initiatives which resulted in improved operating income, and in November of the same year announced a new long-term strategy, which is discussed below under “Overview of our U.S. Foodservice strategy.”

Reinforcing accountability, controls and corporate governance

As part of our Road to Recovery strategy, we have implemented numerous initiatives and changes to clarify accountability, improve our internal controls and strengthen our corporate governance. We have concluded that as of the end of the period covered by this annual report, the two material weaknesses reported in our 2004 annual report no longer exist. For additional information, see “Corporate governance” and “Internal control” above.

2006 AND ONWARD

Overview of our retail strategy

We have defined a growth strategy for 2006 and onwards based on core values that our operating companies share and core capabilities that we are improving. Our core values are rooted in Ahold’s heritage and reflect our ambitions for the future. Increasing the focus on our core capabilities will help us build upon what we do best and differentiate us from the competition.


 

56


Table of Contents

 

Our business model

The strategies of our companies are based on one shared business model. It is designed to enable our group of companies to apply relentless efficiency and simplicity to everything we do. By working as one team we benefit from group synergies and innovation that serve to further reduce costs. Improving our efficiencies and lowering our cost base enable us to invest in providing our customers better value for money and an easier shopping experience.

The intention is to drive our sales volumes. We generate cash that can be invested in new stores, new stores and innovation. The cash we generate can be used for acquisitions in both the retail and foodservice businesses to enhance our position in certain markets. The overall goal is to make our offering more appealing for customers, improve our bottom line and create value for our shareholders.

Our value repositioning programs at Albert Heijn and ICA Sverige have been successful to date, which has increased our net sales and improved our ability to compete. The value repositioning program is based on our business model of lowering costs, investing the savings in value (including price and customer offering), creating cost leverage in order to sustain our price strategy over time and thereby driving our net sales volumes to generate cash proceeds which can be invested in our business. In order to support our value repositioning programs, we are continuing our strategic business cost savings initiatives to improve competitiveness and, ultimately, net sales and profitability. These initiatives are expected to lower costs related to sourcing, information technology, supply chain and store operations.

We plan to implement an arena-wide value improvement program at both Stop & Shop and Giant-Landover. Starting in 2006, this program will be implemented over the next three years in phases applying a product category-by-category approach. This program has similar objectives to the value repositioning program that we have successfully implemented at Albert Heijn and ICA. However, the starting points and competitive environments are different and we have designed the value improvement program specifically for the region and the market of the Stop & Shop/Giant-Landover Arena to help us compete effectively with the supermarkets and alternative outlets of our competitors.

Next generation sourcing

Sourcing and category management teams have been established to support two of our core capabilities and important focus areas for increasing our competitive strength in the future. The BSO and teams from Albert Heijn, the Central Europe Arena and ICA are working together to start “Next Generation Sourcing” for selected

product categories. This initiative will enable us to critically analyze the whole value chain from raw materials to our store shelves, identify cost savings and find ways to optimize the value we deliver to our customers. Strategic sourcing methods will be integrated in day-to-day sourcing and the alignment between sourcing and category management teams will be improved. In 2006, we will start the initiative by creating a common organizational platform for central sourcing of selected private label products.

General merchandise

We plan to introduce a family-focused range of homewares in the first half of 2007 in our retail arenas. This range of non-food merchandise will initially include kitchen items and glassware, but will be extended gradually to include other general merchandise categories which will accompany our existing food offering. To support this initiative, a global sourcing structure will be developed. Our ambition is to expand our general merchandise sales within a multi-year period by developing a design-driven, affordable and profitable global range of such products selected investments will be made in our store portfolio to support an attractive offering of general merchandise to our customers.

IT outsourcing agreements

In November 2005, we signed several major IT outsourcing agreements, including a five-year contract for global IT enterprise outsourcing with EDS, including applications maintenance services in the U.S. We also signed five-year agreements with Atos Origin and NCR (both covering the Albert Heijn Arena) for applications maintenance and in-store IT-support, respectively. Expected total costs during the five-year term of the outsourcing agreements is approximately EUR 467 million based on expected levels of services. Subject to termination charges, we may terminate each of the agreements by giving our outsourcing partner six months notice. Approximately 450 Ahold employees located in the U.S. and the Netherlands are expected to transition to EDS. These IT outsourcing initiatives are expected to reduce overall IT costs by streamlining our infrastructure, improve support to the arenas and facilitate our ongoing harmonization initiative across the business. The transition costs related to these initiatives will almost completely be incurred in 2006.

Category management / Learning organization

Being highly skilled in category management and understanding our customers enables us to provide them with a more targeted range and assortment with products and services in a cost-efficient and convenient way. Our retail strategy is supported by our company-wide ambition to build a learning organization that encourages knowledge exchange to leverage our expertise wherever possible.


 

AHOLD ANNUAL REPORT 2005

   57


Table of Contents

> Management’s discussion & analysis

 

Initiatives including value repositioning, optimizing the supply chain, developing new store formats and improving private label penetration are supported by the execution of our business model in our retail arenas.

In 2005, competitive and operating cost pressures in our retail markets were greater than expected and the turnaround at certain of our businesses was slower than planned. The financial targets we originally set for retail in 2003 have become increasingly challenging. Based on the retail trends we have seen so far in 2006, we expect our retail net sales growth in 2006 to be between 2.5% and 3.0% (assuming constant currency exchange rates and excluding divestments made in 2005). In addition, we expect that our retail operating margin will be between 4.0% and 4.5% in 2006. Our overall priority remains to drive net sales growth and achieve a retail operating margin of 5%.

Our capital expenditure for the food retail arenas is expected to be approximately 4% of net retail sales for 2006 with a continued focus on the Stop & Shop/Giant-Landover Arena.

OVERVIEW OF OUR U.S. FOODSERVICE STRATEGY

Pursuing profitable sales growth

In November 2005, we announced our strategic plan focused on pursuing profitable sales growth at U.S. Foodservice. The strategic plan includes the following initiatives:

Improving customer focus and organizational effectiveness by creating two separate operating companies

Starting in 2006, U.S. Foodservice was split into two separate operating companies, each of which serves a different customer segment:

·   “Broadline” that serves independent restaurants, healthcare providers, hospitality customers, governmental entities, educational institutions and other foodservice customers.
·   “Multi-Unit” that serves primarily national and regional casual dining and quick service restaurant chains.

The reorganization of U.S. Foodservice into these two operating companies is intended to drive greater focus on the specific needs of each of these different businesses and to provide stakeholders with greater transparency into U.S. Foodservice’s progress in achieving its targets. Ahold will change its segment reporting to reflect these changes in financial reporting starting in the first quarter of 2006.

 

Broadline strategy

The Broadline strategy is based on four core initiatives that are intended to drive a balance of top-line net sales growth, bottom-line profit improvement and operational excellence:

·   New private brands model. To accelerate the growth and increase the penetration of its private brands offered to Broadline customers, U.S. Foodservice is embracing a new business model by establishing a centralized, dedicated private brands organization. This new organization, named “Monarch Foods,” is responsible for the entire private brands value chain, including product development, sourcing, quality assurance and marketing. As part of the new private brands growth strategy, the current portfolio of over 60 private brands will be consolidated into approximately 20 strong private brands, supported by an aggressive plan for new product introductions.
·   Field sales investment. To drive profitable sales growth, U.S. Foodservice intends to increase the number of its Broadline sales representatives by 10% during the next two years with more significant increases in selected geographies. As of January 1, 2006, the number of sales representatives totaled 4,850. To increase the effectiveness of this field sales force, U.S. Foodservice is deploying new proprietary laptop-based sales tools and expanding its sales training capability, with particular focus on building field sales expertise in its private brands offering.
·   Enhancing local position in selected geographies. To further improve its scale in certain geographical areas, U.S. Foodservice consolidated a number of its Broadline divisions and has targeted the acquisition of certain smaller scale distribution organizations.
·   Operational Excellence program. U.S. Foodservice has made significant progress in improving the effectiveness and efficiency of many of its warehouse and transportation operations. As part of the U.S. Foodservice Advanced Service Technologies (“USFAST”) initiative, a system integration project, U.S. Foodservice has installed new operating support systems in approximately half of its Broadline facilities, significantly improving customer order fulfillment accuracy and service performance as well as reducing warehouse and transportation costs. U.S. Foodservice will continue to install these support systems in the remaining facilities. These systems are the backbone of the field cost reduction to support profitability. To provide a focused framework for future improvement in every aspect of business performance, U.S. Foodservice has initiated a new multi-year Operational Excellence program aimed at improving end-to-end business processes.

 

58


Table of Contents

 

Multi-Unit strategy

The Multi-Unit strategy is intended to make the Multi-Unit business profitable based on the following initiatives:

·   Dedicated operating unit with focused management. Multi-Unit customers are now served by a separate business, which provides more focus on the needs of this segment.
·   Efficiency focus. The improvement in the Multi-Unit business will be driven primarily from initiatives to mitigate operating cost pressures and to drive productivity improvements. U.S. Foodservice is working with its customers to reduce overall supply chain costs by optimizing inbound and outbound distribution logistics, reducing working capital and optimizing drop size and drop frequency. As part of the USFAST initiative, U.S. Foodservice has installed new support systems at approximately half of its Multi-Unit distribution centers and will continue to install these support systems at the remaining distribution centers.
·   Operational Excellence program. The Multi-Unit business is participating in the Operational Excellence program to improve end-to-end business processes. The Multi-Unit business is also working with its customers to provide value-added services including integrated supply-chain management, non-food and equipment purchases and other services. U.S. Foodservice believes that a broader service offering is a key component of long-term success in the Multi-Unit business.

Administrative cost structure right-sizing program

U.S. Foodservice’s significant operational integration programs, executed as part of the Road to Recovery strategy, have provided the foundation upon which additional administrative cost reductions can be achieved. U.S. Foodservice is implementing a plan to reduce total administrative costs by approximately USD 100 million, with more than half of these savings to be realized in 2006 and the balance in 2007 and 2008.

As part of this cost reduction plan, the Broadline field operations were consolidated from four regions to three. In addition, U.S. Foodservice is consolidating certain support office functions and locations and the previously announced headcount reductions involving nearly 700 positions.

We expect that U.S. Foodservice’s operating margin in U.S. dollars before impairment of goodwill will exceed 1.7% no later than 2006.

 

Review of underperforming assets / Reduce corporate overhead

In 2006, our focus will be on a comprehensive review of underperforming assets and a reduction of corporate overhead.

RESULTS OF OPERATIONS

The tables summarizing our consolidated results below are followed by discussions of the consolidated Company results and then the results of operations for each of our business segments. These discussions should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this annual report.

The following discussions contain certain non-GAAP financial measures which are further discussed under “Reconciliation of non-GAAP financial measures.”

Adoption of International Financial Reporting Standards

Beginning with 2005, we are required by a EU regulation to prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU. Under IFRS, net sales figures are adjusted to exclude discontinued operations, which we present separately from our continuing operations. As required under IFRS, the prior year net sales figures included as comparatives have been adjusted to exclude net sales from discontinued operations.

The impact of the adoption of IFRS is discussed in Note 36 to our consolidated financial statements included in this annual report.


 

AHOLD ANNUAL REPORT 2005

   59


Table of Contents

> Management’s discussion & analysis

 

Store count

Set forth in the tables below are:

·   store count of our consolidated subsidiaries;
·   changes in store count of our consolidated subsidiaries;
·   store count of our joint ventures and associates; and
·   changes in store count of our joint ventures and associates.

Store count of our consolidated subsidiaries:

 

     As of January 1, 2006
     Company-
operated
retail
locations
       Franchise
retail
locations
       Associate
retail
locations
       Total

Stop & Shop/Giant-Landover Arena

   573                573

Giant-Carlisle/Tops Arena

   262      5           267

Albert Heijn Arena

   994      657           1,651

Central Europe Arena

   499      3           502

Schuitema

   105           357      462

Total

   2,433      665      357      3,455
                                 

Changes in store count of our consolidated subsidiaries:

 

       
     2005          2004  

Beginning of period

   4,072        5,071  

Opened / acquired

   149        130  

Disposed / closed / divested

   (766 )      (1,129 )

End of period

   3,455        4,072  
                   

 

Store count of our joint ventures and associates:

 

     As of December 31, 2005
     Company-
operated
retail
locations
       Franchise
retail
locations
       Associate
retail
locations
       Total

ICA 1

   328      489      1,502      2,319

JMR 2

   223                223

Total

   551      489      1,502      2,542
                                 
1 This does not include the stores from ICA’s two joint ventures. Rimi Baltic operates over 170 stores and Netto over 70 stores.
2 This includes 15 stores operated by Funchalgest, SGPS, S.A., a 50/50 joint venture of JMR.

Changes in store count of our joint ventures and associates:

 

       
     2005          2004  

Beginning of period

   3,146        3,570  

Opened / acquired

   48        143  

Disposed / closed / divested

   (652 )      (567 )

End of period

   2,542        3,146  
                   

For additional information about the results of operations for each of our business segments, see “Business segment results.”


 

60


Table of Contents

 

CONSOLIDATED RESULTS SUMMARY

The following table sets forth a summary of our consolidated statements of operations for 2005 and 2004:

 

     2005        2004
               

Euros in millions, except percentages and per share data

   (52 weeks)          % of net
sales
       (53 weeks)          % of net
sales

Net sales

   44,496        100.0      44,610        100.0

Gross profit

   9,206        20.7      9,212        20.7

Operating expenses

   (8,958 )      20.1      (8,289 )      18.6

Operating income

   248        0.6      923        2.1

Net financial expense

   (646 )      1.5      (281 )      0.6

Share in income of joint ventures and associates

   155        0.4      138        0.3

Income taxes

   205        0.5      (147 )      0.3

Income (loss) from continuing operations

   (38 )      0.1      633        1.4

Income from discontinued operations

   197        0.4      265        0.6

Net income

   159        0.4      898        2.0

Income (loss) per share from continuing operations attributable to

common shareholders

                 

Basic

   (0.04 )           0.40       

Diluted

   (0.04 )                 0.40           

 

TOTAL COMPANY NET SALES

The following table sets forth our net sales by arena and other business segments for 2005 and 2004:

 

     2005          2004
           

Euros in millions, except

percentages, excluding

intersegment sales

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Retail

            

Stop & Shop/

Giant-Landover Arena

   13,161      1.6        12,949

Giant-Carlisle/Tops Arena

   4,989      (4.2 )      5,209

Albert Heijn Arena

   6,585      2.6        6,418

Central Europe Arena 1

   1,761      4.6        1,683

Schuitema

   3,128         (1.7 )         3,181

Total retail

   29,624      0.6        29,440

Foodservice

            

U.S. Foodservice

   14,872      (2.0 )      15,170

Total Company

   44,496      (0.3 )      44,610
                          
1 The financial year for the Central Europe Arena corresponds to the calendar year. Consequently, financial year 2004 did not contain an additional week.

 

·   Our consolidated net sales decreased in 2005 compared to 2004 primarily as a result of the positive impact of the additional week in 2004. Excluding week 53 of 2004, net sales in 2005 increased by 1.5%.
·   Among the most significant factors affecting net sales in 2005 was the decision of U.S. Foodservice to exit certain businesses and the divestments of 198 Wilson Farms and SugarCreek convenience stores in the Giant-Carlisle/Tops Arena, which had a negative impact on our net sales in 2005 compared to 2004. Higher net sales in the Stop & Shop/Giant-Landover Arena and the Albert Heijn Arena had a positive impact on our 2005 net sales.
·   Currency exchange rates had almost no impact on our net sales in 2005 compared to 2004. The average U.S. dollar to euro exchange rate for full year 2005 remained stable compared to full year 2004.

TOTAL COMPANY GROSS PROFIT

The following table sets forth our gross profit and gross profit margins for 2005 and 2004:

 

     2005        2004
               

Euros in

millions,

except

percentages

   (52
weeks)
 
 
       % of net
sales
       (53
weeks)
 
 
       % of net
sales

Net sales    

   44,496        100.0      44,610        100.0

Cost of sales    

   (35,290 )      79.3      (35,398 )      79.4

Gross profit

   9,206          20.7 1        9,212          20.6 1
1 Gross profit margin is gross profit as a percentage of net sales.

 

AHOLD ANNUAL REPORT 2005

   61


Table of Contents

> Management’s discussion & analysis

 

·   Our gross profit margin was stable in 2005 compared to 2004. This was mainly due to a higher gross profit margin at U.S. Foodservice, offset by slightly lower gross profit margins in some of our retail arenas.
·   The improved gross profit margin at U.S. Foodservice was primarily a result of its systematic category review process, which included negotiating better supply terms and rationalizing its product portfolio.
·   The gross profit margin in the Giant-Carlisle/Tops Arena increased slightly, mainly as a result of improvements in inventory shrinkage, product mix, merchandising and operational efficiencies in perishable products.
·   The gross profit margin at Schuitema also increased slightly, mainly as a result of reduced logistics costs.
·   In addition, our gross profit margin was slightly positively impacted by an increase in the gross profit margin in the Central Europe Arena, mainly as a result of more centralized sourcing and the divestment of the Polish hypermarkets.
·   These increases in gross profit margin were offset by a decrease in the gross profit margin in the Stop & Shop/Giant-Landover Arena as a result of competitive pressure from new store openings and increased promotional activity, and at Albert Heijn where the ongoing value repositioning program put pressure on the gross profit margin.

TOTAL COMPANY OPERATING EXPENSES

The following table sets forth our operating expenses by category for 2005 and 2004:

 

     2005        2004
               

Euros in millions, except percentages

   (52
weeks)
 
 
       % of
net sales
       (53
weeks)
 
 
       % of
net sales

Selling expenses

   (6,545 )      14.7      (6,475 )      14.5

General and administrative expenses

   (1,610 )      3.6      (1,814 )      4.1

Settlement securities class action

   (803 )      1.8            

Total operating expenses

   (8,958 )      20.1      (8,289 )      18.6
                                     

Our operating expenses and operating expenses as a percentage of net sales increased in 2005 compared to 2004, primarily because of the charge for the settlement of the Securities Class Action.

 

Selling expenses

Our selling expenses and selling expenses as a percentage of net sales increased slightly in 2005 compared to 2004 because of increased selling expenses of in some of our arenas, particularly selling expenses as a percentage of net sales in the Central Europe Arena and at Schuitema. The increase in the Central Europe Arena was primarily a result of higher net sales, various project costs and a write-off of supplier receivables and inventories related to stock-taking differences. This increase was partially offset by a decrease in selling expenses as a percentage of net sales in the Albert Heijn Arena, primarily as a result of cost reductions and efficiency improvements with respect to logistic and transportation expenses.

General and administrative expenses

Our general and administrative expenses decreased in 2005 compared to 2004 primarily because of the one-time costs of USD 54 million (EUR 44 million) in 2004 related to the integration of Giant-Landover, Stop & Shop and the U.S. retail support service. Our net payments to AIG Europe (the Netherlands) N.V. in connection with the settlement of insurance coverage litigation with respect to a director’s and officer’s liability insurance policy issued by AIG for Ahold and U.S. Foodservice were USD 31.5 million (EUR 25.5 million), both in 2005 and 2004.

In 2005, general and administrative expenses included restructuring and other one-time costs at U.S. Foodservice of USD 61 million (EUR 51 million) primarily related to the restructuring as announced on November 29, 2005. Included in the restructuring and other one-time costs at U.S. Foodservice are costs to close and consolidate operating facilities of USD 19 million, costs to close and consolidate support office locations of USD 14 million, severance and other costs associated with the announced reduction of the workforce by approximately 700 positions of USD 14 million. Other charges included in the restructuring and other one-time costs, such as non-current assets disposals, one-time costs associated with exiting certain businesses and the asset impairment charge for a distribution facility (which is still operated by U.S. Foodservice) amounted to USD 14 million. In 2005, general and administrative expenses also included start-up costs for an accounting center in the Central Europe Arena. Salaries and wages, as well as rent and depreciation expenses, remained stable in 2005 compared to 2004.

Intangible asset amortization

Our amortization of intangible assets decreased by EUR 24 million in 2005 compared to 2004 primarily as a result of lower amortization in the Stop & Shop/Giant-Landover Arena.


 

62


Table of Contents

 

Impairment goodwill

Our impairment losses relating to goodwill increased by EUR 19 million in 2005 compared to 2004. In 2005, we recorded impairment losses of goodwill of EUR 14 million in the Giant-Carlisle/Tops Arena, EUR 3 million at Schuitema and EUR 2 million in the Albert Heijn Arena.

Impairment and amortization charges of non-current assets

Our impairments of non-current assets were EUR 87 million lower in 2005 compared to 2004. In 2005, we recorded the following material impairments of non-current assets:

·   EUR 70 million in the Giant-Carlisle/Tops Arena due to impairments of Tops stores as a result of store closures, especially in the northeast Ohio region;
·   EUR 17 million at U.S. Foodservice due to impairments of office locations and warehouses, included in the restructuring costs discussed above; and
·   EUR 8 million in the Stop & Shop/Giant-Landover Arena due to impairments of property, plant and equipment.

In 2004, we recorded the following material impairments of non-current assets:

·   EUR 74 million at Schuitema due to impairment of stores, capitalized commercial expenses and loan receivables;
·   EUR 30 million in the Central Europe Arena due to impairments of the divested hypermarkets in Poland;
·   EUR 29 million in the Stop & Shop/Giant-Landover Arena due to impairments of stores as a result of increased competitive pressure;
·   EUR 26 million in the Giant-Carlisle/Tops Arena due to impairments of stores as a result of increased competitive pressure; and
·   EUR 13 million in the Albert Heijn Arena due to impairments of stores as a result of increased competitive pressure.

Gain on disposal of non-current assets

We recorded a gain on the disposal of non-current assets of EUR 52 million in 2005, compared to a gain of EUR 15 million in 2004. In 2005, our gain on the disposal of non-current assets included a EUR 19 million gain on the disposal of the hypermarkets in Poland and a shopping center in the Central Europe Arena, a EUR 19 million gain on the disposal of stores in the Giant-Carlisle/Tops Arena and EUR 7 million in the Stop & Shop/Giant-Landover Arena. Our gain on the disposal of non-current assets in 2004 included a EUR 9 million gain on the sale of a shopping center in the Central Europe Arena.

 

Settlement securities class action

Our operating expenses and operating expenses as a percentage of net sales increased in 2005 compared to 2004, primarily because of the charge of EUR 803 million in operating income, which includes insurance proceeds, for the agreement to settle the Securities Class Action. Under the terms of the settlement agreement in the Securities Class Action, the lead plaintiffs agree to settle all claims in the Securities Class Action against Ahold, its subsidiaries, the individual defendants and the underwriters for the sum of USD 1.1 billion (EUR 937 million). This amount includes USD 9 million (EUR 8 million) as compensation to the VEB for facilitating the global settlement. The settlement is subject to final court approval. Excluding the impact of the settlement, net of the insurance proceeds, our operating expenses and operating expenses as a percentage of net sales decreased in 2005 compared to 2004. For more information on the settlement of the Securities Class Action, see Note 35 to our consolidated financial statements included in this annual report.

TOTAL COMPANY OPERATING INCOME

 

    2005         2004  
           

Euros in millions,

except percentages

  (52 weeks)         Change (%)         (53 weeks)  

Retail

         

Stop & Shop/Giant-Landover Arena

  708       2.5       691  

Giant-Carlisle/Tops Arena

  72       (36.8 )     114  

Albert Heijn Arena    

  288       (9.1 )     317  

Central Europe Arena 1

  (44 )     (18.5 )     (54 )

Schuitema    

  95         41.8         67  

Total retail

  1,119       (1.4 )     1,135  

Foodservice

         

U.S. Foodservice

  86       59.3       54  

Group Support Office

  (957 )     259.8       (266 )

Ahold Group

  248       (73.1 )     923  
                           

 

 

1 The financial year for the Central Europe Arena corresponds to the calendar year. Consequently, financial year 2004 did not contain an additional week.

Our operating income decreased in 2005 compared to 2004 mainly due to impact of the settlement of the Securities Class Action of EUR 803 million, which includes insurance proceeds. Our operating income in 2005 compared to 2004 was also negatively affected by the impact of the restructuring charges at U.S. Foodservice, which negative


 

AHOLD ANNUAL REPORT 2005

   63


Table of Contents

> Management’s discussion & analysis

 

impact was more than offset by lower impairments and integration expenses in 2005 compared to 2004 and higher gains on disposal of non-current assets in 2005 compared to 2004. In addition, our operating income in 2005 was positively impacted by improved operating income at U.S. Foodservice, Schuitema and in the Stop & Shop/Giant-Landover Arena, partially offset by lower operating income in the Giant-Carlisle/Tops Arena and the Albert Heijn Arena. Operating income in 2005 compared to 2004 was also negatively impacted by the fact that 2005 consisted of 52 weeks while 2004 consisted of 53 weeks.

NET FINANCIAL EXPENSE

The following table sets forth our net financial expense for 2005 and 2004:

 

    2005         2004  
           

Euros in millions,

except percentages

  (52 weeks)         Change (%)         (53 weeks)  

Interest income

  89       34.9       66  

Interest expense

  (678 )       (11.9 )       (770 )

Net interest expense

  (589 )     (16.3 )     (704 )

Gain (loss) on

foreign exchange

  (1 )         43  

Other financial

income (expense)

  (56 )         380  

Net financial expense

  (646 )     129.9       (281 )
                           

Our net financial expense increased in 2005 compared to 2004, primarily as a result of the 2004 net gain of EUR 379 million relating to the ICA put option transaction. In 2004 we acquired an additional 20% interest in ICA (10% of which we transferred to our joint venture partner) pursuant to the exercise of a put option by one of the ICA partners. Our net financial expense in 2005 also increased as a result of an additional one-time loss of EUR 53 million relating to a bond buy back transaction in October 2005 and as a result of the EUR 39 million gain in 2004 relating to a derivative hedge that no longer qualified for hedge accounting.

Our net interest expense decreased in 2005 compared to 2004. The decrease of net interest expense was mainly impacted by lower average outstanding debt balances as a result of debt repayments totaling EUR 2.3 billion during 2005 as well as the full year effect of debt repayments of EUR 1.5 billion in 2004. The increase in interest income was primarily a result of a higher return on average outstanding cash balances invested.

 

For further information about our borrowings, see Note 26 to our consolidated financial statements included in this annual report.

INCOME TAXES

In 2005, our income tax benefit amounted to EUR 205 million, as compared to an income tax expense of EUR 147 million in 2004. Our effective tax rate, calculated as a percentage of income (loss) before income taxes, increased significantly in 2005 compared to 2004 and reached a level of 84.4% (2004: 18.8%). This high effective tax rate indicates that 84.4% of our loss before income taxes is offset by an income tax gain.

The main factor contributing to this increase in effective tax rate in 2005 compared to 2004 was the impact of the charge recorded at the Group Support Office relating to the settlement of the Securities Class Action, which significantly reduced our income before income taxes in 2005.

The effective tax rate in 2005 was positively affected by the application of IFRS. Under IFRS the share in income (loss) of our joint ventures and associates is required to be included in income before tax without a corresponding income tax expense effect. Because of our loss before income taxes in 2005, the application of IFRS contributed to the increase in our effective tax rate in 2005 compared to our 2004 income before income taxes, in which year the application of IFRS led to a reduction of our effective tax rate. Furthermore, a tax exempt capital gain of EUR 38 million with respect to the release of the D&S litigation provision had a positive impact on the effective tax rate in 2005, whereas additional valuation allowances related to loss carry-forwards in our Central Europe Arena had a negative impact on the effective tax rate in 2005.

The effective tax rate for 2004 was positively affected by a tax exempt gain on the ICA put option transaction of EUR 379 million and negatively affected by an impairment on loan receivables of EUR 47 million.

For a full discussion of our accounting treatment of income taxes, see Notes 3 and 11 to our consolidated financial statements included in this annual report.


 

64


Table of Contents

 

SHARE IN INCOME OF JOINT VENTURES AND ASSOCIATES

 

       

Euros in millions

   2005        2004

ICA, Scandinavia

   96      97

JMR, Portugal

   36      39

Other 1

   23      2

Total share in income (loss) of joint ventures and associates

   155      138
               

 

1 Other includes our share in income of several real estate joint ventures. For more information on our share in income of joint ventures and associates see Note 18 to our consolidated financial statements included in this annual report.

ICA, Scandinavia

Our share in income of ICA decreased in 2005 despite the full-year effect of the increase in our interest in ICA from 50% to 60% in November 2004. The reporting currency of ICA is the Swedish krona (“SEK”).

Net sales of our unconsolidated joint venture ICA amounted to SEK 71,663 million (EUR 7.7 billion) in 2005, a decrease of 2.3% compared to 2004 (SEK 73,334 million (EUR 8 billion)). The decrease was primarily a result of the de-consolidation of the Baltic operations and the sale of the Danish operations. Excluding the impacts of the de-consolidation of the Baltic operations and the sale of the Danish operations, net sales in SEK increased by 3.8% in 2005 compared to 2004. Net sales at ICA Sverige increased, primarily due to the successful value repositioning program. Net sales at ICA Norge decreased, primarily due to competition, divestments of stores and the conversion of company-operated stores to franchise stores.

Operating income of ICA in 2005 was positively impacted by higher net sales at ICA Sverige and ICA Meny, and also by higher volumes at ICA Banken as well as cost cuts at ICA Sverige and ICA Norge. Operating income in 2004 was positively impacted by the gain on the sale of ICA’s 50% interest in Statoil Detaljhandel and ICA’s share in income of Statoil Detaljhandel. Operating income in 2004 was, however, negatively impacted by the write-down to market value of the former Danish operations ISO-ICA A/S.

ICA Sverige reported a lower operating income in 2005 compared to 2004, primarily as a result of the value repositioning program, the negative impact of which primarily occurred in the first two quarters in 2005 due to the timing of savings and costs. ICA Norge reported increased operating income in 2005 primarily as a result of cost cuts and higher gains on property sales. As reported by ICA, ICA Meny and ICA’s joint venture Rimi Baltic improved

their operating income substantially in 2005 compared to 2004, primarily as a result of higher net sales.

On February 22, 2006, ICA announced its intention to sell ICA Meny.

JMR, Portugal

Our share in income of JMR in 2005 decreased slightly compared to 2004. Despite the continued strong competition and the weak economy in Portugal, JMR increased its net sales in 2005 compared to 2004, primarily as a result of higher identical sales and an increase in the number of its stores. Gross profit margin decreased in 2005 compared to 2004, mainly due to fierce price competition. Operating income increased in 2005 primarily as a result of higher net sales and lower operating costs. However, a higher effective tax rate resulted in a lower net income in 2005 compared to 2004.

INCOME FROM DISCONTINUED OPERATIONS

Income from our discontinued operations, which consisted of operational results from discontinued operations and result on divestments, decreased in 2005 to EUR 197 million compared to EUR 265 million 2004, primarily as a result of higher gains on divestments in 2004.

In 2005, operational results of the discontinued operations of G. Barbosa, Paiz Ahold, Deli XL and BI-LO and Bruno’s amounted to EUR 25 million mainly attributable to Paiz Ahold (part of our former “Other Retail” segment) and Deli XL, compared to an operational result in 2004 of EUR 27 million mainly relating to BI-LO and Bruno’s. The decrease in operational results of the discontinued operations in 2005 compared to 2004 was primarily a result of the inclusion in income from our discontinued operations in 2004 of the full-year results of BI-LO and Bruno’s, which we sold in January 2005. BI-LO and Bruno’s operating income in 2004 was somewhat offset by operating losses related to certain under-performing assets that we sold in 2004.

In 2005, our result on divestments decreased compared to 2004. In 2005, we realized a gain of EUR 172 million on the divestments of Paiz Ahold, Deli XL, G. Barbosa, BI-LO and Bruno’s, compared to a gain on divestments of EUR 238 million in 2004 relating to the divestments of Bompreço / Hipercard, Disco and our operations in Spain and Thailand.

For more information on discontinued operations, see Note 12 to our consolidated financial statements included in this annual report.


 

AHOLD ANNUAL REPORT 2005

   65


Table of Contents

> Management’s discussion & analysis

 

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS OF AHOLD

Net income attributable to common shareholders of Ahold in 2005 was EUR 133 million, a significant decrease compared to EUR 885 million in 2004. This decrease in 2005 was primarily a result of the impact of the settlement of the Securities Class Action and the positive impact of EUR 379 million net gain related to the ICA put option transaction in 2004. For more information on the settlement of the Securities Class Action, see “Total Company operating expenses – Settlement securities class action” above and Note 35 to our consolidated financial statements included in this annual report.

ADJUSTMENTS TO CONFORM TO US GAAP

Our consolidated financial statements have been prepared in accordance with IFRS, as adopted by the EU, which differs in certain significant respects from US GAAP. For 2005 and 2004, our net income under IFRS was EUR 159 million and EUR 898 million, respectively, compared to a net loss under US GAAP of EUR 9 million in 2005 and a net income under US GAAP of EUR 89 million in 2004. Under US GAAP, net loss per common share – basic was EUR (0.03) in 2005, compared to a net income per common share – basic of EUR 0.03 in 2004.

The most significant items in reconciling our net income (loss) under IFRS to net income (loss) under US GAAP in 2005 and 2004 are set forth below:

 

       

Euros in millions

   2005          (Restated)
2004
 
 

Items increasing (decreasing) net income in accordance with IFRS:

       

Goodwill

   17        (158 )

Non-current assets held for sale and discontinued operations

   (190 )      (491 )

Investments in joint ventures and associates, net of tax

   (24 )      (261 )

Derivative instruments and loans

   86        48  

Pensions and other post-employment benefits

   (42 )        (50 )

 

The most significant items in reconciling our shareholders’ equity under IFRS to shareholders’ equity under US GAAP in 2005 and 2004 are set forth below:

 

       

Euros in millions

   2005        (Restated)
2004

Items increasing (decreasing) shareholders’ equity in accordance with IFRS:

       

Goodwill

   3,623      3,214

Investments in joint ventures and associates, net of tax

   1,370      1,529

Other intangible assets, net of accumulated amortization

   503        456

The testing methodology for impairments of goodwill under IFRS differs in certain aspects from the impairment testing methodology under US GAAP. With respect to non-current assets held for sale and discontinued operations, IFRS and US GAAP have different definitions of a discontinued operation, as well as differences in the carrying value of assets held for sale. We record our share of income (loss) of joint ventures and associates under both IFRS and US GAAP using the equity method of accounting, but the adjustment reflects various differences between IFRS and US GAAP. For more information about the significant items in reconciling IFRS and US GAAP, as they apply to us, see Note 37 to our consolidated financial statements included in this annual report.

During the process of addressing of our material weaknesses, which no longer exist, we identified certain unintentional errors that were made in the determination of net income (loss) and shareholders’ equity under US GAAP for 2004. To correct these errors, we have restated the US GAAP information in the notes to our consolidated financial statements with the effect of lowering net income by EUR 21 million. Errors relating to years prior to 2004 amounting to EUR 21 million have been adjusted as a reduction in opening equity of financial year 2004. In addition, the cumulative preferred financing shares, which under US GAAP are considered equity instruments, have been reclassified to a separate class of equity, as required by EITF D-98. For more information about our restatement under US GAAP, see Note 37d to our consolidated financial statements included in this annual report.

BUSINESS SEGMENT RESULTS

The following is a discussion of the results of operations, including net sales and operating income, for our business segments other than the Group Support Office. Market share


 

66


Table of Contents

 

as used in this annual report, refers to data published by A.C. Nielsen and is calculated as an annual average.

Stop & Shop/Giant-Landover Arena results

Net sales

The following table sets forth net sales, store counts and sales area information for the Stop & Shop/Giant-Landover Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except

percentages, store count

and sales area

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   13,161      1.6        12,949

Net sales in USD

   16,346      1.5        16,105

Change in identical sales 1

            

Stop & Shop

        0.2       

Giant-Landover

        (3.0 )     

Change in comparable sales 2

            

Stop & Shop

        0.7       

Giant-Landover

        (2.4 )     

Company-operated stores 3

   573           563

New stores

   17           26

Replacement stores

   10           17

Remodeled stores

   15           19

Closed stores

   6           6

Sales area in thousands of square feet 3, 4

   21,720           21,215

Net sales as a percentage of consolidated net sales

   29.6%                   29.0%

 

1 The identical sales in 2005 are compared to 2004 identical sales (52 weeks in 2005 and 52 weeks in 2004).
2 The comparable sales in 2005 are compared to 2004 comparable sales (52 weeks in 2005 and 52 weeks in 2004).
3 At year-end.
4 The sales area in thousands of square meters in 2005 and 2004 was 2,020 and 1,969, respectively.

 

·   The arena’s net sales in U.S. dollars increased in 2005 compared to 2004, which was largely attributable to the opening of new stores and replacement stores.
·   Net sales growth in 2005 was negatively affected by the inclusion of the additional week in 2004. Excluding week 53 of 2004, net sales increased by 3.5% in 2005.
·   In 2005, identical sales at Stop & Shop, excluding net sales of gasoline, decreased by 0.4%. Gasoline prices experienced a higher rate of inflation than food prices in 2005. Net sales of gasoline had a positive effect on Stop & Shop’s identical sales in 2005.
·   Net sales per transaction at Stop & Shop increased by 3.6% in 2005 compared to 2004, primarily as a result
 

of an increase in the average item value by 4.6%. The number of transactions at Stop & Shop decreased by 3.3% in 2005 compared to 2004, primarily as a result of a lower shopping frequency.

·   Net sales per transaction at Giant-Landover increased by 0.7% in 2005 compared to 2004, primarily as a result of an increase in the average item value by 4.0%. The number of transactions at Giant-Landover decreased by 3.7% in 2005 compared to 2004, primarily as a result of a lower shopping frequency.
·   Identical sales and comparable sales in 2005 were negatively impacted by pressure from new store openings by competitors and increased competitive activities in the form of major promotional campaigns. The arena also faced increased competition from alternative retail formats, including traditional discount stores and wholesale club outlets.
·   Despite the increased competition, Stop & Shop was able to increase its market share to 24.5% in 2005 compared to 24.0% in 2004, while Giant-Landover’s market share decreased to 30.6% compared to 31.2% in 2004.
·   Net sales in 2005 included USD 108 million of net sales from our subsidiary the American Sales Company to BI-LO and Bruno’s and Wilson Farms which, prior to their divestments in 2005, were eliminated as intercompany sales. The American Sales Company provides purchasing and distribution services to the U.S. arenas. Following January 1, 2006 no sales, have been made to BI-LO and Bruno’s and Wilson Farms.
·   The arena encountered strong competition from traditional supermarkets in the New England market, which intensified as a result of continuing consolidation, including Shaw’s, which was bought by Albertsons, which in its turn has agreed to be acquired by Supervalu.
·   At Peapod net sales in 2005 increased by 26.5% compared to 2004. Excluding week 53 of 2004, net sales increased by 28.6% in 2005. This increase was driven by higher customer counts, in part as a result of an increase in the market area served by Peapod, and higher net sales per transaction.
·   During 2005, the arena added Staples, Inc. as a partner for collaboration on a Staples branded store-in-store section of school and office supplies in the arena’s stores. These Staples sections were introduced at a majority of the arena’s retail locations in 2005. During 2005, the arena also launched Nature’s Promise, its organic foods line of private label products.

 

AHOLD ANNUAL REPORT 2005

   67


Table of Contents

> Management’s discussion & analysis

 

Operating income

The following table sets forth information relating to operating income for the Stop & Shop/Giant-Landover Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   13,161      1.6        12,949

Net sales in USD

   16,346      1.5        16,105

Operating income in EUR

   708      2.5        691

Operating income in USD

   882      2.6        860

Operating income in USD as a percentage of net sales

   5.4%           5.3%

Change in gross profit margin

        (0.7 )     

Change in operating expenses as a percentage of net sales

            0.8           

 

·   Competitive pressure from new store openings and increased promotional activity resulted in a decrease in the gross profit margin in 2005. In addition, increased costs for perishable products, which were not fully passed on to customers, had a negative impact on gross profit margin in 2005. The arena was able to partially offset the impact of the increased promotional activities on the gross profit margin by reducing the cost of goods sold primarily as a result of vendor negotiations. The decrease in gross profit margin at Stop & Shop was greater than the decrease at Giant-Landover.
·   Operating income increased in 2005 compared to 2004. However, excluding the impact of the USD 24 million restructuring charge in 2005 relating to the restructuring of the Giant-Landover supply chain, the conversion of eight Super-G stores to the Stop & Shop banner and the closing of four Super-G stores, as well as the increased insurance loss reserve totaling USD 45 million in 2004 and the USD 54 million integration expense in 2004, operating income decreased in 2005.
·   Operating income in 2005 was negatively impacted by an increase in energy prices compared to 2004.
·   Operating income was negatively impacted by non-current asset impairment of USD 10 million in 2005 compared to USD 48 million in 2004. In 2005, the arena recorded a USD 9 million real estate gain, compared to a USD 2 million gain in 2004, offset by a USD 9 million loss related to a lease termination in 2005.
·   The arena’s capital expenses for store development were lower in 2005 compared to 2004. The arena’s capital expenses in 2006 are expected to remain comparable to 2005. Giant-Landover plans to replace or remodel
 

18 stores as part of its store upgrade program over the next two years. In addition, health care costs are expected to increase in 2006.

Giant-Carlisle/Tops Arena results

Net sales

The following table sets forth net sales, store counts and sales area information for the Giant-Carlisle/Tops Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages, store count

and sales area

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   4,989      (4.2 )      5,209

Net sales in USD

   6,201      (4.3 )      6,480

Change in identical sales 1

        (0.3 )     

Giant-Carlisle

        3.6       

Tops

        (4.7 )     

Change in comparable sales 2

        0.8       

Giant-Carlisle

        5.1       

Tops

        (3.9 )     

Company-operated stores 3

   262           477

Franchise stores 3

   5           6

New stores

   4           5

Replacement stores

   6           2

Remodeled stores

   10           13

Closed stores

   220 4           3

Sales area in thousands of square feet 3, 5

   9,788           10,414

Net sales as a percentage of consolidated net sales

   11.2%                   11.7%

 

1 The identical sales in 2005 are compared to 2004 identical sales (52 weeks in 2005 and 52 weeks in 2004).
2 The comparable sales in 2005 are compared to 2004 comparable sales (52 weeks in 2005 and 52 weeks in 2004).
3 At year-end.
4 This includes the divested 198 Wilson Farms and SugarCreek convenience stores.
5 The sales area in thousands of square meters in 2005 and 2004 was 909 and 968, respectively.

 

·  

The decrease in net sales in U.S. dollars in 2005 for the arena was largely attributable to the divestment of 198 Wilson Farms and SugarCreek convenience stores in the second quarter of 2005. Net sales in 2005 were also negatively affected by the inclusion of the additional week in 2004. Excluding week 53 of 2004 and the divested convenience stores, net sales increased by 0.5%. Tops continued its portfolio rationalization program in order to focus on its core business to improve long-term success. As a result nine northeast Ohio supermarkets were closed

 


68


Table of Contents

 

 

and 10 of the 31 eastern New York stores planned for divestment were closed or sold in 2005.

·   Identical and comparable sales at Giant-Carlisle increased primarily as a result of consistent growth in net sales per transaction, driven by successful customer loyalty programs, ongoing effective pricing and promotional activities. The number of transactions at identical Giant-Carlisle stores decreased by 3.3% in 2005 compared to 2004. This decrease was primarily a result of a lower shopping frequency because of a trend of increased trip consolidation. Furthermore the impact of net sales of gasoline had a favorable impact on identical sales because gasoline prices had a higher rate of infl ation in 2005 than food prices. Excluding net sales of gasoline, identical sales increased by 2.6%.
·   Identical and comparable sales at Tops decreased, primarily caused by a weak economic environment and strong competition in the northeast Ohio region. Net sales per transaction at Tops remained stable in 2005 compared to 2004.
·   Market share for Giant-Carlisle increased to 29.5% in 2005 from 28.5% in 2004 mainly as a result of strong identical sales growth and store openings. Market share for Tops decreased to 23.8% in 2005 from 26.0% in 2004 mainly as a result of the portfolio rationalization program and an increase in competitive pressure.

Operating income

The following table sets forth information relating to operating income for the Giant-Carlisle/Tops Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except

percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   4,989      (4.2 )      5,209

Net sales in USD

   6,201      (4.3 )      6,480

Operating income in EUR

   72      (36.8 )      114

Operating income in USD

   92      (35.2 )      142

Operating income in USD as a percentage of net sales

   1.5%           2.2%

Change in gross profit margin

        0.4       

Change in operating expenses as a percentage of net sales

            (1.1 )         

 

·   The arena’s operating income decreased in 2005 compared to 2004, primarily as a result of higher impairment losses at Tops, especially in the northeast Ohio region. This decrease was partly offset by improved net sales at Giant-Carlisle.
·   The arena’s gross profi t margin increased as a result of continued improvements of inventory shrinkage, product mix, merchandising and operational efficiencies.
·   Operating expenses in 2005 included non-current asset impairments of USD 85 million, a goodwill impairment loss of USD 17 million and gains on the disposal of property, plant and equipment of USD 24 million. In 2004, the arena’s operating expenses included an addition of USD 11 million to the loss reserve for self-insurance for the U.S. operations. In addition, 2004 included non-current asset impairments of USD 33 million and an intangible assets impairment loss of USD 5 million relating to software. Excluding these items, operating expenses as a percentage of net sales were higher in 2005 compared to 2004, mainly due to higher IT, consulting and utility costs, as well as lower net sales.
·   The arena’s operating income in 2005 compared to 2004 was negatively impacted by the additional week in 2004.
·   In 2006, the arena expects to continue its portfolio rationalization program at Tops.

Albert Heijn Arena results

Net sales

The following table sets forth net sales, store counts and sales area information for the Albert Heijn Arena in 2005 and 2004:

 

     2005        2004
           

In millions, except percentages, store count and sales area

   (52
weeks)
       Change
(%)
       (53
weeks)

Net sales in EUR

   6,585      2.6      6,418

Change in identical sales 1

        3.7     

Change in comparable sales 2

        4.1     

Company-operated stores 3

   994           983

Franchise stores 3

   657           645

New stores

   45           33

Replacement stores

   29           24

Remodeled stores

   124           133

Closed stores

   22           29

Sales area in thousands of square meters 3, 4

   934           930

Net sales as a percentage of consolidated net sales

   14.8%                 14.4%

 

 

1 The identical sales in 2005 are compared to 2004 identical sales (52 weeks in 2005 and 52 weeks in 2004).
2 The comparable sales in 2005 are compared to 2004 comparable sales (52 weeks in 2005 and 52 weeks in 2004).
3 At year-end.
4 The sales area in thousands of square feet in 2005 and 2004 was 10,052 and 10,015, respectively.

 

AHOLD ANNUAL REPORT 2005

   69


Table of Contents

> Management’s discussion & analysis

 

·   The increase in net sales for the arena was largely attributable to the strong increase in sales volume as a result of an increased number of transactions at Albert Heijn. The increase occurred despite the additional week in 2004. Excluding week 53 of 2004, the arena’s net sales in 2005 increased by 4.6% to EUR 6.6 billion compared to 2004.
·   The increase in the arena’s net sales in 2005 was primarily driven by the success of Albert Heijn’s value repositioning program, its strong promotional activities and increases in its total sales area in 2005, partly offset by lower prices.
·   Net sales at the arena’s Internet retail company, Albert, increased by 26.6% in 2005. Excluding week 53 of 2004, Albert’s net sales increased by 28.1%.
·   The arena closed four Albert Heijn stores in 2005. At the end of 2004, 12 convenience stores at gas stations were closed due to the expiration of the arena’s contract with ESSO.
·   The increases in identical and comparable sales at Albert Heijn in 2005 compared to 2004 were primarily driven by the value repositioning program and strong promotional activities. Albert Heijn had substantially higher net sales due to an increased number of transactions, while net sales per transaction slightly decreased as a result of the continuing food price deflation in the Dutch food retail market.
·   In 2005, Albert Heijn continued its value repositioning program for its private label products, which resulted in an increase of net sales of such products.
·   The market share of Albert Heijn increased to 26.4% compared to 25.3% in 2004.
·   Net sales at Etos decreased by 3.5% to EUR 341 million in 2005. Excluding week 53 of 2004, net sales at Etos in 2005 decreased by 1.2% compared to 2004 mainly as result of lower prices and fierce competition. During the second part of 2005 Etos began to implement a renewed commercial strategy focused on competitive pricing and at the same time strengthening quality and service. The first positive effects of the strategy were seen during the 2005 holiday season.
·   In 2006, Albert Heijn expects to continue the value repositioning program, to focus on adding new stores, to make bulk shopping, which is targeted at families with children, more attractive and to add next generation store prototypes.

 

Operating income

The following table sets forth information relating to operating income for the Albert Heijn Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   6,585      2.6        6,418

Operating income in EUR

   288      (9.1 )      317

Operating income as a percentage of net sales

   4.4%           4.9%

Change in gross profit margin

        (0.9 )     

Change in operating expenses as a percentage of net sales

            0.4           

 

·   Operating income for the arena decreased in 2005 compared to 2004 primarily as a result of higher pension and other retirement costs, which increased by EUR 34 million compared to 2004, mainly due to pension plan amendments, changes in the key assumptions used to calculate benefit obligations and net periodic benefit costs, as well as new agreements with labor unions.
·   The arena’s operating income in 2005 compared to 2004 was negatively impacted by the additional week in 2004.
·   The arena’s operating income in 2005 was positively impacted by lower non-current asset impairment losses which decreased by EUR 12 million compared to 2004, partly offset by lower gains of EUR 3 million on the sale of real estate compared to 2004.
·   Albert Heijn’s ongoing value repositioning program combined with strong promotional activities resulted in fierce price competition in the Dutch food retail market and put pressure on gross profit margins, which decreased in 2005 compared to 2004.
·   The ongoing cost reduction program at Albert Heijn is focused on lowering logistic and transportation expenses, other variable store expenses and administrative expenses as a percentage of net sales. As a result of these cost reductions and efficiency improvements, as well as the favorable impact of the increase in net sales, operating expenses as a percentage of net sales were lower in 2005 compared to 2004.
·   Operating income at Etos was lower in 2005 compared to 2004, primarily as a result of lower net sales, lower prices and the start-up costs for its new commercial strategy initiated in the second half of 2005.
·   Albert Heijn expects to continue its cost reduction program in 2006 and to focus on efficiency and optimization programs at the store level and throughout the supply chain.

 

70


Table of Contents

 

Central Europe Arena results

Net sales

The following table sets forth net sales, store counts and sales area information for the Central Europe Arena in 2005 and 2004:

 

     2005          2004
           

In millions, except

percentages, store count

and sales area

   (12
months)
       Change
(%)
 
 
       (12
months)

Net sales in EUR 1

   1,761      4.6        1,683

Change in identical sales 2

        (4.9 )     

Company-operated stores 3

   499           442

Franchise stores 3

   3          

New stores

   80           25

Remodeled stores

   36           37

Closed stores

   20           10

Sales area in thousands of square meters 3, 4

   685           686

Net sales as a percentage of consolidated net sales

   4.0%                   3.8%

 

1 Consolidated net sales for the Central Europe Arena are presented in EUR, but occur in the local currency of each of the countries where the stores are located.
2 Comparable sales are the same as identical sales.
3 At year-end.
4 The sales area in thousands of square feet in 2005 and 2004 was 7,371 and 7,388, respectively.

 

·   The increase in net sales in 2005 compared to 2004 was primarily attributable to favorable changes in currency exchange rates, the acquisition of 58 Julius Meinl stores during the second half of 2005 and the opening of 26 new stores. Net sales, excluding currency impact, decreased by 3.4%.
·   Net sales in 2005 were negatively impacted by the divestment of 13 Polish hypermarkets in the first quarter of 2005, the closing of seven unprofitable small stores and lower identical sales. Net sales, excluding currency impact and the divested Polish hypermarkets, increased by 4.9%. Excluding the impact of currency exchange rates, the divested Polish hypermarkets and the acquired Julius Meinl stores net sales in 2005 increased by 3.6%.
·   The decrease in identical sales in 2005 was primarily caused by lower net sales per transaction as a result of fierce price competition and a strong customer focus on discounted articles, as well as by fewer transactions.
·   Market share in the Czech Republic increased as a result of the acquired Julius Meinl stores and the opening of new stores, despite the negative publicity concerning the quality of certain perishable products. Market share in Slovakia increased slightly and the market share in Poland
 

decreased primarily due to the divestment of the Polish hypermarkets in the first quarter of 2005.

Operating loss

The following table sets forth information relating to operating loss for the Central Europe Arena in 2005 and 2004:

 

     2005          2004  
           

In millions, except percentages

   (12
months)
 
 
       Change
(%)
 
 
       (12
months)
 
 

Net sales in EUR 1

   1,761        4.6        1,683  

Operating loss in EUR

   (44 )      (18.5 )      (54 )

Operating loss as a percentage of net sales

   (2.5% )           (3.2% )

Change in gross profit margin

        1.0       

Change in operating expenses as a percentage of net sales

              (0.3 )           

 

1 Consolidated net sales for the Central Europe Arena are presented in EUR, but occur in the local currency of each of the countries where the stores are located.

 

·   The arena’s operating loss decreased in 2005 compared to 2004, primarily as a result of a gain of EUR 19 million on sales of real estate in 2005, compared to a gain of EUR 9 million in 2004, and a EUR 12 million write-off of receivables and inventories in 2005. In addition, operating loss decreased in 2005 as a result of impairment losses on property, plant and equipment and other intangible assets of EUR 5 million in 2005 compared to EUR 30 million in 2004. In 2004, operating expenses were positively affected by EUR 10 million related to the release of a provision for costs in connection with the termination of a shopping center lease agreement.
·   Excluding gains on sale of real estate and impairment losses, the arena’s operating loss decreased by EUR 25 million primarily due to higher operating expenses which were partially offset by a higher gross profit.
·   Despite the intensive price competition, gross profit increased primarily due to higher net sales, a higher gross profit margin as a result of more centralized sourcing, and the divestment of the Polish hypermarkets.
·   Operating expenses, excluding gains on sales of real estate and impairment losses, as a percentage of net sales, increased in 2005 primarily as a result of lower cost leverage due to declining identical sales, project costs related to the start-up of a new centralized accounting center, investments in the quality of the backoffice operations to prepare for future growth.

 

AHOLD ANNUAL REPORT 2005

   71


Table of Contents

> Management’s discussion & analysis

 

·   In March 2006, the arena sold two shopping centers in Poland and one in the Czech Republic to a subsidiary of ING Real Estate.
·   In March 2006, the arena sold two shopping centers in Poland and one in the Czech Republic to a subsidiary of ING Real Estate.
·   In 2006, the arena expects to continue to increase the number of supermarkets and compact hypermarkets and will seek to improve competitiveness through its pricing policy and by rationalizing the product assortment, including improvements in its offering of perishable and private label products.

Schuitema results

Net sales

The following table sets forth net sales, store counts and sales area information for Schuitema in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages, store count and sales area

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   3,128      (1.7 )      3,181

Company-operated stores 1

   105           93

Associated stores 1

   357           378

New stores

   1           7

Closed stores

   10           14

Sales area in thousands of square meters 1, 2

   428           423

Net sales as a percentage of consolidated net sales

   7.0%                   7.1%

 

1 At year-end.
2 The sales area in thousands of square feet in 2005 and 2004 was 4,601 and 4,547, respectively.

 

·   Net sales in 2005 decreased compared to 2004 mainly as a result of the additional week in 2004. Excluding week 53 of 2004, net sales increased by 0.2%. This increase in net sales largely reflects the favorable impact of an increase in sales space, partially offset by low price levels as a result of fierce competition and the closing of underperforming stores.
·   As of January 1, 2006, 315 of the 462 stores were operated under the new C1000 format which provides for larger stores with customer-appealing layouts, compared to 284 as of January 2, 2005.
·   Schuitema’s market share in 2005 decreased to 14.8% compared to 14.9% in 2004, primarily as a result of weak net sales in the last quarter of 2005 mainly as a result of fierce competition.

 

Operating income

The following table sets forth information relating to operating income for Schuitema in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   3,128      (1.7 )      3,181

Operating income in EUR

   95      41.8        67

Operating income as a percentage of net sales

   3.0%           2.1%

Change in gross profit margin

        0.8       

Change in operating expenses as a percentage of net sales

            0.1           

 

·   Operating income at Schuitema increased in 2005 compared to 2004 primarily as a result of non-operational effects in 2004. Excluding the impact of the EUR 74 million impairments in 2004 relating to stores, capitalized commercial expenses and loan receivables, operating income in 2005 was substantially lower compared to 2004.
·   The arena’s gross profit margin increased in 2005 compared to 2004 primarily as a result of decreasing expenditures for commercial activities and further cost savings in logistics.
·   The arena’s operating income in 2005 compared to 2004 was negatively impacted by week 53 of 2004.
·   In 2006, Schuitema will focus on maintaining and, where possible, enhancing the market position of its C1000 store format, including efforts to improve its organizational structure in order to support its future activities, including the roll-out of its fourth generation stores focusing on higher quality at lower prices.

U.S. Foodservice results

Net sales

The following table sets forth net sales information for U.S. Foodservice in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   14,872      (2.0 )      15,170

Net sales in USD

   18,468      (2.0 )      18,847

Net sales as a percentage of consolidated net sales

   33.4%                   34.0%

 

·  

The decrease in net sales in U.S. dollars in 2005 compared to 2004 was largely attributable to the effect of the additional week in 2004 and to U.S. Foodservice’s

 


72


Table of Contents

 

 

decision to exit certain businesses. During 2005, currency exchange differences between the U.S. dollars and the euro had a minimal effect on net sales as reported in euros.

·   Excluding week 53 of 2004, net sales in U.S. dollars decreased in 2005 by 0.5% to USD 18.5 billion.
·   Net sales in 2005 were negatively impacted by approximately 2% as a result of the company’s decision to exit certain businesses.
·   During 2005, the impact of food cost inflation had minimal impact on net sales at U.S. Foodservice.

Operating income

The following table sets forth information relating to operating income for U.S. Foodservice in 2005 and 2004:

 

     2005          2004
           

In millions, except percentages

   (52
weeks)
       Change
(%)
 
 
       (53
weeks)

Net sales in EUR

   14,872      (2.0 )      15,170

Net sales in USD

   18,468      (2.0 )      18,847

Operating income in EUR

   86      59.3        54

Operating income in USD

   107      59.7        67

Operating income in USD as a percentage of net sales

   0.6%                   0.4%

 

·   Operating income in 2005 increased compared to 2004 due to a higher gross profit margin, which was partially offset by higher operating expenses, including restructuring charges of USD 61 million in 2005.
·   The increase in gross profit margin is primarily a result of improved sales mix, pricing and product cost reductions due to improved procurement practices. The restructuring charges in 2005 related to planned workforce reductions, lease expenses for facilities to be exited, charges relating to termination of contracts and included USD 20 million in impairment losses. These restructuring charges primarily related to the strategic reorganization into the Broadline and Multi-Unit operating companies and the previously announced headcount reductions involving nearly 700 positions. The increase in operating expenses was partially offset by a gain of USD 19 million relating to the sale of Sofco in 2005.
·   Excluding the restructuring charges and the gain on the sale of Sofco in 2005, and also excluding the pension curtailment gain of USD 12 million in 2004, operating expenses as a percentage of net sales increased slightly in 2005 compared to 2004. Significantly increased fuel costs were partially offset by lower bad debt expenses and operating efficiencies in distribution and warehousing. U.S. Foodservice experienced improving trends in its key expense metrics in 2005, including increased cases per mile and increased average drop sizes.
·   Operating income in both 2005 and 2004 reflect approximately USD 42 million of amortization expense that related to other intangible assets that expires in 2009.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The following table sets forth a reconciliation of net sales in 2005 adjusted to net sales in 2004:


 

<
          2005        Adjusted
2004
       Last week
2004
       2004
                 

In millions

        (52 weeks)        (52 weeks)        (1 week)        (53 weeks)

Total Company

   EUR    44,496      43,871      739      44,610

Retail

                    

Stop & Shop/Giant-Landover Arena

   USD    16,346      15,800      305      16,105

Giant-Carlisle/Tops Arena

   USD    6,201      6,352      128      6,480

Albert Heijn Arena

   EUR    6,585      6,296      122      6,418

Schuitema

   EUR    3,128      3,121      60      3,181