-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M0SuKpp/ZWm06F0cRrSw7o8C/4HQ4Ix2mQdDllQy2eg81C/JbnjBfOzmy6Q8nKJN +VaNlLNLW+IJu9NBqrllNQ== 0000950149-98-000481.txt : 19980325 0000950149-98-000481.hdr.sgml : 19980325 ACCESSION NUMBER: 0000950149-98-000481 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFEWAY INC CENTRAL INDEX KEY: 0000086144 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 943019135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00041 FILM NUMBER: 98571823 BUSINESS ADDRESS: STREET 1: 5918 STONERIDGE MALL RD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5104673000 MAIL ADDRESS: STREET 1: 5918 STONERIDGE MALL ROAD CITY: PLEASANTON STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: SAFEWAY STORES INC DATE OF NAME CHANGE: 19900226 10-K 1 FORM 10-K FOR THE PERIOD ENDED 1/3/98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number 1-41 SAFEWAY INC. (Exact name of Registrant as specified in its charter) Delaware 94-3019135 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 5918 Stoneridge Mall Road Pleasanton, California 94588 ------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (925) 467-3000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $0.01 par value per share New York Stock Exchange 9.30% Senior Secured Debentures due 2007 New York Stock Exchange 10% Senior Notes due 2002 New York Stock Exchange 9.35% Senior Subordinated Notes due 1999 New York Stock Exchange 10% Senior Subordinated Notes due 2001 New York Stock Exchange 9.65% Senior Subordinated Debentures due 2004 New York Stock Exchange 9.875% Senior Subordinated Debentures due 2007 New York Stock Exchange 6.85% Senior Notes due 2004 New York Stock Exchange 7.00% Senior Notes due 2007 New York Stock Exchange 7.45% Senior Debentures due 2027 New York Stock Exchange
(Cover continued on following page) ================================================================================ 2 (Cover continued from previous page) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Aggregate market value of the voting stock held by non-affiliates of Registrant as of March 17, 1998, was $13.2 billion. As of March 17, 1998, there were issued and outstanding 478.7 million shares of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the extent specified herein:
Document Description 10-K Part -------------------- --------- 1997 Annual Report to Stockholders I, II, III, IV 1998 Proxy Statement dated March 27, 1998 III
3 SAFEWAY INC. AND SUBSIDIARIES PART I ITEM 1. BUSINESS AND ITEM 2. PROPERTIES GENERAL: Information appearing under the caption "Company in Review" beginning on page 12 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. RETAIL OPERATIONS: Information appearing under the captions "Retail Operations" and "Distribution" on pages 12 and 13 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. MANUFACTURING AND WHOLESALE OPERATIONS: Information appearing under the caption "Manufacturing and Wholesale Operations" on page 13 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. Various agricultural commodities constitute the principal raw materials used by the Company in the manufacture of its food products. Management believes that raw materials for its products are not in short supply, and all are readily available from a wide variety of independent suppliers. CAPITAL EXPENDITURES: Information appearing under the caption "Capital Expenditure Program" on pages 13 and 14 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. Safeway's new stores, remodels, and closures during the last five years were as follows:
Total Five Years 1997 1996 1995 1994 1993 ----- ---- ---- ---- ---- ---- New stores: New locations 53 15 14 10 6 8 Replacements 80 22 16 22 14 6 --- -- -- -- -- -- 133 37 30 32 20 14 === == == == == == Remodels: (Note A) Expansions 110 34 29 13 7 27 "Four-Wall" remodels 436 147 112 95 64 18 --- --- --- -- -- -- 546 181 141 108 71 45 === === === === == == Vons stores acquired 316 316 - - - - Closures 184 37 37 35 36 39 Stores at year-end 1,368 1,052 1,059 1,062 1,078
Note A. Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000. 3 4 SAFEWAY INC. AND SUBSIDIARIES ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS: This information is omitted because the Company has no significant lines of business or industry segments except the principal business of operating retail supermarkets. TRADEMARKS: The Company has invested significantly in the development and protection of the "Safeway" name. The right to use the "Safeway" name is considered to be an important asset. Safeway also owns approximately 100 other trademarks registered or pending in the United States Patent and Trademark Office, including its product line names such as Safeway, Safeway SELECT, Lucerne and Mrs. Wright's, and the marks Vons and Pavilions. Each trademark registration is for an initial period of 10 or 20 years and is renewable for as long as the use of the trademark continues. Safeway considers certain of its trademarks to be of material importance to its business and actively defends and enforces such trademarks. Safeway has also registered certain of its trademarks in Canada. WORKING CAPITAL: At year-end 1997, working capital deficit was composed of $2.0 billion of current assets and $2.5 billion of current liabilities. Normal operating fluctuations in these substantial balances can result in changes to cash flow from operations presented in the Consolidated Statements of Cash Flows that are not necessarily indicative of long-term operating trends. There are no unusual industry practices or requirements relating to working capital items. COMPETITION: Food retailing is intensely competitive. The number of competitors and the amount of competition experienced by Safeway's stores vary by market area. The principal competitive factors that affect the Company's business are location, quality, service, price and consumer loyalty to other brands and stores. Local, regional, and national food chains as well as independent food stores and markets comprise the principal competition, although Safeway also faces substantial competition from convenience stores, liquor retailers, membership warehouse clubs, specialty retailers, supercenters, and large-scale drug and pharmaceutical chains. Safeway and its competitors engage in price competition which, from time to time, has adversely affected operating margins in many of its markets. COMPLIANCE WITH ENVIRONMENTAL LAWS: The Company's compliance with the federal, state, and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relate to the protection of the environment has not had and is not expected to have a material adverse effect upon the financial position or results of operations of the Company. 4 5 SAFEWAY INC. AND SUBSIDIARIES ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED) EMPLOYEES: At year-end 1997, Safeway Inc. ("Safeway" or the "Company") had approximately 147,000 full and part-time employees. Approximately 90% of Safeway's employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three-year terms, with some agreements having terms of up to five years. Accordingly, Safeway renegotiates a significant number of these agreements every year. By year-end 1997, Safeway had concluded early negotiations and signed new labor contracts covering employees whose collective bargaining agreements had been due to expire in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Spokane, Washington. In addition, union members in British Columbia ratified a new labor contract. Management considers the terms of these new contracts to be satisfactory. As a result of these early negotiations, the only significant remaining labor contracts due to expire in 1998 are in the Seattle and Winnipeg operating areas covering approximately 110 stores. In the last three years there have been four significant work stoppages. During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. The Company continued to operate the affected stores with a combination of replacement workers, management and employees who returned to work. During the second and third quarters of 1996, Safeway was engaged in a labor dispute in British Columbia which lasted 40 days and affected 86 stores. Under Provincial law in British Columbia, replacement workers could not be hired, and therefore all the affected stores were closed throughout the strike-lockout. Separately, the Company was engaged in a strike-lockout in the Denver operating area which lasted 44 days also during the second and third quarters of 1996. All of the Denver stores operated during the strike-lockout, largely with replacement workers. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. These work stoppages were resolved in a manner that management considered generally satisfactory. Safeway estimates that the Alberta strike reduced 1997 net income by approximately $0.04 per share, that the combined impact of the disputes in Denver and British Columbia reduced 1996 earnings by approximately $0.07 per share, and that the dispute in northern California reduced 1995 earnings by an estimated $0.01 per share. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES: Note L to the consolidated financial statements, included on page 36 of the Company's 1997 Annual Report to Stockholders and incorporated herein by this reference, contains financial information by geographic area. At year-end 1997, the Company's foreign operations were composed of retail grocery and wholesale operations in Canada and a 49% equity investment in Casa Ley, S.A. de C.V. ("Casa Ley"), a Mexican company. Other than the competitive nature of the retail food business and the economic situation in Mexico, the Company is not aware of any significant risks of operating in these foreign countries. 5 6 SAFEWAY INC. AND SUBSIDIARIES The Company's policy for translating Casa Ley's financial statements into U.S. dollars is described under the caption "Translation of Foreign Currencies" on page 25 of the Company's 1997 Annual Report to Stockholders. Casa Ley had total assets of $319.0 million and $263.1 million as of September 30, 1997 and 1996, based on financial information provided by Casa Ley. Sales and net income for Casa Ley were as follows (in millions):
12 months ended September 30, ---------------------------------- 1997 1996 1995 ------ ------ ------ Sales $943.8 $810.1 $861.4 ====== ====== ====== Net income $ 38.6 $ 33.8 $ 17.9 ====== ====== ======
ITEM 3. LEGAL PROCEEDINGS Information about legal proceedings appearing under the caption "Legal Matters" as reported in Note K to the consolidated financial statements on page 35 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. 6 7 SAFEWAY INC. AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders during the fourth quarter of 1997. EXECUTIVE OFFICERS OF THE COMPANY The names and ages of the current executive officers of the Company and their positions as of March 17, 1998, are set forth below. Unless otherwise indicated, each of the executive officers served in various managerial capacities with the Company over the past five years. None of the executive officers named below is related to any other executive officer or director by blood, marriage or adoption. Officers serve at the discretion of the Board of Directors.
Year First Elected Name and all Positions with the Company ------------------------- Held at March 17, 1998 Age Officer Present Office - ---------------------- --- ------- -------------- Steven A. Burd 48 1992 1992 President and Chief Executive Officer Kenneth W. Oder(1) 50 1993 1993 Executive Vice President Labor Relations, Human Resources, Law and Public Affairs Julian C. Day(2) 45 1993 1993 Executive Vice President and Chief Financial Officer David F. Bond(3) 44 1997 1997 Senior Vice President Finance and Control David T. Ching(4) 45 1994 1994 Senior Vice President and Chief Information Officer Lawrence V. Jackson(5) 44 1997 1997 Senior Vice President Supply Operations Diane Peck 49 1990 1995 Senior Vice President Human Resources Melissa C. Plaisance 38 1993 1995 Senior Vice President Finance and Public Affairs
7 8 SAFEWAY INC. AND SUBSIDIARIES ITEM 4. EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
Year First Elected Name and all Positions with the Company ------------------------- Held at March 17, 1998 Age Officer Present Office - ---------------------- --- ------- -------------- Larree M. Renda 39 1991 1994 Senior Vice President Corporate Retail Operations Michael C. Ross(1) 50 1993 1993 Senior Vice President Secretary and General Counsel Gary D. Smith 55 1988 1995 Senior Vice President and Director of Marketing Richard A. Wilson 64 1988 1988 Vice President Tax Donald P. Wright 45 1991 1991 Senior Vice President Real Estate and Engineering
- ---------- (1) Mr. Oder and Mr. Ross were previously partners at the law firm of Latham & Watkins. (2) Mr. Day was previously self-employed as an independent consultant. (3) Mr. Bond was previously a partner at the accounting firm of Deloitte & Touche LLP. (4) During 1994, Mr. Ching was the General Manager -- North America for the British American Consulting Group. From 1979 to 1994, he was employed by Lucky Stores, Inc., where he was the Senior Vice President of Information Systems beginning in 1989. (5) Mr. Jackson was previously the Senior Vice President, Worldwide Operations of PepsiCo Food Systems, a division of PepsiCo, Inc. from 1995-97, and Vice President and General manager of Pepsi-Cola Company, a unit of PepsiCo, Inc., from 1992-95. Section 16(a) Beneficial Ownership. Information appearing under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated herein by this reference. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $0.01 par value, is listed on the New York Stock Exchange. Information as to quarterly sales prices for the Company's common stock appears in Note M to the consolidated financial statements on page 37 of the Company's 1997 Annual Report to Stockholders and is incorporated herein by this reference. There were 9,162 stockholders of record as of March 17, 1998; however, approximately 76% of the Company's outstanding stock is held in "street name" by depositories or nominees on behalf of beneficial holders. The price per share of common stock, as reported on the New York Stock Exchange Composite Tape, was $35 1/2 at the close of business on March 17, 1998. 8 9 SAFEWAY INC. AND SUBSIDIARIES ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (CONTINUED) Holders of common stock are entitled to receive dividends if, as, and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued. The Company has not paid dividends on common stock through 1997 and has no current plans for dividend payments. ITEM 6. SELECTED FINANCIAL DATA The "Five-Year Summary Financial Information" included on page 15 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. The Five-Year Summary should be read in conjunction with the Company's consolidated financial statements and accompanying notes incorporated by reference in Item 8, Consolidated Financial Statements and Supplementary Data. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information appearing under the caption "Financial Review" on pages 16 through 18 and under the caption "Capital Expenditure Program" on pages 13 and 14 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. Information regarding the terms of outstanding indebtedness appearing in Note C to the consolidated financial statements on pages 27 through 28 of the Company's 1997 Annual Report to Stockholders is incorporated herein by this reference. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the uncoming calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary to avoid system failures and the temporary inability to process transactions or engage in other normal business activities. The Company utilizes a significant number of computer software programs and operating systems across its entire organization, including applications used in stores, manufacturing, product development, financial business systems and various administrative functions. In addition, the Company is communicating with major vendors to determine the extent to which the Company is vulnerable to third-party Year 2000 compliance issues. Given information known at this time about the Company's systems that are non-compliant, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, management does not expect Year 2000 compliance costs to have any material adverse impact on the Company's liquidity or ongoing results of operations. 9 10 SAFEWAY INC. AND SUBSIDIARIES By year-end 1997, Safeway had concluded early negotiations and signed new labor contracts covering employees whose collective bargaining agreements had been due to expire in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Spokane, Washington. In addition, union members in British Columbia ratified a new labor contract. Management considers the terms of these new contracts to be satisfactory. As a result of these early negotiations, the only significant remaining labor contracts due to expire in 1998 are in the Seattle and Winnipeg operating areas covering approximately 110 stores. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 19 through 39 of the Company's 1997 Annual Report to Stockholders, which include the consolidated financial statements, Computation of Earnings Per Common Share and Common Share Equivalent (listed as Exhibit 11.1 to Item 14(a)3), and the Independent Auditors' Report as listed in Item 14(a)1, are incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors of the Company. Information on the nominees for election as Directors and the continuing Directors of the Company, which appears under the caption "Election of Directors" in the Company's 1998 Proxy Statement, is incorporated herein by this reference. Executive Officers of the Company. See PART I under the caption "Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION Information appearing under the captions "Executive Compensation" and "Pension Plans" in the Company's 1998 Proxy Statement is incorporated herein by this reference. Information appearing under the captions "Report of the Compensation and Stock Option Committee; Report of the Section 162(m) Committee" and "Stock Performance Graph" in the Company's 1998 Proxy Statement is not incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing under the caption "Beneficial Ownership of Securities" in the Company's 1998 Proxy Statement is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Note J to the consolidated financial statements, included on page 34 of the Company's 1997 Annual Report to Stockholders, and the captions "Certain Relationships and Transactions" and "Compensation Committee Interlocks and Insider Participation" in the Company's 1998 Proxy Statement contain information about certain relationships and related transactions and are incorporated herein by this reference. 10 11 SAFEWAY INC. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT: 1. Consolidated Financial Statements of the Company are incorporated by reference in PART II, Item 8: Consolidated Statements of Income for fiscal 1997, 1996, and 1995. Consolidated Balance Sheets as of the end of fiscal 1997 and 1996. Consolidated Statements of Cash Flows for fiscal 1997, 1996, and 1995. Consolidated Statements of Stockholders' Equity for fiscal 1997, 1996, and 1995. Notes to Consolidated Financial Statements. Independent Auditors' Report. 2. Consolidated Financial Statement Schedules: None required 3. The following exhibits are filed as part of this report: Exhibit 2.1 Agreement and Plan of Merger dated as of December 15, 1996, by and among Safeway Inc., SSCI Merger Sub, Inc. and The Vons Companies, Inc., as amended on January 8, 1997 (incorporated by reference to Exhibit 2.1 to Registrant's Registration on Form S-4 No. 333-22837 dated March 5, 1997). Exhibit 2.2 Amended and Restated Stock Repurchase Agreement, dated as of January 8, 1997 by and between Safeway Inc. and SSI Associates, L.P. (incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K dated January 8, 1997). Exhibit 3.1 Restated Certificate of Incorporation of the Company and Certificate of Amendment of Restated Certificate of Incorporation by the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 15, 1996). Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-33388), and Amendment to the Company's By-laws effective March 8, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended January 2, 1993). Exhibit 4(i).1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4(i).2 to Registration Statement No. 33-33388). Exhibit 4(i).2 Registration Rights Agreement dated November 25, 1986 between the Company and certain limited partnerships (incorporated by reference to Exhibit 4(i).4 to Registration Statement No. 33-33388). Exhibit 4(i).3 Indenture dated as of November 20, 1991 between the Company and The Bank of New York, as Trustee, relating to the Company's Senior Subordinated Debt Securities (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated November 13, 1991), as supplemented by the Supplemental Indenture dated as of September 4, 1997.
11 12 SAFEWAY INC. AND SUBSIDIARIES ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) Exhibit 4(i).4 Form of Officers' Certificate establishing the terms of the 10% Senior Subordinated Notes due December 1, 2001, including the form of Note (incorporated by reference to Exhibit 4.4 of Registrant's Form 8-K dated November 13, 1991). Exhibit 4(i).5 Form of Officers' Certificate establishing the terms of the 9.65% Senior Subordinated Debentures due January 15, 2004, including the form of Debenture (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated January 15, 1992). Exhibit 4(i).6 Indenture dated as of February 1, 1992 between the Company and The First National Bank of Chicago, as Trustee, relating to the Company's 9.30% Senior Secured Debentures due 2007, including the form of Debenture and the forms of Deed of Trust and Environmental Indemnity Agreement attached as exhibits thereto (incorporated by reference to Exhibit 4(i).14 of Registrant's Form 10-K for the year ended December 28, 1991), as supplemented by the Supplemental Indenture dated as of September 4, 1997. Exhibit 4(i).7 Indenture dated as of March 15, 1992 between the Company and Harris Trust and Savings Bank, as Trustee, relating to the Company's Senior Subordinated Debt Securities (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated March 17, 1992), as supplemented by the Supplemental Indenture dated as of September 4, 1997. Exhibit 4(i).8 Form of Officers' Certificate establishing the terms of the 9.35% Senior Subordinated Notes due March 15, 1999 and the 9.875% Senior Subordinated Debentures due March 15, 2007, including the form of Note and form of Debenture (incorporated by reference to Exhibit 4.2 of Registrant's Form 8-K dated March 17, 1992). Exhibit 4(i).9 Indenture dated as of September 1, 1992 between the Company and The Chase Manhattan Bank (National Association), as Trustee, relating to the Company's Debt Securities (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K dated September 16, 1992), as supplemented by the Supplemental Indenture dated as of September 4, 1997. Exhibit 4(i).10 Form of Officers' Certificate relating to the Company's Fixed Rate Medium-Term Notes and the Company's Floating Rate Medium-Term Notes, form of Fixed Rate Note and form of Floating Rate Note (incorporated by reference to Exhibits 4.2, 4.3 and 4.4 of Registrant's Form 8-K dated September 16, 1992). Exhibit 4(i).11 Form of Officers' Certificate establishing the terms of a separate series of Safeway Inc.'s Medium-Term Notes entitled 10% Senior Notes due November 1, 2002, including the form of Note (incorporated by reference to Exhibits 4.1 and 4.2 of Registrant's Form 8-K dated November 5, 1992). Exhibit 4(i).12 Form of Officers' Certificate establishing the terms of a separate series of Safeway Inc.'s Medium-Term Notes entitled Medium-Term Notes due June 1, 2003 (Series OPR-1), including the form of Note (incorporated by reference to Exhibits 4.1 and 4.2 of Registrant's Form 8-K dated June 1, 1993).
12 13 SAFEWAY INC. AND SUBSIDIARIES ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) Exhibit 4(i).13 Common Stock Purchase Warrants to purchase 14,148,969 shares of Safeway Inc. common stock. Exhibit 4(i).14 Credit Agreement dated as of April 8, 1997 among Safeway Inc., The Vons Companies, Inc. and Canada Safeway Limited as Borrowers; Bankers Trust Company as Administrative Agent; The Chase Manhattan Bank as Syndication Agent; The Bank of Nova Scotia and Bank of America National Trust and Savings Association as Documentation Agents; the agents listed therein as Agents; and the lenders listed therein as Lenders. (incorporated by reference to Exhibit 4(i).1 of the Registrant's Form 10-Q for the quarterly period ended March 22, 1997). Exhibit 4(i).15 Indenture, dated as of September 10, 1997, between Safeway Inc. And The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K dated September 10, 1997). Exhibit 4(i).16 Form of Officers' Certificate establishing the terms of the Registrant's 6.85% Senior Notes due 2004, the Registrant's 7.00% Senior Notes due 2007 and the company's 7.45% Senior Debentures due 2027 (incorporated by reference to Exhibit 4.2 to Registrant's Form 8-K dated September 10, 1997). Exhibit 4(i).17 Form of 6.85% Senior Note due 2004 (incorporated by reference to Exhibit 4.3 to Registrant's Form 8-K dated September 10, 1997). Exhibit 4(i).18 Form of 7.00% Senior Note due 2007 (incorporated by reference to Exhibit 4.4 to Registrant's Form 8-K dated September 10, 1997). Exhibit 4(i).19 Form of 7.45% Senior Debenture due 2027 (incorporated by reference to Exhibit 4.6 to Registrant's Form 8-K dated September 10, 1997). Exhibit 4(iii) Registrant agrees to provide the Securities and Exchange Commission, upon request, with copies of instruments defining the rights of holders of long-term debt of the Registrant and all of its subsidiaries for which consolidated financial statements are required to be filed with the Securities and Exchange Commission. Exhibit 10(iii).1* Safeway Inc. Outside Director Equity Purchase Plan (incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-36753), and First Amendment to the Safeway Inc. Outside Director Equity Purchase Plan dated as of July 5, 1994 (incorporated by reference to Exhibit 10(iii).1 to Registrant's Form 10-Q for the quarterly period ended September 10, 1994). Exhibit 10(iii).2* Share Appreciation Rights Plan of Canada Safeway Limited (incorporated by reference to Exhibit 10(iii).17 to Registrant's Form 10-K for the year ended December 29, 1990) and Amendment No. 1 thereto dated December 13, 1991 (incorporated by reference to Exhibit 10(iii).17 to Registrant's Form 10-K for the year ended December 28, 1991). Exhibit 10(iii).3* Share Appreciation Rights Plan of Lucerne Foods Ltd. (incorporated by reference to Exhibit 10(iii).18 to Registrant's Form 10-K for the year ended December 29, 1990) and Amendment No. 1 thereto dated December 13, 1991 (incorporated by reference to Exhibit 10(iii).18 to Registrant's Form 10-K for the year ended December 28, 1991). Exhibit 10(iii).4* Stock Option Plan for Consultants of Safeway Inc. (incorporated by reference to Exhibit 10(iii).7 to Registrant's Form 10-Q for the quarterly period ending June 19, 1993).
* Management contract, or compensatory plan or arrangement. 13 14 SAFEWAY INC. AND SUBSIDIARIES ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) Exhibit 10(iii).5* First Amendment to the Stock Option Plan for Consultants of Safeway Inc. (incorporated by reference to Exhibit 10(iii).7 to Registrant's Form 10-K for the year ended January 1, 1994). Exhibit 10(iii).6* 1994 Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc. (incorporated by reference to Exhibit 10(iii).8 to Registrant's Form 10-K for the year ended January 1, 1994) and First Amendment thereto dated March 1, 1995 (incorporated by reference to Exhibit 10(iii).7 of Registrant's Form 10-K/A for the year ended December 31, 1994). Exhibit 10(iii).7* Operating Performance Bonus Plan for Executive Officers of Safeway Inc. (incorporated by reference to Exhibit 10(iii).9 to Registrant's Form 10-K for the year ended January 1, 1994); First Amendment thereto dated January 1, 1997. (incorporated by reference to Exhibit 110(iii).12 of Registrant's Form 10-K for the year ended December 28, 1996); Second Amendment thereto dated October 7, 1997; and Third Amendment thereto dated March 10, 1998. Exhibit 10(iii).8* Capital Performance Bonus Plan for Executive Officers of Safeway Inc. Exhibit 10(iii).9* Retirement Restoration Plan of Safeway Inc. (incorporated by reference to Exhibit 10(iii).11 to Registrant's Form 10-K for the year ended January 1, 1994). Exhibit 10(iii).10* Deferred Compensation Plan for Safeway Directors (incorporated by reference to Exhibit 10(iii).11 of Registrant's Form 10-K for the year ended December 31, 1994). Exhibit 10(iii).11* Form of stock option agreement for former directors of The Vons Companies, Inc. (incorporated by reference to Exhibit 10(iii).12 of Registrant's Form 10-K for the year ended December 28, 1996). Exhibit 10(iii).12* The Vons Companies, Inc. Management Stock Option Plan (incorporated by reference to Exhibit 10.3 to The Vons Companies, Inc. Annual Report on Form 10-K for the twenty-seven weeks ended January 3, 1988). Exhibit 10(iii).13* The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Appendix A to The Vons Companies, Inc. Proxy Statement for its May 17, 1990 Annual Meeting of Shareholders). Exhibit 10(iii).14* Amendment, dated February 17, 1993, to The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.13.1 to The Vons Companies, Inc. Form 10-Q for the quarterly period ended March 28, 1993). Exhibit 10(iii).15* Amendment, effective as of December 13, 1996, to The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.7.2 to The Vons Companies, Inc. Form 10-K for the fiscal year ended December 29, 1996). Exhibit 10(iii).16* Form of Amendments, dated April 8, 1997, to The Vons Companies, Inc. Management Stock Option Plan and The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 4.5 to Registrant's Form S-4 filed on March 5, 1997).
14 15 SAFEWAY INC. AND SUBSIDIARIES ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) Exhibit 11.1 Computation of Earnings Per Share (incorporated by reference to page 38 of the Company's 1997 Annual Report to Stockholders). Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges. Exhibit 13.1 Registrant's 1997 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1 above). Exhibit 22.1 Schedule of Subsidiaries. Exhibit 23.1 Independent Auditors' Consent. Exhibit 27 Financial Data Schedule (electronic filing only).
- -------------- * Management contract, or compensatory plan or arrangement. (b) REPORTS ON FORM 8-K: On September 10, 1997, the Company filed a Current Report on Form 8-K stating under "Item 5. Other Events" that on that day it had completed an underwritten offering of $200 million aggregate principal amount of its 6.85% Senior Notes due 2004, $250 million aggregate principal amount of its 7.00% Senior Notes due 2007, and $150 million aggregate principal amount of its 7.45% Senior Debentures due 2027 under its Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 4, 1997 (File no. 333-32741). 15 16 SAFEWAY INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Steven A. Burd Date: March 24, 1998 - ------------------------ --------------------- SAFEWAY INC. Steven A. Burd President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/ Julian C. Day /s/ David F. Bond - ------------------ ----------------- Julian C. Day David F. Bond Executive Vice President and Senior Vice President Chief Financial Officer Finance and Control Date: March 24, 1998 Date: March 24, 1998
Director Date -------- ---- /s/Steven A. Burd March 24, 1998 - ----------------- -------------- Steven A. Burd /s/ Sam Ginn March 24, 1998 - ------------ -------------- Sam Ginn /s/ James H. Greene, Jr. March 24, 1998 - ------------------------ -------------- James H. Greene, Jr. /s/ Paul Hazen March 24, 1998 - -------------- -------------- Paul Hazen /s/ Henry R. Kravis March 24, 1998 - -------------------------- -------------- Henry R. Kravis /s/ Robert I. MacDonnell March 24, 1998 - -------------------------- -------------- Robert I. MacDonnell /s/ Peter A. Magowan March 24, 1998 - -------------------- -------------- Peter A. Magowan /s/ George R. Roberts March 24, 1998 - --------------------- -------------- George R. Roberts /s/ Michael T. Tokarz March 24, 1998 - --------------------- -------------- Michael T. Tokarz
16 17 SAFEWAY INC, AND SUBSIDIARIES Exhibit Index LIST OF EXHIBITS FILED WITH FORM 10-K FOR THE PERIOD ENDED JANUARY 3, 1998 Exhibit 4(i).3 Supplemental Indenture dated as of September 4, 1997 between the Company and The Bank of New York, as Trustee, relating to the Company's Senior Subordinated Debt Securities. Exhibit 4(i).6 Supplemental Indenture dated as of September 4, 1997 between the Company and The First National Bank of Chicago, as Trustee, relating to the Company's 9.30% Senior Secured Debentures due 2007. Exhibit 4(i).7 Supplemental Indenture dated as of September 4, 1997 between the Company and Harris Trust and Savings Bank, as Trustee, relating to the Company's Senior Subordinated Debt Securities. Exhibit 4(i).9 Supplemental Indenture dated as of September 4, 1997 between the Company and The Chase Manhattan Bank (National Association), as Trustee, relating to the Company's Debt Securities. Exhibit 4(i).13 Common Stock Purchase Warrants to purchase 14,148,969 shares of Safeway Inc. common stock. Exhibit 10(iii).7 Second Amendment to the Operating Performance Bonus Plan for Executive Officers of Safeway Inc. dated October 7, 1997 and Third Amendment to the Operating Performance Bonus Plan for Executive Officers of Safeway Inc. dated March 10, 1988. Exhibit 10(iii).8 The Capital Performance Bonus Plan for Executive Officers of Safeway Inc. Exhibit 11.1 Computation of Earnings Per Share (incorporated by reference to page 38 of the Company's 1997 Annual Report to Stockholders). Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges Exhibit 13.1 Registrant's 1997 Annual Report to Stockholders (considered filed to the extent specified in Item 1, Item 2, Item 3, Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1 above). Exhibit 22.1 Schedule of Subsidiaries Exhibit 23.1 Independent Auditors' Consent. Exhibit 27 Financial Data Schedule (electronic filing only) EX-4.3 2 SUPP. INDENTURE - CO. & BANK OF NEW YORK 1 EXHIBIT 4(i).3 ================================================================================ SAFEWAY INC., ISSUER AND THE BANK OF NEW YORK, TRUSTEE _________________ SUPPLEMENTAL INDENTURE DATED AS OF SEPTEMBER 4, 1997 _________________ Supplemental to the Indenture dated as of November 20, 1991 with respect to the following series of Securities: 10.00% Senior Subordinated Notes due 2001 and 9.65% Senior Subordinated Debentures due 2004 ================================================================================ 2 SUPPLEMENTAL INDENTURE, dated as of September 4, 1997, between SAFEWAY INC., a Delaware corporation (hereinafter called the "Company"), as issuer, and THE BANK OF NEW YORK, as trustee (hereinafter called the "Trustee"), under the Indenture, dated as of November 20, 1991, between the Company and the Trustee, as amended and supplemented to the date hereof (the "Indenture"). RECITALS OF THE COMPANY The Company has implemented a refinancing plan designed to reduce its interest expense, extend the maturities of the Company's outstanding long-term debt and enhance its operating and financial flexibility. As part of the refinancing plan, the Company is making cash tender offers (each of the offers is referred to herein individually, as an "Offer" and, collectively, as the "Offers") to purchase certain debt securities of the Company (the "Debt Securities"), including the Company's 10.00% Senior Subordinated Notes due 2001 and 9.65% Senior Subordinated Debentures due 2004 (the "Securities"), which were issued as separate series of securities under the Indenture. The Company also is soliciting consents from Holders of the Securities to amendments to the Indenture (the "Amendments") and to each indenture under which each other series of Debt Securities was issued (all as described in the Company's Offer to Purchase and Consent Solicitation Statement dated August 4, 1997 (the "Statement")). In accordance with Section 11.2 of the Indenture, the Holders of not less than a majority of the principal amount of the outstanding Securities of each series have consented to the Amendments. The Board of Directors of the Company has duly authorized the execution and delivery of this Supplemental Indenture. In addition, the Company has delivered an Opinion of Counsel to the Trustee pursuant to Section 11.5 of the Indenture and has done all other things necessary to make this Supplemental Indenture a valid agreement of the Company in accordance with the terms hereof and of the Indenture. This Supplemental Indenture is effective as of the date upon which the conditions set forth in Section 1.9 hereof are satisfied and the Amendments effected by this Supplemental Indenture will become operative with respect to the 10.00% Senior Subordinated Notes due 2001 on the date such Securities are accepted for payment by the Company pursuant to the Offer therefor and with respect to the 9.65% Senior Subordinated Debentures due 2004 on the date such Securities are accepted for payment by the Company pursuant to the Offer therefor. WHEREFORE, each party agrees as follows for the benefit of the other party and for the equal or ratable benefit of the Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS. For all purposes of the Indenture and this Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: 3 (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Indenture and this Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. 1.2 GOVERNING LAW. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 1.3 SUCCESSORS. All agreements of the Company in this Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Supplemental Indenture shall bind its successors. 1.4 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 1.5 SEPARABILITY. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 1.6 HEADINGS, ETC. The Article and Section headings of this Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms and provisions hereof. Except as expressly provided herein and notwithstanding the elimination of certain Sections of the Indenture as set forth in Article Two hereof, all references to Sections in the Indenture shall remain unchanged. 1.7 BENEFITS OF SUPPLEMENTAL INDENTURE. Nothing in this Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Paying Agent and the Holders, any benefit or any legal or equitable right, remedy or claim under this Supplemental Indenture. 1.8 TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or accuracy of this Supplemental Indenture. 2 4 1.9 EFFECTIVENESS. This Supplemental Indenture shall take effect on the date (the "Effective Date") that each of the following conditions shall have been satisfied or waived: (a) each of the parties hereto shall have executed and delivered this Supplemental Indenture; and (b) the Trustee shall have received an opinion of Latham & Watkins, Counsel to the Company, dated the Effective Date, pursuant to Section 11.5 of the Indenture; provided, however, that the Amendments set forth in Article Two hereof shall take effect only upon and simultaneously with, and shall have no force and effect prior to, (i) with respect to the 10.00% Senior Subordinated Notes due 2001, the acceptance for purchase and payment of the Securities of such series tendered pursuant to the Offer therefor and (ii) with respect to the 9.65% Senior Subordinated Debentures due 2004, the acceptance for purchase and payment of the Securities of such series tendered pursuant to the Offer therefor. ARTICLE II THE AMENDMENTS 2.1 AMENDMENTS. The Indenture is hereby amended as follows: (1) Section 3.9 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.9 [Intentionally omitted]." (2) Section 3.10 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.10 [Intentionally omitted]." (3) Section 3.11 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.11 [Intentionally omitted]." (4) Section 3.12 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.12 [Intentionally omitted]." (5) Section 3.13 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.13 [Intentionally omitted]." (6) Section 6.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 6.1. Events of Default. The following events are hereby defined for all purposes of this Indenture with respect to Securities of any series (except where the term is otherwise defined for specific purposes) as "defaults": (a) Failure to pay the principal of and premium, if any, on any of the Securities of that series, when and as the same shall become due and payable, whether at Stated Maturity 3 5 thereof, by call for redemption or otherwise, whether or not such payment is prohibited by the provisions of Article VII hereof; or (b) Failure to pay any installment of interest on any of the Securities of that series, when and as the same shall become payable as therein expressed, and such failure shall continue for a period of 30 days (it being understood that if the entire amount of such payment of interest is deposited by the Company with the Trustee, or with another paying agent duly appointed hereunder, before the expiration of such period of 30 days, such default shall no longer be considered to be continuing under this Indenture), whether or not such payment is prohibited by the provisions of Article VII hereof; or (c) Failure to perform or observe any other of the covenants, conditions or agreements on the part of the Company in this Indenture (other than a covenant, condition or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series) or in the Securities of that series, and such failure shall continue for a period of 60 days after written notice to the Company from the Trustee or to the Company and to the Trustee from the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding under this Indenture; or (d) [Intentionally omitted]. (e) If the Company shall file a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors; or the Company shall file a petition or answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable law, or shall consent to the filing of any such petition, answer, or consent; or the Company shall appoint, or consent to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (f) If any order for relief against the Company shall have been entered by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors, and such order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of the Company under any other similar applicable law, and such decree or order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of the Company or of any substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged or unstayed for a period of 120 days; or (g) Any other default provided with respect to Securities of that series. If one or more defaults with respect to Securities of any series shall happen and be continuing, then, and in each and every such case, either the Trustee, by notice in writing to the Company and to the agent under the Bank Credit Agreement (the "Credit Agent"), or the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding, by notice in writing to the Company, the Trustee and the Credit Agent, may declare due and payable, if not already due and payable, 4 6 the principal (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of, premium, if any, plus any accrued interest on all of the Securities of that series; and upon any such declaration all such amounts upon such Securities of that series shall become and be immediately due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Credit Agent of such written notice given hereunder (if upon such first occurrence such default or defaults shall be continuing), anything in this Indenture or in any of such Securities contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal (or portion thereof) of, premium, if any, plus any accrued interest on the Securities of that series shall have been declared due and payable, and prior to the Stated Maturity of the principal thereof, all arrears of interest upon all such Securities (with interest so far as may be lawful on any overdue installments of interest at the rate specified in such Securities) and the expenses of the Trustee, its agents or attorneys shall be paid by or for the account of the Company, and all defaults as aforesaid (other than the payment of principal which has been so declared due and payable) shall have been made good or secured to the satisfaction of the Trustee and provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case the Trustee shall, upon the written request of the Holders of a majority in principal amount of the Securities of that series then outstanding, delivered to the Company and to the Trustee, waive such default and its consequences and rescind or annul such declaration; but no such waiver shall extend to or affect any subsequent default, or impair any right consequent thereon. Notwithstanding the foregoing, to the extent the Company shall have been relieved of any of its obligations under this Indenture with respect to Securities of any series pursuant to Section 13.4 hereof, the failure of the Company to perform any such obligations as to which it has been relieved shall not constitute a default as contemplated by this Indenture. (7) Section 9.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 9.1. Company May Merge, etc. Only on Certain Terms. The Company may not consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) in case the Company shall consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (the "Surviving Person") shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Surviving Person, the Company or any Subsidiary as a result of such transaction as having been incurred by the Surviving Person, the Company, or such Subsidiary at the time of such transaction, no default or event of default shall have occurred and be continuing; (3) [Intentionally omitted]. 5 7 (4) the Company has previously given the Trustee not less than 10 days' prior written notice of such transaction and has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture shall comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. ARTICLE III ENDORSEMENT AND CHANGE OF FORM OF SECURITIES 3.1 NOTICE TO SECURITYHOLDERS. After the Amendments become effective, the Company shall mail to Holders a notice briefly describing such Amendments. 3.2 NOTATION ON SECURITIES. (a) Securities authenticated and delivered after the effectiveness of this Supplemental Indenture shall be affixed by the Trustee at the Company's expense with the following notation: "The Company and the Trustee have entered into a Supplemental Indenture, dated as of September 4, 1997, which (i) eliminated certain restrictive covenants contained in Article III of the Indenture; (ii) amended certain provisions with respect to defaults and remedies contained in Article VI of the Indenture and (iii) amended certain provisions contained in Article IX of the Indenture. Reference is hereby made to such Supplemental Indenture, copies of which are on file with The Bank of New York, Trustee." The Trustee may, but shall not be required to, require holders of Securities authenticated and delivered prior to the effectiveness of this Supplemental Indenture to deliver such Securities to the Trustee so that the Trustee may place the aforementioned notation on such Securities. (b) If the Company or the Trustee so determines, the Company, in exchange for the Securities, shall issue and the Trustee shall authenticate new securities that reflect the changed terms. [signature page follows] 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. SAFEWAY INC., Issuer By:______________________________________________ Name: Melissa C. Plaisance Title: Senior Vice President - Finance and Public Affairs THE BANK OF NEW YORK, Trustee By:______________________________________________ Name: Title: EX-4.6 3 SUPP. INDENTURE - CO. & 1ST NAT'L BANK OF CHICAGO 1 EXHIBIT 4(i).6 ================================================================================ SAFEWAY INC., ISSUER AND THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE _________________ SUPPLEMENTAL INDENTURE DATED AS OF SEPTEMBER 4, 1997 _________________ Supplemental to the Indenture dated as of February 1, 1992 relating to the Issuer's 9.30% Senior Secured Debentures due 2007 ================================================================================ 2 SUPPLEMENTAL INDENTURE, dated as of September 4, 1997, between SAFEWAY INC., a Delaware corporation (hereinafter called the "Company"), as issuer, and THE FIRST NATIONAL BANK OF CHICAGO, as trustee (hereinafter called the "Trustee"), under the Indenture, dated as of February 1, 1992, between the Company and the Trustee, as amended and supplemented to the date hereof (the "Indenture"). RECITALS OF THE COMPANY The Company has implemented a refinancing plan designed to reduce its interest expense, extend the maturities of the Company's outstanding long-term debt and enhance its operating and financial flexibility. As part of the refinancing plan, the Company is making cash tender offers (each of the offers is referred to herein individually, as an "Offer" and, collectively, as the "Offers") to purchase certain debt securities of the Company (the "Debt Securities"), including the Company's 9.30% Senior Secured Debentures due 2007 (the "Securities"), which were issued under the Indenture. The Company also is soliciting consents from Holders of the Securities to amendments to the Indenture (the "Amendments") and to each indenture under which each other series of Debt Securities was issued (all as described in the Company's Offer to Purchase and Consent Solicitation Statement dated August 4, 1997 (the "Statement")). In accordance with Section 9.2 of the Indenture, the Holders of not less than a majority of the principal amount of the outstanding Securities have consented to such Amendments. The Board of Directors of the Company has duly authorized the execution and delivery of this Supplemental Indenture. In addition, the Company has delivered an Opinion of Counsel to the Trustee pursuant to Section 9.5 of the Indenture and has done all other things necessary to make this Supplemental Indenture a valid agreement of the Company in accordance with the terms hereof and of the Indenture. This Supplemental Indenture is effective as of the date upon which the conditions set forth in Section 1.9 hereof are satisfied and the Amendments effected by this Supplemental Indenture will become operative on the date the Securities are accepted for payment by the Company pursuant to the Offer therefor. WHEREFORE, each party agrees as follows for the benefit of the other party and for the equal or ratable benefit of the Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS. For all purposes of the Indenture and this Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Indenture and this Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and 3 (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. 1.2 GOVERNING LAW. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 1.3 SUCCESSORS. All agreements of the Company in this Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Supplemental Indenture shall bind its successors. 1.4 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 1.5 SEPARABILITY. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 1.6 HEADINGS, ETC. The Article and Section headings of this Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms and provisions hereof. Except as expressly provided herein and notwithstanding the elimination of certain Sections of the Indenture as set forth in Article Two hereof, all references to Sections in the Indenture shall remain unchanged. 1.7 BENEFITS OF SUPPLEMENTAL INDENTURE. Nothing in this Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Paying Agent and the Holders, any benefit or any legal or equitable right, remedy or claim under this Supplemental Indenture. 1.8 TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or accuracy of this Supplemental Indenture. 1.9 EFFECTIVENESS. This Supplemental Indenture shall take effect on the date (the "Effective Date") that each of the following conditions shall have been satisfied or waived: (a) each of the parties hereto shall have executed and delivered this Supplemental Indenture; and 2 4 (b) the Trustee shall have received an opinion of Latham & Watkins, Counsel to the Company, dated the Effective Date, pursuant to Section 9.5 of the Indenture; provided, however, that the Amendments set forth in Article Two hereof shall take effect only upon and simultaneously with, and shall have no force and effect prior to, the acceptance for purchase and payment of the Securities tendered pursuant to the Offer therefor. ARTICLE II THE AMENDMENTS 2.1 AMENDMENTS. The Indenture is hereby amended as follows: (1) Section 3.9 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.9 [Intentionally omitted]." (2) Section 3.10 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.10 [Intentionally omitted]." (3) Section 3.11 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.11 [Intentionally omitted]." (4) Section 3.13 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.13 [Intentionally omitted]." (5) Section 5.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 5.1. Events of Default. The following events are hereby defined for all purposes of this Indenture (except where the term is otherwise defined for specific purposes) as "defaults": (a) Failure to pay the principal of any Security, when and as the same shall become due and payable, whether at Stated Maturity thereof, by call for redemption, offer to repurchase or otherwise; or (b) Failure to pay any installment of interest on any Security, when and as the same shall become payable as therein expressed, and such failure shall continue for a period of 30 days (it being understood that if the entire amount of such payment of interest is deposited by the Company with the Trustee, or with another Paying Agent duly appointed hereunder, before the expiration of such period of 30 days, such default shall no longer be considered to be continuing under this Indenture); or (c) Failure to perform or observe any other of the covenants, conditions or agreements on the part of the Company in this Indenture, the Securities or the Deed of Trust (in each case other than a covenant, condition or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), or in the Environmental Indemnity Agreement, and such failure shall continue for a period of 60 days after written notice to the Company from the Trustee or to the Company and to the Trustee from the Holders of not less than a majority of the principal amount of the Securities then outstanding; or 3 5 (d) [Intentionally omitted]. (e) If the Company shall file a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors; or the Company shall file a petition or answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable law, or shall consent to the filing of any such petition, answer, or consent; or the Company shall appoint, or consent to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (f) If any order for relief against the Company shall have been entered by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors, and such order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of the Company under any other similar applicable law, and such decree or order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of the Company or of any substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged or unstayed for a period of 120 days. If one or more defaults shall happen and be continuing, then, and in each and every such case, either the Trustee, by notice in writing to the Company and to the agent under the Bank Credit Agreement (the "Credit Agent"), or the Holders of not less than a majority of the principal amount of the Securities then outstanding, by notice in writing to the Company, the Trustee and the Credit Agent, may declare due and payable, if not already due and payable, the principal of plus any accrued interest on the Securities; and upon any such declaration all such amounts upon the Securities shall become and be immediately due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Credit Agent of such written notice given hereunder (if upon such first occurrence such default or defaults shall be continuing), anything in this Indenture, the Deed of Trust or the Securities contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal of and accrued interest on the Securities shall have been declared due and payable, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, all arrears of interest upon all such Securities and the expenses of the Trustee, the Deed of Trust Trustee and their respective agents or attorneys shall be paid by or for the account of the Company, and all defaults as aforesaid (other than the payment of principal which has been so declared due and payable) shall have been made good or secured to the satisfaction of the Trustee and provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case the Trustee shall, upon the written request of the Holders of a majority in principal amount of the Securities then outstanding, delivered to the Company and to the Trustee, waive such default and its consequences and rescind or annul such declaration; but no such waiver shall extend to or affect any subsequent default, or impair any right consequent thereon. Notwithstanding the foregoing, to the extent the Company shall have been relieved of any of its obligations under this Indenture pursuant to Section 11.4 hereof, the failure of the Company to perform any such obligations as to which it has been relieved shall not constitute a default as contemplated by this Indenture. 4 6 (6) Section 7.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 7.1. Company May Merge, Etc. Only on Certain Terms. The Company may not consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) in case the Company shall consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (the "Surviving Person") shall (i) be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia, (ii) expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed and (iii) expressly assume, by written instruments executed and delivered to the Trustee, in form satisfactory to the Trustee, all covenants, agreements and obligations of the Company under the Deed of Trust and the Environmental Indemnity Agreement; (2) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Surviving Person, the Company or any Subsidiary as a result of such transaction as having been incurred by the Surviving Person, the Company, or such Subsidiary at the time of such transaction, no default or event which, with giving of notice or lapse of time or both, would be a default shall have occurred and be continuing; (3) [Intentionally omitted]. (4) the Company has previously given the Trustee not less than 10 days' prior written notice of such transaction and has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture and written instruments are required in connection with such transaction, such supplemental indenture and written instruments shall comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. ARTICLE III ENDORSEMENT AND CHANGE OF FORM OF SECURITIES 3.1 NOTICE TO SECURITYHOLDERS. After the Amendments become effective, the Company shall mail to Holders a notice briefly describing such Amendments. 5 7 3.2 NOTATION ON SECURITIES. (a) Securities authenticated and delivered after the effectiveness of this Supplemental Indenture shall bear the following notation: "The Company and the Trustee have entered into a Supplemental Indenture, dated as of September 4, 1997, which (i) eliminated certain restrictive covenants contained in Article III of the Indenture; (ii) amended certain provisions with respect to defaults and remedies contained in Article V of the Indenture and (iii) amended certain provisions contained in Article VII of the Indenture. Reference is hereby made to such Supplemental Indenture, copies of which are on file with The First National Bank of Chicago, Trustee." The Trustee may require holders of Securities authenticated and delivered prior to the effectiveness of this Supplemental Indenture to deliver such Securities to the Trustee so that the Trustee may place the aforementioned notation on such Securities. (b) If the Company or the Trustee so determines, the Company, in exchange for the Securities, shall issue and the Trustee shall authenticate new securities that reflect the changed terms. [signature page follows] 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. SAFEWAY INC., Issuer By:_______________________________________________ Name: Melissa C. Plaisance Title: Senior Vice President - Finance and Public Affairs THE FIRST NATIONAL BANK OF CHICAGO, Trustee By:_______________________________________________ Name: Title: EX-4.7 4 SUPP. INDENTURE - CO. & HARRIS TRUST & SAVINGS 1 EXHIBIT 4(i).7 ================================================================================ SAFEWAY INC., ISSUER AND HARRIS TRUST AND SAVINGS BANK, TRUSTEE _________________ SUPPLEMENTAL INDENTURE DATED AS OF SEPTEMBER 4, 1997 _________________ Supplemental to the Indenture dated as of March 15, 1992 with respect to the following series of Securities: 9.35% Senior Subordinated Notes due 1999 and 9.875% Senior Subordinated Debentures due 2007 ================================================================================ 2 SUPPLEMENTAL INDENTURE, dated as of September 4, 1997, between SAFEWAY INC., a Delaware corporation (hereinafter called the "Company"), as issuer, and HARRIS TRUST AND SAVINGS BANK, as trustee (hereinafter called the "Trustee"), under the Indenture, dated as of March 15, 1992, between the Company and the Trustee, as amended and supplemented to the date hereof (the "Indenture"). RECITALS OF THE COMPANY The Company has implemented a refinancing plan designed to reduce its interest expense, extend the maturities of the Company's outstanding long-term debt and enhance its operating and financial flexibility. As part of the refinancing plan, the Company is making cash tender offers (each of the offers is referred to herein individually, as an "Offer" and, collectively, as the "Offers") to purchase certain debt securities of the Company (the "Debt Securities"), including the Company's 9.35% Senior Subordinated Notes due 1999 and 9.875% Senior Subordinated Debentures due 2007 (the "Securities"), which were issued as separate series of securities under the Indenture. The Company also is soliciting consents from Holders of the Securities to amendments to the Indenture (the "Amendments") and to each indenture under which each other series of Debt Securities was issued (all as described in the Company's Offer to Purchase and Consent Solicitation Statement dated August 4, 1997 (the "Statement")). In accordance with Section 11.2 of the Indenture, the Holders of not less than a majority of the principal amount of the outstanding Securities of each series have consented to the Amendments. The Board of Directors of the Company has duly authorized the execution and delivery of this Supplemental Indenture. In addition, the Company has delivered an Opinion of Counsel to the Trustee pursuant to Section 11.5 of the Indenture and has done all other things necessary to make this Supplemental Indenture a valid agreement of the Company in accordance with the terms hereof and of the Indenture. This Supplemental Indenture is effective as of the date upon which the conditions set forth in Section 1.9 hereof are satisfied and the Amendments effected by this Supplemental Indenture will become operative with respect to the 9.35% Senior Subordinated Notes due 1999 on the date such Securities are accepted for payment by the Company pursuant to the Offer therefor and with respect to the 9.875% Senior Subordinated Debentures due 2007 on the date such Securities are accepted for payment by the Company pursuant to the Offer therefor. WHEREFORE, each party agrees as follows for the benefit of the other party and for the equal or ratable benefit of the Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS. For all purposes of the Indenture and this Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: 3 (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Indenture and this Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. 1.2 GOVERNING LAW. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 1.3 SUCCESSORS. All agreements of the Company in this Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Supplemental Indenture shall bind its successors. 1.4 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 1.5 SEPARABILITY. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 1.6 HEADINGS, ETC. The Article and Section headings of this Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms and provisions hereof. Except as expressly provided herein and notwithstanding the elimination of certain Sections of the Indenture as set forth in Article Two hereof, all references to Sections in the Indenture shall remain unchanged. 1.7 BENEFITS OF SUPPLEMENTAL INDENTURE. Nothing in this Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Paying Agent and the Holders, any benefit or any legal or equitable right, remedy or claim under this Supplemental Indenture. 1.8 TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or accuracy of this Supplemental Indenture. 2 4 1.9 EFFECTIVENESS. This Supplemental Indenture shall take effect on the date (the "Effective Date") that each of the following conditions shall have been satisfied or waived: (a) each of the parties hereto shall have executed and delivered this Supplemental Indenture; and (b) the Trustee shall have received an opinion of Latham & Watkins, Counsel to the Company, dated the Effective Date, pursuant to Section 11.5 of the Indenture; provided, however, that the Amendments set forth in Article Two hereof shall take effect only upon and simultaneously with, and shall have no force and effect prior to, (i) with respect to the 9.35% Senior Subordinated Notes due 1999, the acceptance for purchase and payment of the Securities of such series tendered pursuant to the Offer therefor and (ii) with respect to the 9.875% Senior Subordinated Debentures due 2007, the acceptance for purchase and payment of the Securities of such series tendered pursuant to the Offer therefor. ARTICLE II THE AMENDMENTS 2.1 AMENDMENTS. The Indenture is hereby amended as follows: (1) Section 3.9 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.9 [Intentionally omitted]." (2) Section 3.10 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.10 [Intentionally omitted]." (3) Section 3.11 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.11 [Intentionally omitted]." (4) Section 3.12 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.12 [Intentionally omitted]." (5) Section 3.13 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.13 [Intentionally omitted]." (6) Section 6.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 6.1. Events of Default. The following events are hereby defined for all purposes of this Indenture with respect to Securities of any series (except where the term is otherwise defined for specific purposes) as "defaults": (a) Failure to pay the principal of and premium, if any, on any of the Securities of that series, when and as the same shall become due and payable, whether at Stated Maturity thereof, by call for 3 5 redemption upon surrender for repurchase or otherwise, whether or not such payment is prohibited by the provisions of Article VII hereof; or (b) Failure to pay any installment of interest on any of the Securities of that series, when and as the same shall become payable as therein expressed, and such failure shall continue for a period of 30 days (it being understood that if the entire amount of such payment of interest is deposited by the Company with the Trustee, or with another paying agent duly appointed hereunder, before the expiration of such period of 30 days, such default shall no longer be considered to be continuing under this Indenture), whether or not such payment is prohibited by the provisions of Article VII hereof; or (c) Failure to perform or observe any other of the covenants, conditions or agreements on the part of the Company in this Indenture (other than a covenant, condition or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which, pursuant to Section 2.1, is not applicable to Securities of that series or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series) or in the Securities of that series, and such failure shall continue for a period of 60 days after written notice to the Company from the Trustee or to the Company and to the Trustee from the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding under this Indenture; or (d) [Intentionally omitted]. (e) If the Company shall file a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors; or the Company shall file a petition or answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable law, or shall consent to the filing of any such petition, answer, or consent; or the Company shall appoint, or consent to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (f) If any order for relief against the Company shall have been entered by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors, and such order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of the Company under any other similar applicable law, and such decree or order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of the Company or of any substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged or unstayed for a period of 120 days; or (g) Any other default provided with respect to Securities of that series. If one or more defaults with respect to Securities of any series shall happen and be continuing, then, and in each and every such case, either the Trustee, by notice in writing to the Company and to the agent under the Bank Credit Agreement (the "Credit Agent"), or the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding, by notice in writing to the Company, the Trustee and the Credit Agent, may declare due and payable, if not already due and payable, 4 6 the principal (or, if the Securities of that series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of, premium, if any, plus any accrued interest on all of the Securities of that series; and upon any such declaration all such amounts upon such Securities of that series shall become and be immediately due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Credit Agent of such written notice given hereunder (if upon such first occurrence such default or defaults shall be continuing), anything in this Indenture or in any of such Securities contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal (or portion thereof) of, premium, if any, plus any accrued interest on the Securities of that series shall have been declared due and payable, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, all arrears of interest upon all such Securities (with interest so far as may be lawful on any overdue installments of interest at the rate specified in such Securities) and the expenses of the Trustee, its agents or attorneys shall be paid by or for the account of the Company, and all defaults as aforesaid (other than the payment of principal which has been so declared due and payable) shall have been made good or secured to the satisfaction of the Trustee and provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case the Trustee shall, upon the written request of the Holders of a majority in principal amount of the Securities of that series then outstanding, delivered to the Company and to the Trustee, waive such default and its consequences and rescind or annul such declaration; but no such waiver shall extend to or affect any subsequent default, or impair any right consequent thereon. Notwithstanding the foregoing, to the extent the Company shall have been relieved of any of its obligations under this Indenture with respect to Securities of any series pursuant to Section 13.4 hereof, the failure of the Company to perform any such obligations as to which it has been relieved shall not constitute a default as contemplated by this Indenture. (7) Section 9.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 9.1. Company May Merge, Etc. Only on Certain Terms. The Company may not consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) in case the Company shall consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (the "Surviving Person") shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Surviving Person, the Company or any Subsidiary as a result of such transaction as having been incurred by the Surviving Person, the Company, or such Subsidiary at the time of such transaction, no default or event which, with giving of notice or lapse of time or both, would be a default shall have occurred and be continuing; 5 7 (3) [Intentionally omitted]. (4) the Company has previously given the Trustee not less than 10 days' prior written notice of such transaction and has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture shall comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. ARTICLE III ENDORSEMENT AND CHANGE OF FORM OF SECURITIES 3.1 NOTICE TO SECURITYHOLDERS. After the Amendments become effective, the Company shall mail to Holders a notice briefly describing such Amendments. 3.2 NOTATION ON SECURITIES. (a) Securities authenticated and delivered after the effectiveness of this Supplemental Indenture shall bear the following notation: "The Company and the Trustee have entered into a Supplemental Indenture, dated as of September 4, 1997, which (i) eliminated certain restrictive covenants contained in Article III of the Indenture; (ii) amended certain provisions with respect to defaults and remedies contained in Article VI of the Indenture and (iii) amended certain provisions contained in Article IX of the Indenture. Reference is hereby made to such Supplemental Indenture, copies of which are on file with Harris Trust and Savings Bank, Trustee." The Trustee may require holders of Securities authenticated and delivered prior to the effectiveness of this Supplemental Indenture to deliver such Securities to the Trustee so that the Trustee may place the aforementioned notation on such Securities. (b) If the Company or the Trustee so determines, the Company, in exchange for the Securities, shall issue and the Trustee shall authenticate new securities that reflect the changed terms. [signature page follows] 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. SAFEWAY INC., Issuer By:______________________________________________ Name: Melissa C. Plaisance Title: Senior Vice President - Finance and Public Affairs HARRIS TRUST AND SAVINGS BANK, Trustee By:______________________________________________ Name: Title: EX-4.9 5 SUPP. INDENTURE - CO. & THE CHASE MANHATTAN BANK 1 EXHIBIT 4(i).9 ================================================================================ SAFEWAY INC., ISSUER AND THE CHASE MANHATTAN BANK, TRUSTEE ---------------------- SUPPLEMENTAL INDENTURE DATED AS OF SEPTEMBER 4, 1997 ---------------------- Supplemental to the Indenture dated as of September 1, 1992 with respect to the following series of Securities: 10.00% Senior Notes due 2002 ================================================================================ 2 SUPPLEMENTAL INDENTURE, dated as of September 4, 1997, between SAFEWAY INC., a Delaware corporation (hereinafter called the "Company"), as issuer, and THE CHASE MANHATTAN BANK (successor to The Chase Manhattan Bank (National Association)) as trustee (hereinafter called the "Trustee"), under the Indenture, dated as of September 1, 1992, between the Company and the Trustee, as amended and supplemented to the date hereof (the "Indenture"). RECITALS OF THE COMPANY The Company has implemented a refinancing plan designed to reduce its interest expense, extend the maturities of the Company's outstanding long-term debt and enhance its operating and financial flexibility. As part of the refinancing plan, the Company is making cash tender offers (each of the offers is referred to herein individually, as an "Offer" and, collectively, as the "Offers") to purchase certain debt securities of the Company (the "Debt Securities"), including the Company's 10.00% Senior Notes due 2002 (the "Securities"), which were issued as a series of securities under the Indenture. The Company also is soliciting consents from Holders of the Securities to amendments to the Indenture (the "Amendments") and to each indenture under which each other series of Debt Securities was issued (all as described in the Company's Offer to Purchase and Consent Solicitation Statement dated August 4, 1997 (the "Statement")). In accordance with Section 10.2 of the Indenture, the Holders of not less than a majority of the principal amount of the outstanding Securities of each series have consented to the Amendments. The Board of Directors of the Company has duly authorized the execution and delivery of this Supplemental Indenture. In addition, the Company has delivered an Opinion of Counsel to the Trustee pursuant to Section 10.5 of the Indenture and has done all other things necessary to make this Supplemental Indenture a valid agreement of the Company in accordance with the terms hereof and of the Indenture. This Supplemental Indenture is effective as of the date upon which the conditions set forth in Section 1.9 hereof are satisfied and the Amendments effected by this Supplemental Indenture will become operative on the date the Securities are accepted for payment by the Company pursuant to the Offer therefor. WHEREFORE, each party agrees as follows for the benefit of the other party and for the equal or ratable benefit of the Holders of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 1.1 DEFINITIONS. For all purposes of the Indenture and this Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Indenture and this Supplemental Indenture as a whole and not to any particular Article, Section or subdivision; and 3 (b) capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture. 1.2 GOVERNING LAW. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 1.3 SUCCESSORS. All agreements of the Company in this Supplemental Indenture shall bind its successors. All agreements of the Trustee in this Supplemental Indenture shall bind its successors. 1.4 DUPLICATE ORIGINALS. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 1.5 SEPARABILITY. In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 1.6 HEADINGS, ETC. The Article and Section headings of this Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms and provisions hereof. Except as expressly provided herein and notwithstanding the elimination of certain Sections of the Indenture as set forth in Article Two hereof, all references to Sections in the Indenture shall remain unchanged. 1.7 BENEFITS OF SUPPLEMENTAL INDENTURE. Nothing in this Supplemental Indenture, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, any Paying Agent and the Holders, any benefit or any legal or equitable right, remedy or claim under this Supplemental Indenture. 1.8 TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or accuracy of this Supplemental Indenture. 1.9 EFFECTIVENESS. This Supplemental Indenture shall take effect on the date (the "Effective Date") that each of the following conditions shall have been satisfied or waived: (a) each of the parties hereto shall have executed and delivered this Supplemental Indenture; and 2 4 (b) the Trustee shall have received an opinion of Latham & Watkins, Counsel to the Company, dated the Effective Date, pursuant to Section 10.5 of the Indenture; provided, however, that the Amendments set forth in Article Two hereof shall take effect only upon and simultaneously with, and shall have no force and effect prior to, the acceptance for purchase and payment of the Securities tendered pursuant to the Offer therefor. ARTICLE II THE AMENDMENTS 2.1 AMENDMENTS. The Indenture is hereby amended as follows: (1) Section 3.9 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.9 [Intentionally omitted]." (2) Section 3.10 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.10 [Intentionally omitted]." (3) Section 3.11 of the Indenture is hereby eliminated in its entirety and replaced with the words: "SECTION 3.11 [Intentionally omitted]." (4) Section 6.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 6.1. Events of Default. The following events are hereby defined for all purposes of this Indenture with respect to Securities of any series (except where the term is otherwise defined for specific purposes) as "defaults": (a) Failure to pay the principal of and premium, if any, on any of the Securities of that series, when and as the same shall become due and payable, whether at Stated Maturity thereof, by call for redemption upon surrender for repurchase or otherwise; or (b) Failure to pay any installment of interest on any of the Securities of that series, when and as the same shall become payable as therein expressed, and such failure shall continue for a period of 30 days (it being understood that if the entire amount of such payment of interest is deposited by the Company with the Trustee, or with another paying agent duly appointed hereunder, before the expiration of such period of 30 days, such default shall no longer be considered to be continuing under this Indenture); or (c) Failure to perform or observe any other of the covenants, conditions or agreements on the part of the Company in this Indenture (other than a covenant, condition or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which, pursuant to Section 2.1, is not applicable to Securities of that series or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series) or in the Securities of that series, and such failure shall continue for a period of 60 days after written notice to the Company from the Trustee or to the Company and to the Trustee from the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding under this Indenture; or 3 5 (d) [Intentionally omitted]. (e) If the Company shall file a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors; or the Company shall file a petition or answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable law, or shall consent to the filing of any such petition, answer, or consent; or the Company shall appoint, or consent to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (f) If any order for relief against the Company shall have been entered by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws or any similar state law for the relief of debtors, and such order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of the Company under any other similar applicable law, and such decree or order shall have continued undischarged or unstayed for a period of 120 days; or a decree or order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of the Company or of any substantial part of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have remained in force undischarged or unstayed for a period of 120 days; or (g) Any other default provided with respect to Securities of that series. If one or more defaults with respect to Securities of any series shall happen and be continuing, then, and in each and every such case, either the Trustee, by notice in writing to the Company and to the agent under the Bank Credit Agreement (the "Credit Agent"), or the Holders of not less than a majority of the principal amount of the Securities of that series then outstanding, by notice in writing to the Company, the Trustee and the Credit Agent, may declare due and payable, if not already due and payable, the principal (or, if any of the Securities of that series are Original Issue Discount Securities, such portion of the principal amount thereof as may be specified in the terms of such Securities) of, premium, if any, plus any accrued interest on all of the Securities of that series; and upon any such declaration all such amounts upon such Securities of that series shall become and be immediately due and payable upon the first to occur of an acceleration under the Bank Credit Agreement or five Business Days after receipt by the Company and the Credit Agent of such written notice given hereunder (if upon such first occurrence such default or defaults shall be continuing), anything in this Indenture or in any of such Securities contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal (or portion thereof) of, premium, if any, plus any accrued interest on the Securities of that series shall have been declared due and payable, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, all arrears of interest upon all such Securities (with interest so far as may be lawful on any overdue installments of interest at the rate specified in such Securities) and the expenses of the Trustee, its agents or attorneys shall be paid by or for the account of the Company, and all defaults as aforesaid (other than the payment of principal which has been so declared due and payable) shall have been made good or cured to the satisfaction of the Trustee and provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case the Trustee shall, upon the written request of the Holders of a majority in principal amount of the Securities of that series then outstanding, delivered to the Company and to the Trustee, waive such default and its 4 6 consequences and rescind or annul such declaration; but no such waiver shall extend to or affect any subsequent default, or impair any right consequent thereon. Notwithstanding the foregoing, to the extent the Company shall have been relieved of any of its obligations under this Indenture with respect to Securities of any series pursuant to Section 11.4 hereof, the failure of the Company to perform any such obligations as to which it has been relieved shall not constitute a default as contemplated by this Indenture. (5) Section 8.1 of the Indenture is hereby amended to state, in its entirety, the following: SECTION 8.1. Company May Merge, Etc. Only on Certain Terms. The Company may not consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) in case the Company shall consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (the "Surviving Person") shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Surviving Person, the Company or any Subsidiary as a result of such transaction as having been incurred by the Surviving Person, the Company, or such Subsidiary at the time of such transaction, no default or event which, with giving of notice or lapse of time or both, would be a default shall have occurred and be continuing; (3) [Intentionally omitted]. (4) the Company has previously given the Trustee not less than 10 days' prior written notice of such transaction and has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture shall comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. ARTICLE III ENDORSEMENT AND CHANGE OF FORM OF SECURITIES 3.1 NOTICE TO SECURITYHOLDERS. After the Amendments become effective, the Company shall mail to Holders a notice briefly describing such Amendments. 5 7 3.2 NOTATION ON SECURITIES. (a) Securities authenticated and delivered after the effectiveness of this Supplemental Indenture shall bear the following notation: "The Company and the Trustee have entered into a Supplemental Indenture, dated as of September 4, 1997, which (i) eliminated certain restrictive covenants contained in Article III of the Indenture; (ii) amended certain provisions with respect to defaults and remedies contained in Article VI of the Indenture and (iii) amended certain provisions contained in Article VIII of the Indenture. Reference is hereby made to such Supplemental Indenture, copies of which are on file with The Chase Manhattan Bank, Trustee." The Trustee may require holders of Securities authenticated and delivered prior to the effectiveness of this Supplemental Indenture to deliver such Securities to the Trustee so that the Trustee may place the aforementioned notation on such Securities. (b) If the Company or the Trustee so determines, the Company, in exchange for the Securities, shall issue and the Trustee shall authenticate new securities that reflect the changed terms. [signature page follows] 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. SAFEWAY INC., Issuer By:______________________________________________ Name: Melissa C. Plaisance Title: Senior Vice President - Finance and Public Affairs THE CHASE MANHATTAN BANK, Trustee By:______________________________________________ Name: Title: EX-4.13 6 COMMON STOCK PURCHASE WARRANTS 1 EXHIBIT 4(i).13 VOID AFTER 5:00 P.M., NEW YORK CITY TIME, NOVEMBER 15, 2001 Certificate No. 10 SAFEWAY INC. COMMON STOCK PURCHASE WARRANTS CERTIFICATE FOR 14,148,969 WARRANTS TO PURCHASE 14,148,969 SHARES OF COMMON STOCK OF SAFEWAY INC. This certifies that, for value received, SSI Equity Associates, L.P., or registered assigns (the "Holder") is entitled to purchase from Safeway Inc., a Delaware corporation (the "Company"), at any time after the date hereof and until 5:00 p.m., New York City time, on November 15, 2001, at the purchase price of $1.00 per share, up to an aggregate of 14,148,969 shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), subject to adjustment as herein provided. In this warrant certificate (the "Warrant Certificate"), the right to purchase each share of Common Stock is referred to as a "Warrant"; the shares of Common Stock or, pursuant to the terms hereof, other securities, issuable upon exercise of the Warrants are referred to as the "Warrant Shares", and the purchase price of $1.00 per Warrant Share, subject to adjustment as herein provided, is referred to as the "Warrant Price". The Warrants are subject to the following terms, conditions and provisions: SECTION 1. Registration; Transferability; Exchange of Warrant Certificate. 1.1 Registration. The Company shall number and register the Warrants in a register (the "Warrant Register") as they are issued by the Company. The Company shall be entitled to treat the Holder of any Warrant as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for complying with a request by a fiduciary or nominee of a fiduciary to register a transfer of any Warrant which is registered in the name of such fiduciary or nominee. 2 1.2 Transfer. Subject to compliance with Section 3 hereof, the Warrants shall be transferable only in the Warrant Register maintained at the office of the Company in New York, New York (the "Office"), upon presentation of this Warrant Certificate and proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and remain with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Company in its discretion. 1.3 Exchange of Warrant Certificate. This Warrant Certificate may be exchanged for another certificate or certificates entitling the Holder to purchase a like aggregate number of Warrant Shares as this Warrant Certificate then entitles the Holder to purchase. If the Holder desires to exchange this Warrant Certificate, it shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, this Warrant Certificate for exchange. Thereupon, the Company shall countersign and deliver to the person entitled thereto a new Warrant certificate or certificates, as the case may be, as so requested. SECTION 2. Term of Warrants; Exercise of Warrants. 2.1 Term of Warrants. Subject to the terms of this Warrant Certificate, the Holder shall have the right, which may be exercised at any time from the date hereof until 5:00 p.m., New York City time, on November 15, 2001 (the "Expiration Date"), to purchase from the Company up to an aggregate of 14,148,969 fully paid and nonassessable Warrant Shares, or such other number of Warrant Shares which the Holder may at the time be entitled to purchase in accordance with the provisions of this Warrant Certificate. Each Warrant not exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall become void and all rights in respect thereof under this Warrant Certificate shall cease as of such time. 2.2 Exercise of Warrants. (a) The Warrants evidenced by this Warrant Certificate may be exercised in whole or in part upon surrender to the Company at its Office of this Warrant Certificate, together with the Form of Election to Purchase attached hereto duly filed in and signed, and upon payment to the Company of the Warrant Price (as determined in accordance with the provisions of Section 7 hereof), for the number of Warrant Shares in respect of which such Warrants are then exercised. 2 3 (b) Payment of the Warrant Price for Warrant Shares upon exercise of any Warrants may be made (i) in cash, (ii) by certified or official bank check in immediately available funds, or (iii) by any combination of (i) and (ii). (c) Subject to Section 3 hereof, upon the surrender of this Warrant Certificate and payment of the Warrant Price as aforesaid, the Company shall cause to be issued and delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Holder may designate a certificate or certificates for the number of Warrant Shares so purchased. If permitted by applicable law, such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date of the surrender of this Warrant Certificate and payment of the Warrant Price, as aforesaid. The rights of purchase represented by the Warrants shall be exercisable, at the election of the Holder, either in full or from time to time in part and, in the event that this Warrant Certificate is exercised in respect of less than all the Warrant Shares purchasable on such exercise at any time prior to the Expiration Date, a new certificate evidencing the remaining Warrant or Warrants will be issued by the Company. 2.3 Compliance with Government Regulations. The Company covenants that if any Warrant Shares required to be reserved for purposes of exercise of Warrants require, under any Federal or state law or applicable governing rule or regulation of any national securities exchange, registration with or approval of any governmental authority, or listing on any such national securities exchange, before such Warrant Shares may be issued upon exercise, the Company will in good faith and as expeditiously as possible endeavor to cause such shares to be duly registered or approved by such governmental authority or listed on the relevant national securities exchange, as the case may be; provided, however, that in no event shall such Warrant Shares be issued, and the Company is hereby authorized to suspend the exercise of all Warrants, for the period during which such registration, approval or listing is required but not in effect. SECTION 3. Payment of Taxes. The Company will pay all documentary stamp and other taxes, if any, attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or other governmental charge which may be payable in respect of any transfer involved in the issue or delivery of any Warrants, or certificates for Warrant Shares, in a name other than that of the registered Holder of such Warrants, and the 3 4 Company shall not register any such transfer or issue any such certificate until such tax or governmental charge, if required, shall have been paid. SECTION 4. Mutilated or Missing Warrants. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and deliver in exchange and substitution for and upon cancellation of this Warrant Certificate, if mutilated, or in lieu of and in substitution for this Warrant Certificate, if lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon, in the event this Warrant Certificate has been lost, stolen or destroyed, receipt of evidence satisfactory to the Company of such loss, theft or destruction. An applicant for such a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 5. Reservation of Warrant Shares; Purchase, Call and Cancellation of Warrants. 5.1 Reservation of Warrant Shares. There have been reserved, and the Company shall at all times keep reserved, out of its authorized Common Stock, a number of shares of Common Stock (which will at all times remain free of preemptive rights) sufficient to provide for the exercise of the rights of purchase represented by the outstanding Warrants evidenced by this Warrant Certificate. The Company or, if appointed, the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid (each, a "Transfer Agent") will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Warrant Certificate on file with each Transfer Agent. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each Holder pursuant to Section 7.3 hereof. All Warrant Certificates surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Company and retired. 5.2 Purchase of Warrants by the Company. The Company shall have the right, except as limited by law, other agreements or herein, to purchase or otherwise acquire Warrants evidenced hereby at such times, in such manner and for such consideration as it may deem appropriate. 4 5 5.3 Call of Warrants. (a) The Company shall have the right to call all (but not less than all) of the Warrants evidenced hereby for redemption at a cash price for each Warrant Share covered by such Warrants equal to $1.00 upon no less than 90 days' written notice if, at the date of such notice, the Securities and Exchange Commission has, under the Securities Act of 1933, as amended, declared effective a registration statement covering shares of the Common Stock and any shares of such Common Stock have been sold and the Warrant Shares are to be sold pursuant to such registration statement, or any subsequent registration statement of a type contemplated by the Registration Rights Agreement dated November 25, 1986, by and between the Company and SSI Equity Associates, L.P., filed with the Securities and Exchange Commission and declared effective; provided, however, that (i) at the time such registration statement covering the Warrant Shares becomes effective there shall exist an Active Public Trading Market (as such term is defined below) in the shares of Common Stock, and (ii) if at the date of such notice this Warrant shall be owned by SSI Equity Associates, L.P. or any successor partnership it may be called for redemption under the circumstances referred to in this Section 5.3(a) only if the exercise of this Warrant shall then be permissible under the terms of the Limited Partnership Agreement of SSI Equity Associates, L.P. or such successor partnership. (b) If a "Change of Ownership Transaction" (as said term is defined below) occurs or is pending, the Company shall have the right to call all (but not less than all) of the Warrants evidenced hereby, upon written notice to the Holder at a cash price for each Warrant equal to the greater of (x) $.075 or (y) the excess of (A) the fair market value of one Warrant Share (or the fair market value of the securities issuable upon exercise of the Warrants, if other than Warrant Shares) over (B) the Warrant Price therefor; provided, that upon notice from the Holder to the Company, the Company shall deliver, or cause to be delivered, in lieu of cash, securities of the same class for which Warrants would be, or would become, exercisable pursuant to Section 7 hereof, having a fair market value (which shall be the same value as was used to determine the fair market value of one Warrant Share) equal to such excess, except that if as a result of such Change of Ownership Transaction the Warrants (if not redeemed) would not be immediately exercisable for cash or securities that have an Active Public Trading Market (a "Non-Marketable Acquisition Transaction") the Holder shall not have the option to request such securities in lieu of cash if the distribution of such securities to the Holder would require registration under the Securities Act. For 5 6 purposes of determining the fair market value of one Warrant Share pursuant to the preceding sentence, each Warrant Share shall be deemed to have a fair market value equal to the value stated for the consideration for which said Warrant Share is exchangeable in the Change of Ownership Transaction or, in the event there is no such stated value, the value, in the case of securities that have an Active Public Trading Market, equal to the average closing sale price for the 30 trading days ending on the date immediately preceding the date of consummation of the Change of Ownership Transaction (if such securities are then publicly traded on a national securities exchange) or the average closing bid price for the 30 trading days ending on the date immediately preceding the date of consummation of the Change of Ownership Transaction (if such securities are not then publicly traded on a national securities exchange but are included in a national quotation system). If the consideration for which said Warrant Share is exchangeable is other than securities that have an Active Public Trading Market and there is no stated value for the transaction, each Warrant Share shall be deemed to have a fair market value as determined by the Board of Directors of the Company, provided that any such determination of fair market value shall be sent to the Holder at least 30 days prior to the date of redemption, together with written information as to the basis upon which the Board of Directors of the Company made such determination. Such determination by the Board of Directors shall be conclusive and undisputed unless objected to in writing at least 10 days prior to the date of redemption by the holders of a majority of the Warrants. (c) For purposes hereof, (i) a "Change of Ownership Transaction" means (A) a consolidation of the Company with, or a merger of the Company into, another entity, (B) an exchange of all or substantially all of the Common Stock for securities, cash or property of another entity, or (C) a sale, transfer or lease to another entity of all or substantially all of the assets of the Company, if, as a result of any transaction described in the foregoing clauses (A), (B) or (C), and after giving effect thereto, the holders of the Common Stock will own less than 50% of the voting power of all classes of stock having general voting rights of the resulting or acquiring entity and such resulting or acquiring entity is not an "affiliate" of the Company (as such term is defined in Rule 405 under the Securities Act of 1933, as amended, at the date hereof), and (ii) an "Active Public Trading Market" in the shares of Common Stock shall be deemed to exist only if at least 25% of the issued and outstanding shares of Common Stock has been publicly sold and continues to be freely tradeable and the Common Stock is traded on a national securities 6 7 exchange, or included in a national quotation system, or there are at least three active market-makers with respect to the Common Stock who are recognized investment bankers or securities dealers. (d) The Company shall mail the notice of any call for redemption pursuant to Section 5.3(a) or (b) hereof to the Holder hereof not more than 120 days nor less than 90 days prior to the date scheduled for redemption (the "Call Date"); provided, however, that if the Company desires to call the Warrants for redemption pursuant to Section 5.3(a) hereof, such notice shall be mailed not later than the date the registration statement referred to therein shall have been initially filed with the Securities and Exchange Commission. Such notice shall state the Call Date and the place and price of such call. The Holder shall continue to have the right to exercise the warrants until 5:00 p.m., New York time, on the last business day preceding the Call Date. The term "business day" as used herein shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York are not required to be open. 5.4 Cancellation of Warrants. In the event the Company shall purchase or otherwise acquire Warrants, the same shall thereupon be cancelled by it and retired. The Company shall cancel any warrant surrendered for exchange, substitution, transfer or exercise in whole or in part. SECTION 6. Warrant Price. Subject to adjustment as provided in Section 7 hereof, the Warrant Price shall be $1.00 per Warrant Share. SECTION 7. Adjustment of Warrant Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter described. 7.1 Mandatory Adjustments. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend on its outstanding Common Stock in shares of Common Stock or make a distribution to all holders of its outstanding Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of 7 8 Common Stock other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving corporation), the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant upon exercise thereof shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective on the date of dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Such adjustment shall be made successively, whenever such an issuance is made. (b) (i) In case the Company shall distribute to all holders of its outstanding Common Stock evidences of its indebtedness or assets or securities other than its Common Stock (excluding cash distributions payable out of consolidated earnings or earned surplus and dividends or distributions referred to in Section 7.1(a) above or in Section 7.1(b)(ii) hereof) or rights, options or warrants to subscribe for or purchase shares of Common Stock, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, of which the numerator shall be the then current Warrant Price on the date of such distribution, and of which the denominator shall be the then current Warrant Price, less the then fair value (as determined by the Board of Directors of the Company, whose determination shall be conclusive), up to the then current Warrant Price less $.01, of the portion of the evidences of indebtedness, assets, securities, rights, options, warrants or convertible or exchangeable securities so distributed attributable to one share of Common Stock. (ii) In the event of a distribution by the Company to all holders of its outstanding Common Stock of stock of a subsidiary or securities convertible into or exercisable for such stock, then in lieu of an adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant, the Holder of each Warrant, upon the exercise thereof at any time after such distribution, shall be entitled to receive from the Company, such subsidiary or 8 9 both, as the Company shall determine, the stock or other securities to which such Holder would have been entitled if such Holder had exercised such Warrant immediately prior thereto. (iii) The adjustment required by this Section 7.1(b) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (c) In case the Company shall after the date hereof sell and issue shares of Common Stock, or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (all of the foregoing being referred to in this Section 7.1(c) as "Shares") (excluding (i) Shares issued in any of the transactions described in Section 7.1(a) or (b) above, (ii) Shares issuable upon exercise of stock options granted or to be granted to employees or directors of the Company or its subsidiaries, other than pursuant to Shares included in clause (iii) below, (iii) Shares issued to employees of the Company or its subsidiaries pursuant to stock bonus or incentive compensation plans or agreements approved by the stockholders of the Company, provided that the number of Shares so excluded pursuant to this clause (iii) and the immediately preceding clause (ii) shall not exceed in the aggregate 28,000,000 Shares, subject to adjustment under the terms of any such stock options, (iv) Shares issued pursuant to a dividend or interest reinvestment plan, or (v) Shares issued to stockholders of any corporation which is acquired by, merged into or becomes part of the Company or a subsidiary of the Company in an arm's length transaction), at a price per Share (determined, in the case of rights, options, warrants or convertible or exchangeable securities, by dividing (x) the total amount received or receivable by the Company in consideration of the sale and issuance of such rights, options, warrants or convertible or exchangeable securities, plus the total consideration payable to the Company upon exercise or conversion or exchange thereof, by (y) the total number of shares of Common Stock covered by such rights, options, warrants or convertible or exchangeable securities) lower than the then current Warrant Price in effect immediately prior to such sale and issuance, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding immediately after such sale and issuance and the 9 10 denominator of which shall be an amount equal to the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such sale and issuance plus (B) the number of shares of Common Stock which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at the Warrant Price in effect immediately prior to such sale and issuance. Such adjustment shall be made successively whenever such an issuance is made. For the purposes of such adjustments, the shares of Common Stock which the holder of any such rights, options, warrants, or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company (plus any underwriting discounts or commissions in connection therewith) for such rights, options, warrants or convertible or exchangeable securities, plus the consideration or premiums stated in such rights, options, warrants or convertible or exchangeable securities to be paid for the shares of Common Stock owned thereby. In case the Company shall sell and issue Shares for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration received by the Company" for purposes of the first sentence and the immediately preceding sentence of this Section 7.1(c), the Board of Directors of the Company shall determine, in its discretion, the fair value of said property, and such determinations, if made in good faith, shall be binding on all Holders. The determination of whether any adjustment is required under this Section 7.1(c), by reason of the sale and issuance of any rights, options, warrants or convertible or exchangeable securities and the amount of such adjustment, if any, shall be made only at such time and not at the subsequent time of issuance of Shares upon the exercise of such rights to subscribe or purchase. (d) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; provided, however, that any adjustments which by reason of this Section 7.1(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (e) Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as herein 10 11 provided, the Warrant Price payable upon exercise of each Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (f) No adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant need be made under Section 7.1(b) hereof if the Company issues or distributes to each Holder of Warrants the rights, options, warrants, convertible or exchangeable securities, evidences of indebtedness, assets or securities referred to in such paragraph which each Holder of Warrants would have been entitled to receive had the Warrants been exercised prior to the happening of such event or the record date with respect thereto. No adjustment need be made for a change in the par value of the Warrant Shares that does not affect the number of shares of Common Stock outstanding after giving effect to such change. (g) For the purposes of this Section 7.1, the term "shares of Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Warrant Certificate or (ii) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to Section 7.1(a) above, the Holders shall become entitled to purchase any securities other than shares of Common Stock, thereafter the number of such other securities so purchasable upon exercise of each Warrant and the Warrant Price of such securities shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in Section 7.1(a) through (e), inclusive, above, and the provisions of Section 2 and Sections 7.2 through 7.4, inclusive, with respect to the Warrant Shares, shall apply on like terms to any such other securities. (h) Upon the expiration of any rights, options, warrants or conversion or exchange privileges which resulted in adjustments pursuant to subsections (a), (b) or (c) of this Section 7.1, if any thereof shall not have been exercised, the Warrant Price and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be readjusted and shall thereafter be such as it would have been had it been originally adjusted (or had the 11 12 original adjustment not been required, as the case may be) as if (A) the only shares of Common Stock purchasable upon exercise of such rights, options, warrants or conversion or exchange privileges were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange privileges and (B) such shares of Common Stock so issued or sold, if any, were issuable for the consideration actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion or exchange privileges whether or not exercised; provided, that no such readjustment shall have the effect of increasing the Warrant Price or decreasing the number of Warrant Shares purchasable upon the exercise of each Warrant by an amount in excess of the amount of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange privileges. 7.2 Voluntary Adjustment by the Company. The Company may at its option, at any time during the term of the Warrants, reduce the then current Warrant Price to any amount deemed appropriate by the Board of Directors of the Company; provided that if the Company elects so to reduce the then current Warrant Price, such reduction shall remain in effect for at least a 15-day period, after which time the Company may, at its option, reinstate the Warrant Price in effect prior to such reduction. 7.3 Notice of Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Warrant Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder a notice of such adjustment or adjustments and a certificate of an officer of the Company accompanied by the report thereon by a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants for the Company) setting forth the number of Warrant Shares purchasable upon the exercise of each Warrant and the Warrant Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive evidence of the correctness of such adjustment. 7.4 No Adjustment for Dividends. Except as provided in Section 7.1 hereof, no adjustment in respect of any dividends or other payments or distributions made to holders of securities issuable upon exercise of Warrants shall be made during the term of a Warrant or upon the exercise of a Warrant. 7.5 Preservation of Purchase Rights Upon Merger, Consolidation, etc. Subject to Section 5.3 hereof, in case of 12 13 any consolidation of the Company with or merger of the Company into another entity (whether or not the Company is the surviving corporation), or in the case of any sale, transfer or lease to another of all or substantially all the property of the Company, the Company or such successor or purchasing entity, as the case shall be, shall deliver to the Holder an undertaking that the Holder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase upon exercise of each Warrant the kind and amount of securities, cash and property which the Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale, transfer or lease had such Warrant been exercised immediately prior to such action. Upon the execution of such agreement, such Warrant shall be exercisable only for such securities, cash and property. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The provisions of this Section 7.5 shall similarly apply to successive consolidations, mergers, sales, transfers or leases. 7.6 Statement on Warrants. Irrespective of any adjustments in the Warrant Price or the number or kind of securities purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Warrant Certificate. SECTION 8. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the Holder, the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 8, be issuable on the exercise of any Warrant (or specified portion thereof) there will be paid in cash to the Holder of the Warrants an amount per Warrant Share equal to the same fraction of the current market value of a share of Common Stock. For purposes of this Section 8, the "current market value" per share of Common Stock shall be (a) if the Common Stock is then publicly traded on a national securities exchange, the closing sale price of the Common Stock on such exchange on the last trading day prior to the date of determination, (b) if the Common Stock is not then publicly traded on a national securities exchange but is included in a national quotation system, the closing bid price for the Common Stock on the last trading day prior to the date of determination, and (c) if neither (a) nor (b) is applicable, as determined in good faith by the Board of Directors of the Company. 13 14 SECTION 9. No Rights as Stockholders; Notices to Holders. Nothing contained in this Warrant Certificate shall be construed as conferring upon the Holder or its transferees the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders of the Company for the election of the directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any of the following events shall occur: (a) the Company shall declare any dividend payable in cash or in any securities upon its shares of Common Stock or make any distribution to the holders of its shares of Common Stock; (b) the Company shall offer to all holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe for or purchase any thereof; (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed: or (d) a proposed transaction, which, if consummated, would permit the Company to call the Warrants pursuant to Section 5.3 hereof, then in any one or more of said events, the Company shall give notice in writing of such event to the Holder as provided in Section 11 hereof, such giving of notice to be completed at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, or subscription rights, or for the determination of the stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive such notice or any defect therein or in the mailing thereof shall not affect the validity of any action taken in connection with such dividend, distribution or subscription rights, or such proposed dissolution, liquidation or winding up. SECTION 10. Identity of Transfer Agent. Forthwith upon the appointment of any Transfer Agent for the Warrant Shares, or any other securities issuable upon the exercise of the 14 15 Warrants, the Company will notify the Holder of the name and address of such Transfer Agent. SECTION 11. Notices. Any notice pursuant to this Warrant Certificate by the Holder to the Company shall be in writing and shall be delivered in person or by facsimile transmission, or mailed by first class mail, postage prepaid to the Company, at Safeway Inc., 5918 Stoneridge Mall Road, Pleasanton, California 94588. Any notice pursuant to this agreement by the Company to the Holder shall be in writing and shall be mailed first class, postage prepaid, or otherwise delivered, to the Holder at its address on the books of the Company. Each party hereto may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice to the other party. SECTION 12. Supplements and Amendments. The Company may from time to time supplement or amend this Warrant Certificate without the approval of the Holder in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interests of the Holder in any material respect. SECTION 13. Successors. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns hereunder. SECTION 14. Merger or Consolidation of the Company. The Company will not merge or consolidate with or into, or sell, transfer or lease all or substantially all of its property to, any other corporation unless the successor, transferee or lessee corporation, as the case may be (if not the Company), shall expressly assume the due and punctual performance and observance of each and every covenant and condition of this Warrant Certificate to be performed and observed by the Company, subject to Sections 5.3 and 7.5 hereof. SECTION 15. Applicable Law. This Warrant Certificate and each Warrant issued hereunder shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. The parties hereto agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out 15 16 of or relating to this Warrant Certificate and/or the Warrants evidenced hereby. SECTION 16. Benefits of this Warrant Certificate. Nothing in this Warrant Certificate shall be construed to give to any person or entity other than the Company and the Holder any legal or equitable right, remedy or claim under this Warrant Certificate; but this Warrant Certificate shall be for the sole and exclusive benefit of the Company and the Holder. SECTION 17. Captions. The captions of the sections and paragraphs of this Warrant Certificate have been inserted for convenience only and shall have no substantive effect. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed this __th day of January, 1998. SAFEWAY INC. By:____________________________________ Name: Michael C. Ross Title: Senior Vice President 16 17 [FORM OF ELECTION TO PURCHASE] (To be executed upon exercise of Warrants) To Safeway Inc.: The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, ______ shares of Common Stock, as provided for therein, and requests that a certificate or certificates for such shares of Common Stock be issued in the name of, and any cash for any fractional shares be paid to: Name ____________________________ (Please print name, address and Social Security or other taxation identification No.) If said number of shares shall not be all the shares purchasable under the within Warrant Certificate, the undersigned requests that a new Warrant Certificate for the balance remaining of the shares purchasable thereunder (less any fraction of a share paid in cash pursuant to the terms of the Warrant Certificate) be issued to: Name ____________________________ (Please print name, address and Social Security or other taxation identification No.) In full payment of the Warrant Price with respect to the Warrants exercised hereby and transfer taxes, if any, the undersigned hereby tenders payment of $______, payable as follows: (a) in cash, as to $______ and/or (b) by certified or official bank check, as to $___________. Dated: __________________ ----------------------------------------- (Name, signature, address and social security or other taxation identification number of Holder - signature must conform in all respects to name of Holder on the face of Warrant Certificate or with the name of assignee appearing in the Warrant Register.) 17 EX-10.7 7 AMENDED OPERATING PERFORMANCE BONUS PLAN 1 EXHIBIT 10(iii).7 SECOND AMENDMENT TO THE OPERATING PERFORMANCE BONUS PLAN FOR EXECUTIVE OFFICERS OF SAFEWAY INC. Safeway Inc. (the "Company"), a corporation organized under the laws of the State of Delaware, by resolution of its Board of Directors has adopted this Second Amendment to The Operating Performance Bonus Plan for Executive Officers of Safeway Inc. (the "Plan") pursuant to Section 9.2 of the Plan, effective as of October 7, 1997. 1. The second sentence of Section 2.1 of the Plan is hereby amended in its entirety to read as follows: "Achievement of specified levels above the performance target will result in an award not to exceed 120% of Base Compensation, paid in accordance with Article III." 2. The second sentence of Section 2.2 of the Plan is hereby amended to read in its entirety as follows: "Achievement of specified levels above the performance target described under Section 2.1 will result in bonus awards not to exceed 40% for some and up to 120% of other Executive Officers' Base Compensation, as previously established by the Committee." 3. Section 3.2 of the Plan is hereby amended to read in its entirety as follows: "Section 3.2 - Timing of Payment. Unless otherwise directed by the Committee, each bonus award shall be paid as soon as practicable after the end of the fiscal year to which such bonus award relates." * * * * * * * * * I hereby certify that the foregoing Second Amendment to the Plan was duly adopted by the Board of Directors of Safeway Inc. as of October 7, 1997. Executed on this _____ day of _________________ , 1997. ------------------------------------- Assistant Secretary 2 THIRD AMENDMENT TO THE OPERATING PERFORMANCE BONUS PLAN FOR EXECUTIVE OFFICERS OF SAFEWAY INC. Safeway Inc. (the "Company"), a corporation organized under the laws of the State of Delaware, by resolution of its Board of Directors has adopted this Third Amendment to The Operating Performance Bonus Plan for Executive Officers of Safeway Inc. (the "Plan") pursuant to Section 9.2 of the Plan, effective as of March 10, 1998. 1. Section 1.1 of the Plan is hereby amended in its entirety to read as follows: Section 1.1 - Base Compensation. "Base Compensation" shall mean the Participant's regular weekly base salary rate, excluding moving expenses, bonus pay and other payments which are not considered part of regular weekly salary rate, multiplied by the number of weeks the Participant is eligible, including up to six weeks of Paid Leave of Absence. Any changes in the Participant's regular weekly base salary rate effected during the fiscal year shall be taken into account, on a proportionate basis, in computing any bonus award for the fiscal year. 2. Section 2.1 of the Plan is hereby amended to read in its entirety as follows: Section 2.1 - CEO. For each fiscal year the Section 162(m) Committee of the Board (the "Committee") shall establish a performance target which shall include three components of overall Company performance: (i) identical store sales, (ii) operating profit and (iii) working capital. Achievement of specified levels above the performance target will result in an award not to exceed 120% of Base Compensation, up to a maximum of $1.5 million, paid in accordance with Article III. Prior to the payment of a bonus award the Committee must certify the level of performance attained by the Company during the year to which such bonus award relates. 3. Section 2.2 of the Plan is hereby amended to read in its entirety as follows: Section 2.2 - Executive Officers. Each Executive Officer (including the Senior Vice President - Supply, but excluding the CEO) is eligible for this bonus award. Achievement of specified levels above the performance target described under Section 2.1 will result in bonus awards not to exceed 30% for some and up to 120% of other Executive Officers' Base Compensation, as previously established by the CEO, up to a maximum bonus award of $1.5 million, paid in accordance with Article III. At the CEO's discretion, however, the CEO may reduce the amount payable to any Executive Officer. 3 Prior to the payment of a bonus award the Committee must certify in writing the level of performance attained by the Company during the year to which such bonus award relates. 4. Section 2.3 is hereby amended to read in its entirety as follows: Section 2.3 - Senior Vice President - Supply. For each fiscal year the Committee shall establish a performance target which shall include four components of performance for the Supply Division: (i) total Supply Division income, (ii) plant performance, (iii) Glencourt income contribution and (iv) working capital turnover. Achievement of specified levels above the performance target will result in an award not to exceed 55% of Base Compensation, up to a maximum of $550,000, paid in accordance with Article III. Prior to the payment of a bonus award the Committee must certify in writing the level of performance attained by the Supply Division during the year to which such bonus relates. * * * * * * * * * I hereby certify that the foregoing Third Amendment to the Plan was duly adopted by the Board of Directors of Safeway Inc. as of March 10, 1998. Executed on this _____ day of _________________ , 1998. ------------------------------------ Assistant Secretary EX-10.8 8 CAPITAL PERFORMANCE BONUS PLAN 1 EXHIBIT 10(iii).8 THE CAPITAL PERFORMANCE BONUS PLAN FOR EXECUTIVE OFFICERS OF SAFEWAY INC. Safeway Inc., a Delaware corporation (the "Company"), hereby adopts The Capital Performance Bonus Plan for Executive Officers of Safeway Inc. (the "Plan"). The objectives of the Plan are to motivate and reward executives to produce results that increase shareholder value and to encourage individual and team behavior that helps the Company achieve both short and long-term corporate objectives. ARTICLE I DEFINITIONS Section 1.1 - Base Compensation. "Base Compensation" shall mean the Participant's regular weekly base salary rate, excluding moving expenses, bonus pay and other payments which are not considered part of regular weekly salary rate, multiplied by the number of weeks the Participant is eligible, including up to six weeks of Paid Leave of Absence. Any changes in the Participant's regular weekly base salary rate effected during the fiscal year shall be taken into account, on a proportionate basis, in computing any bonus award for the fiscal year. Section 1.2 - Eligible Project. "Eligible Project" shall mean either a First Year Eligible Project or a Third Year Eligible Project. "First Year Eligible Project" shall mean a new store or remodel project which (a) has been completed during the current fiscal year or the immediately preceding fiscal year (unless otherwise determined by the Committee) and (b) with respect to which an audit has been completed in the current fiscal year. "Third Year Eligible Project" shall mean a new store or remodel project with respect to which an audit has been completed during the second fiscal year following the fiscal year during which such project was audited as a First Year Eligible Project. Section 1.3 - Paid Leave of Absence. "Paid Leave of Absence" shall mean a period of time during which a Participant performs no duties due to an illness, incapacity (including disability), layoff, jury duty, military duty or a leave of absence for which the Participant is so paid or so entitled to payment by the Company, whether direct or indirect, but excluding vacation time. Section 1.4 - Participant. "Participant" shall mean any of the Chief Executive Officer ("CEO"), the Chief Financial Officer, the Senior Vice President - Corporate Retail Operations, the Senior Vice President and Director of Marketing, the 2 Senior Vice President - Supply Operations and the Senior Vice President - Real Estate ("SVP-Real Estate"). Section 1.5 - Performance Goal. "Performance Goal" shall mean one or more levels of targeted return on invested capital for each Eligible Project for each fiscal year that correspond to a bonus award with respect to any Participant expressed as a percentage (which need not be identical for each Participant) of Base Compensation, as determined by the Committee as provided in Section 4.2. ARTICLE II BONUS AWARDS Section 2.1 - CEO. For each fiscal year, the Section 162(m) Committee of the Board (the "Committee") shall establish Performance Goals for each Eligible Project that apply to the determination of the bonus award for the CEO. Achievement of specified levels above the Performance Goals will result in an award to the CEO not to exceed 30% of the CEO's Base Compensation, up to a maximum of $375,000, for all Eligible Projects in the aggregate for any fiscal year, paid in accordance with Article III. Prior to the payment of a bonus award the Committee must certify in writing the extent to which the Performance Goals have been achieved for each Eligible Project for the fiscal year to which such bonus award relates. Section 2.2 - Other Executive Officers. Each Participant (other than the CEO) is eligible for a bonus award in any fiscal year equal to a fixed percentage of Base Compensation based on the Performance Goals established under Section 2.1. Achievement of specified levels above the Performance Goals described under Section 2.1 will result in an award to each such Executive Officer that ranges from 15% up to a maximum of 30% of such Executive Officer's Base Compensation, up to a maximum of $300,000, for all Eligible Projects in the aggregate for any fiscal year, paid in accordance with Article III. At the CEO's discretion, however, the CEO may reduce the amount payable to any such Executive Officer. Prior to the payment of a bonus award, the Committee must certify in writing the extent to which the Performance Goals have been achieved for each Eligible Project for the fiscal year to which such bonus award relates. ARTICLE III PAYMENT OF BONUS AWARD Section 3.1 - Form of Payment. Each bonus award shall be paid in cash. Section 3.2 - Timing of Payment. Unless otherwise determined by the Committee, each bonus award shall be paid as soon as practicable after the end of the fiscal year to which such bonus award relates. 5 3 Section 3.3 - Taxes. All amounts payable hereunder shall be subject to applicable federal, state and local tax withholding. ARTICLE IV SECTION 162(m) Section 4.1 - Qualified Performance Based Compensation. The Committee, in it discretion, may determine whether a bonus award should qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the "Code") and may take such actions which it may deem necessary to ensure that such bonus award will so qualify. Any such bonus award shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) and of the Code) or any regulations or rulings issued thereunder that are requirements for qualifications as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements. Section 4.2 - Performance Goals. With respect to any bonus award which the Committee determines should qualify as performance- based compensation, any of the Performance Goals described in Section 2.1, if applicable to such bonus award, shall be established before the first day of the fiscal year to which such bonus award relates, except as may be otherwise provided under Section 162(m)(4)(C) of the Code. ARTICLE V TRANSFERS AND TERMINATIONS Section 5.1 - Transfers. For a Participant who moves from one eligible Executive Officer position to another during a year, the bonus award for the year will be the sum of the pro-rata bonus awards calculated for each position. Section 5.2 - Terminations. Except as provided in Section 5.1 or as otherwise provided by the Committee, a Participant who, whether voluntarily or involuntarily, is terminated, demoted, transferred or otherwise ceases to be an eligible Executive Officer at any time during a year shall not be eligible to receive a partial year bonus award, except when the reason for leaving the position is for reasons of health or retirement; provided, however, that with respect to a Participant who leaves for reasons of health or retirement, the Committee or the CEO, in their discretion, may determine that such participant shall not receive a partial year bonus award. 4 ARTICLE VI ADMINISTRATION Section 6.1 - 162(m) Committee (a) The Committee shall consist of at least two persons, each of whom is an "outside director" for purposes of Section 162(m) of the Code, appointed by and holding office at the pleasure of the Board. (b) Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. Section 6.2 - Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan, and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Section 162(m) of the Code are required to be determined in the sole and absolute discretion of the Committee. Section 6.3 - Majority Rule. The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. ARTICLE VII OTHER PROVISIONS Section 7.1 - Amendment, Suspension or Termination of the Plan. This Plan does not constitute a promise to pay and may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, to the extent required by Section 162(m) with respect to bonus awards which the Committee determines should qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, no action of the Board may modify the performance targets described in Section 2.1 if applicable to such bonus awards, after the commencement of the year with respect to which such bonus awards relate, except as may be otherwise provided under Section 162(m)(4)(C) of the Code. 5 Section 7.2 - Approval of Plan by Stockholders. This Plan shall be submitted for the approval of the Company's stockholders. * * * * * * * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Safeway Inc. as of March 10, 1998. Executed on this___________ day of__________________, 1998 _______________________________ Assistant Secretary EX-12.1 9 COMPUTATION OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 SAFEWAY INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Fiscal Year ------------------------------------------------------------------------- 53 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks 1997 1996 1995 1994 1993 --------- ---------- -------- -------- -------- Income before income taxes and extraordinary loss $1,076.3 $767.6 $556.5 $424.1 $216.3 Add interest expense 241.2 178.5 199.8 221.7 265.5 Add interest on rental expense (a) 88.5 90.0 87.5 86.6 88.0 Less equity in earnings of unconsolidated affiliates (34.9) (50.0) (26.9) (27.3) (33.5) Add minority interest in subsidiary 4.4 3.4 3.9 3.0 3.5 --------- -------- -------- -------- -------- Earnings $1,375.5 $989.5 $820.8 $708.1 $539.8 ========= ======== ======== ======== ======== Interest expense $ 241.2 $178.5 $199.8 $221.7 $265.5 Add capitalized interest 5.7 4.4 4.6 2.9 4.2 Add interest on rental expense (a) 88.5 90.0 87.5 86.6 88.0 --------- -------- -------- -------- -------- Fixed charges $ 335.4 $272.9 $291.9 $311.2 $357.7 ========= ======== ======== ======== ======== Ratio of earnings to fixed charges 4.10 3.63 2.81 2.28 1.51 ========= ======== ======== ======== ======== (b)
(a) Based on a 10% discount factor on the estimated present value of future operating lease payments. (b) Safeway's ratio of earnings to fixed charges during 1993 was adversely affected by a $54.9 million charge to operating and administrative expense for severance payments made to retail employees in the Alberta, Canada division as part of a voluntary employee buyout. Excluding this charge, the ratio of earnings to fixed charges for 1993 would have been 1.66. EX-13.1 10 SELECTED FINANCIALS FROM 1997 ANNUAL REPORT 1 EXHIBIT 13.1 COMPANY IN REVIEW Safeway Inc. ("Safeway" or the "Company") is the second largest food and drug chain in North America based on sales, with 1,368 stores, including 315 Vons stores, at year-end 1997. The Company's U.S. retail operating areas are located principally in Washington, Oregon, northern California, southern California, Arizona, Colorado and the Mid-Atlantic region. The Company also has Canadian retail operations which are located primarily in British Columbia, Alberta and Manitoba/Saskatchewan. For each of its 10 retail operating areas, Safeway believes that it holds the number one or number two market share position for the total area served. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities. On April 8, 1997, Safeway completed the acquisition of The Vons Companies, Inc. ("Vons") pursuant to which the Company issued 83.2 million shares of the Company's Common Stock for all of the shares of Vons common stock that it did not already own (the "Merger"). The Company also holds a 49% interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 74 food and general merchandise stores in western Mexico. RETAIL OPERATIONS STORES Safeway operates stores ranging in size from approximately 5,900 square feet to over 89,000 square feet. Safeway determines the size of a new store based on a number of considerations, including the needs of the community the store serves, the location and site plan, and the estimated return on capital invested. Most stores offer a wide selection of both food and general merchandise and feature a variety of specialty departments such as bakery, delicatessen, floral and pharmacy. In most of Safeway's larger stores, specialty departments are showcased in each corner and along the perimeter walls of the store to create a pleasant shopping atmosphere. Safeway's primary new store prototype is 55,000 square feet and is designed to accommodate changing consumer needs and to achieve certain operating efficiencies. Safeway continues to operate a number of smaller stores which offer an extensive selection of food and general merchandise, and generally include one or more specialty departments. These stores remain an important part of the Company's store network in smaller communities and certain other locations where larger stores may not be feasible because of space limitations and/or community needs or restrictions. The following table summarizes Safeway's stores by size at year-end 1997:
Number Percent of Stores of Total --------- -------- Less than 30,000 square feet 368 27% 30,000 to 50,000 730 53 More than 50,000 270 20 ----- --- Total stores 1,368 100% ===== ===
STORE OWNERSHIP At year-end 1997, Safeway owned more than one-third of its stores. Safeway leased its remaining stores. In recent years, the Company has preferred ownership because it provides control and flexibility with respect to financing, remodel- ing, expansions and closures. MERCHANDISING Safeway's operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high quality products at competitive prices. The Company emphasizes high quality perishables such as produce and meat, and specialty departments, including in-store bakery, delicatessen, floral, and pharmacy designed to provide one-stop shopping for today's busy shoppers. Safeway has introduced a line of more than 850 premium corporate brand products since 1993 under the "Safeway SELECT" banner. These products include soft drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt, pet food and laundry detergent. The line also includes Safeway SELECT "Healthy Advantage" items such as low-fat ice cream and low-fat cereal bars, and Safeway SELECT "Gourmet Club" frozen entrees and hors d'oeuvres. 12 2 The Safeway SELECT line is designed to offer premium quality products that are equal or superior in quality to comparable best-selling nationally advertised brands, are offered at more competitive prices, or are not available from national brand manufacturers. Safeway also offers a wide selection of private label products under well-known and respected brand names such as Safeway, Vons, Lucerne, Jerseymaid and Mrs. Wright's, which the Company believes are equivalent in quality to comparable nationally advertised brands. The Company continually refines its merchandising strategies, which are designed to identify and accommodate changing demographics, lifestyles and product preferences of its customers. Safeway has intensified its efforts to improve in-stock conditions and enhance merchandise presentation and selection. MANUFACTURING AND WHOLESALE OPERATIONS The principal function of manufacturing operations is to purchase, manufacture and process private label merchandise sold in stores operated by the Company. As measured by sales dollars, over one-half of Safeway's private label merchandise is manufactured in company-owned plants, and the remainder is purchased from third parties. During 1993, Safeway began a review to identify manufacturing operations that were not providing acceptable returns. This review resulted in the sale or closure of 19 plants from 1993 through 1997 and a reorganization of the manufacturing division administrative office during 1994. In 1998, Safeway expects to have fully operational a new food processing plant in California which will replace one that was closed in 1997 and another that is expected to close in 1998. The ongoing review of remaining manufacturing operations may result in additional plant closures. Safeway's Canadian subsidiary has a wholesale operation that distributes both national brands and private label products to independent grocery stores and institutional customers. Safeway operated the following manufacturing and processing facilities at year-end 1997:
U.S. Canada -- -- Milk plants 7 3 Bread baking plants 6 2 Ice cream plants 5 2 Cheese and meat packaging plants 2 2 Soft drink bottling plants 4 -- Fruit and vegetable processing plants 1 3 Other food processing plants 3 1 Pet food plant 1 -- -- -- Total 29 13 == ==
In addition, the Company operates laboratory facilities for quality assurance and research and development in certain of its plants and at its U.S. manufacturing headquarters in Walnut Creek, California. DISTRIBUTION Each of Safeway's 10 retail operating areas is served by a regional distribution center consisting of one or more facilities. Safeway has 13 distribution/warehousing centers (10 in the United States and three in Canada), which collectively provide the majority of all products to stores operated by the Company. Safeway's distribution centers in northern California and British Columbia are operated by third parties. Management regularly reviews distribution operations focusing on whether these operations support their operating areas in a cost-effective manner. As a result of such reviews, Safeway is constructing a replacement distribution center in Maryland. CAPITAL EXPENDITURE PROGRAM A component of the Company's long-term strategy is its capital expenditure program. The capital expenditure program funds new stores, remodels, advances in information technology, and other facilities including plant and distribution facilities and corporate headquarters. In the last several years, Safeway management has significantly strengthened its program to select and approve new capital investments resulting in improved returns on investment. 13 3 \ The table below reconciles cash paid for property additions reflected in the Consolidated Statements of Cash Flows to Safeway's broader definition of capital expenditures (dollars in millions), and also details changes in the Company's store base during such period:
1997 1996 1995 ------ ------ ------ Cash paid for property additions $758.2 $541.8 $450.9 Less: Purchases of previously leased properties (28.2) (13.2) (9.9) Plus: Present value of all lease obligations incurred 91.3 91.7 62.2 Mortgage notes assumed in property additions 0.9 -- -- Vons first quarter expenditures 7.2 -- -- ------ ------ ------ Total capital expenditures $829.4 $620.3 $503.2 ====== ====== ====== Capital expenditures as a percent of sales 3.7% 3.6% 3.1% Vons stores acquired 316 -- New stores opened 37 30 32 Stores closed or sold 37 37 35 Remodels 181 141 108 Total retail square footage at year-end (in millions) 53.2 40.7 40.1
Improved operations and lower project costs have raised the return on capital projects, allowing Safeway to increase capital expenditures to $829 million in 1997 from $620 million in 1996 and $503 million in 1995. In 1998, Safeway expects to spend approximately $950 million and plans to open 40 to 45 new stores, complete more than 200 remodels and finish construction of the Maryland distribution center. Management regularly reviews the performance of individual stores and other facilities on the basis of a variety of economic factors. Upon reaching the decision to close a store or other facility, the Company accrues estimated future losses, if any, which may include lease payments or other costs of holding the facility, net of estimated future income. As of year-end 1997, Safeway had an accrued liability of $72.0 million for the anticipated future closure of 42 stores and $19.7 million for the anticipated future closure of other facilities. PERFORMANCE-BASED COMPENSATION The Company has performance-based compensation plans that cover approximately 7,750 management employees. Performance-based compensation plans set overall bonus levels based upon both operating results and working capital management. Individual bonuses are based on job performance. Certain employees are covered by capital investment bonus plans which measure the performance of capital projects based on operating performance over several years. 14 4 SAFEWAY INC. AND SUBSIDIARIES FIVE-YEAR SUMMARY FINANCIAL INFORMATION
(Dollars in millions, except 53 WEEKS 52 Weeks 52 Weeks 52 Weeks 52 Weeks per-share amounts) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- RESULTS OF OPERATIONS Sales $ 22,483.8 $ 17,269.0 $ 16,397.5 $ 15,626.6 $ 15,214.5 ========== ========== ========== ========== ========== Gross profit 6,414.7 4,774.2 4,492.4 4,287.3 4,123.3 Operating and administrative expense (5,135.0) (3,882.5) (3,765.0) (3,675.2) (3,681.8) ---------- ---------- ---------- ---------- ---------- Operating profit 1,279.7 891.7 727.4 612.1 441.5 Interest expense (241.2) (178.5) (199.8) (221.7) (265.5) Equity in earnings of unconsolidated affiliates (Note 1) 34.9 50.0 26.9 27.3 33.5 Other income, net 2.9 4.4 2.0 6.4 6.8 ---------- ---------- ---------- ---------- ---------- Income before income taxes and extraordinary loss 1,076.3 767.6 556.5 424.1 216.3 Income taxes (454.8) (307.0) (228.2) (173.9) (93.0) ---------- ---------- ---------- ---------- ---------- Income before extraordinary loss 621.5 460.6 328.3 250.2 123.3 Extraordinary loss, net of tax benefit of $41.1, $1.3 and $6.7 (64.1) -- (2.0) (10.5) -- ---------- ---------- ---------- ---------- ---------- Net income $ 557.4 $ 460.6 $ 326.3 $ 239.7 $ 123.3 ========== ========== ========== ========== ========== Diluted earnings per share (Note 2): Income before extraordinary loss $ 1.25 $ 0.97 $ 0.68 $ 0.51 $ 0.25 Extraordinary loss (0.13) -- -- (0.02) -- ---------- ---------- ---------- ---------- ---------- Net income $ 1.12 $ 0.97 $ 0.68 $ 0.49 $ 0.25 ========== ========== ========== ========== ========== FINANCIAL STATISTICS Identical-store sales increases (Note 3) 1.3% 5.1% 4.6% 4.4% 2.1% Gross profit margin 28.53% 27.65% 27.40% 27.44% 27.10% Operating and administrative expense margin 22.84% 22.48% 22.96% 23.52% 24.20% Operating profit margin 5.7% 5.2% 4.4% 3.9% 2.9% Capital expenditures (Note 4) $ 829.4 $ 620.3 $ 503.2 $ 352.2 $ 290.2 Depreciation and amortization 455.8 338.5 329.7 326.4 330.2 Total assets 8,493.9 5,545.2 5,194.3 5,022.1 5,074.7 Total debt 3,340.3 1,984.2 2,190.2 2,196.1 2,689.2 Stockholders' equity 2,149.0 1,186.8 795.5 643.8 382.9 Weighted average shares outstanding - diluted (in millions) (Note 2) 497.7 475.7 481.2 494.2 493.8 OTHER STATISTICS Vons stores acquired during the year 316 -- -- -- -- Stores opened during the year 37 30 32 20 14 Stores closed or sold during the year 37 37 35 36 39 Total stores at year-end 1,368 1,052 1,059 1,062 1,078 Remodels completed during the year (Note 5) 181 141 108 71 45 Total retail square footage at year-end (in millions) 53.2 40.7 40.1 39.5 39.4
Note 1. Reflects equity in Vons' earnings through the first quarter of 1997. Note 2. Share and per-share amounts have been restated to reflect the two-for-one stock splits effected February 1998 and January 1996. Earnings per share have been restated in accordance with Statement of Financial Accounting Standards No. 128. Note 3. Reflects sales increases for stores operating the entire measurement period in both the current and prior periods. 1997 and 1996 identical-store sales exclude British Columbia stores, which were closed during a labor dispute in 1996. Note 4. Defined on pages 13 and 14 under "Capital Expenditure Program." Note 5. Defined as store projects (other than maintenance) generally requiring expenditures in excess of $200,000. 15 5 FINANCIAL REVIEW STOCK SPLIT On January 28, 1998, Safeway's Board of Directors authorized a two-for-one split of the Company's common stock. The stock split was effected by a distribution on February 25, 1998 of one additional share for each share owned by stockholders of record on February 10, 1998. Share and per-share amounts presented herein have been restated to reflect this stock split. MERGER WITH THE VONS COMPANIES, INC. ("VONS") On April 8, 1997, Safeway acquired Vons (the "Merger"). Pursuant to the Merger, Safeway issued 83.2 million shares of Safeway common stock for all of the Vons stock that Safeway did not already own. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial results. INCOME BEFORE EXTRAORDINARY LOSS (IN MILLIONS) [BAR GRAPH]
1995 1996 1997 ------- ------ ------ Income before extraordinary loss $328.3 $460.6 $621.5
RESULTS OF OPERATIONS Safeway's net income was $557.4 million ($1.12 per share) in 1997, $460.6 million ($0.97 per share) in 1996, and $326.3 million ($0.68 per share) in 1995. In 1997 and 1995, income before extraordinary items related to debt refinancings was $621.5 million ($1.25 per share) and $328.3 million ($0.68 per share), respectively. Safeway's 1997 income statement includes Vons' operating results since the second quarter plus the effect of Safeway's 34.4% equity interest in Vons in the first quarter, while the 1996 income statement reflects Safeway's equity interest in Vons for the full year. In order to facilitate an understanding of the Company's operations, this financial review presents certain pro forma information based on the 1997 and 1996 combined historical financial statements of the two companies as if the Merger had been effective as of the beginning of each of the years discussed. See Note B to the Company's 1997 Consolidated Financial Statements PORTIONS OF 1997 SALES DOLLAR [PIE CHART] Operating Profit 5.69% Operating & Administrative Expense 22.84% Costs of Goods sold 71.47%
During the second quarter of 1997, Safeway was engaged in a 75-day labor dispute affecting 74 stores in the Alberta, Canada operating area. The Company estimates that the Alberta strike reduced 1997 net income by approximately $0.04 per share, and labor disputes in the British Columbia and Denver operating areas reduced 1996 net income by an estimated $0.07 per share. A nine-day strike during the second quarter of 1995 affected 208 stores in northern California. The Company estimates that this dispute reduced 1995 earnings by approximately $0.01 per share. SALES Sales for the 53 weeks of 1997 were $22.5 billion compared to $17.3 billion for the 52 weeks of 1996. The increase was due primarily to the Vons merger and the additional week in 1997. Identical-store sales (stores operating the entire year in both 1997 and 1996, excluding replacement stores but including Vons for 41 weeks in both years) increased 1.3% while comparable-store sales, which includes replacement stores, increased 2.2%. The effects of the second-quarter strike in Alberta weakened 1997 identical and comparable-store sales comparisons. Lack of inflation also softened 1997 sales comparisons. Excluded from identical and comparable-store sales comparisons are 86 stores in British Columbia that were closed during a strike-lockout for a portion of the second and third quarters of 1996. GROSS PROFIT Gross profit represents the portion of sales revenue remaining after deducting the costs of inventory sold during the period, including purchase and distribution costs. Gross profit was 28.53% of sales in 1997 compared to 27.65% in 1996 and 27.40% in 1995. On a pro forma basis, gross profit increased to 28.63% of sales in 1997 from 28.20% in 1996, primarily due to improvements in buying practices and product mix. In addition, the Company recorded LIFO income of $6.1 million in 1997 compared to LIFO expense of $4.9 million in 1996 reflecting slight deflation in 1997. OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense was 22.84% of sales in 1997 compared to 22.48% in 1996 and 22.96% in 1995. Safeway's operating and administrative expense-to-sales ratio has increased compared to 1996 because Von's operating and administrative expense ratio has historically been higher 16 6 than Safeway's (partially due to the high cost of real estate and labor in southern California). In addition, goodwill amortization has increased by approximately $30 million as a result of the Merger. On a pro forma basis, operating and administrative expense declined 35 basis points to 22.95% of sales in 1997, from 23.30% in 1996. INTEREST EXPENSE Interest expense increased to $241.2 million in 1997 from $178.5 million in 1996 because of the debt incurred during the second quarter of 1997 to repurchase stock in conjunction with the Merger. During 1997, Safeway recorded an extraordinary loss of $64.1 million ($0.13 per share) for the repurchase of $589.0 million of Safeway's public debt, $285.5 million of Vons' public debt, and $40.0 million of medium-term notes. The extraordinary loss represents the payment of premiums on retired debt and the write-off of deferred finance costs, net of the related tax benefits. Safeway financed this repurchase with a public offering of $600 million of senior debt securities and the balance with commercial paper. The refinancing extends Safeway's overall long-term debt maturities, increases financial flexibility and, based on current interest rates, is expected to reduce annual interest expense. In May 1997, Safeway entered into interest rate cap agreements which expire in 1999 and entitle the Company to receive from counterparties the amounts, if any, by which interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized cost to purchase the cap agreements was $2.5 million at year-end 1997. As of year-end 1997, the Company had effectively converted $135.1 million of its floating rate debt to fixed interest rate debt through the use of interest rate swap agreements. Interest rate swap and cap agreements increased interest expense by $3.3 million in 1997, $3.0 million in 1996 and $0.3 million in 1995. The significant terms of swap and cap agreements outstanding at year-end 1997 are described in Note E to the Company's 1997 consolidated financial statements. EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES Safeway's investment in unconsolidated affiliates consists of a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 74 food and general merchandise stores in western Mexico. Through the first quarter of 1997, Safeway also held a 34.4% interest in Vons. Safeway records its equity in earnings of unconsolidated affiliates on a one-quarter delay basis. Income from Safeway's equity investment in Casa Ley increased to $22.7 million in 1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa Ley's financial results have gradually improved. Equity in earnings of unconsolidated affiliates included Safeway's share of Vons' earnings of $12.2 million in the first quarter of 1997, $31.2 million in 1996 and $18.3 million in 1995. LIQUIDITY AND FINANCIAL RESOURCES Net cash flow from operations was $1,221.6 million in 1997, $825.2 million in 1996 and $657.7 million in 1995. Net cash flow from operations increased in 1997 and 1996 largely due to increased net income. Cash flow used by investing activities was $607.7 million in 1997, $482.3 million in 1996 and $425.7 million in 1995. The increase in cash flow used by investing activities in 1997 is primarily the result of increased capital expenditures to open 37 new stores, complete 181 remodels, complete construction of a manufacturing plant in California and begin work on a new distribution center in Maryland. Cash flow used by financing activities was $614.6 million in 1997, $337.5 million in 1996 and $218.4 million in 1995, reflecting Safeway's reduction in total debt in 1995 and 1996, followed by increased borrowing related to the Merger in 1997. Net cash flow from operations as presented on the Statement of Cash Flows is an important measure of cash generated by the Company's operating activities. Operating cash flow, as defined below, is similar to net cash flow from operations because it excludes certain non-cash items. However, operating cash flow also excludes interest expense and income taxes. Management believes that operating cash flow is relevant because it assists investors in evaluating Safeway's ability to service its debt by providing a commonly used measure of cash available to pay interest. Operating cash flow also facilitates comparisons of Safeway's results of operations with companies having different capital structures. Other companies may define operating cash flow differently, and as a result, such measures may not be comparable to Safeway's operating cash flow. Safeway's computation of operating cash flow is as follows (dollars in millions):
1997 1996 1995 --------- --------- --------- Income before income taxes and extraordinary loss $ 1,076.3 $ 767.6 $ 556.5 LIFO expense (income) (6.1) 4.9 9.5 Interest expense 241.2 178.5 199.8 Depreciation and amortization 455.8 338.5 329.7 Equity in earnings of unconsolidated affiliates (34.9) (50.0) (26.9) --------- --------- --------- Operating cash flow $ 1,732.3 $ 1,239.5 $ 1,068.6 ========= ========= ========= As a percent of sales 7.70% 7.18% 6.52% ========= ========= ========= As a multiple of interest expense 7.18x 6.94x 5.35x ========= ========= =========
Total debt increased to $3.34 billion at year-end 1997 from $1.98 billion at year-end 1996 due primarily to the Merger. Annual debt maturities over the next five years are set forth in Note C of the Company's 1997 Consolidated Financial Statements. Based upon the current level of operations, Safeway believes that operating cash flow and other sources of liquidity, including borrowings under Safeway's commercial paper program and the Bank Credit Agreement (defined below), will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for 17 7 the foreseeable future. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels. The Bank Credit Agreement is used primarily as a backup facility to the commercial paper program. REPURCHASE AND ACQUISITION OF COMMON STOCK EQUIVALENTS In connection with the Merger, Safeway repurchased 64.0 million shares of Safeway common stock from a partnership affiliated with KKR & Co., L.L.C. ("KKR") at $21.50 per share, for an aggregate purchase price of $1.376 billion (the "Repurchase"). To finance the Repurchase, Safeway entered into a new $3.0 billion bank credit agreement (the "Bank Credit Agreement") that provides for, among other things, increased borrowing capacity, extended maturities and the opportunity to pay lower interest rates based on interest coverage ratios or public debt ratings. The Company subsequently began a commercial paper program, which reduced its outstanding bank debt. As a result of the stock repurchase, Safeway increased its debt and interest expense, but also reduced the number of common shares outstanding used to calculate earnings per share. This reduction of 64.0 million shares partially offsets the increase of 83.2 million shares issued pursuant to the Merger. At year-end 1997, warrants (the "SSI Warrants") to purchase 30.7 million shares of the Company's common stock at $0.50 per share were held by SSI Equity Associates, L.P. ("SSI"), a limited partnership whose sole assets consist of the SSI Warrants. The SSI Warrants are exercisable through November 15, 2001. SSI Partners, L.P., an affiliate of KKR, is the general partner of SSI. During 1996 and 1995, the Company acquired 64.5% of the partnership interests in SSI for $322.7 million, which was accounted for as a reduction to stockholders' equity. STOCK OFFERINGS In December 1997, the Company completed the public offering of 50.0 million shares of common stock owned by affiliates of KKR, including 5.73 million shares issued upon the exercise of SSI Warrants. In January 1998, the underwriters to the offering exercised their over-allotment options for an additional 6.5 million shares of common stock, including 0.8 million issued upon the exercise of SSI Warrants. In connection with the offering, SSI Warrants to purchase 11.9 million shares attributable to the limited partnership interests owned by Safeway were canceled. The Company received proceeds totalling $3.3 million for the exercise of the warrants. Affiliates of KKR received the balance of proceeds from the stock offering. After the offering, two limited partnerships affiliated with KKR own 104.5 million shares of Safeway common stock, and SSI Equity Associates, L.P. holds SSI Warrants to purchase 28.3 million shares of Safeway common stock. In February 1996, the Company completed the public offering of 45.9 million shares of common stock owned by affiliates of KKR, including 4.4 million shares issued upon the exercise of SSI Warrants and 0.4 million shares issued upon the exercise of employee stock options. Also in 1996, SSI Warrants to purchase 4.6 million shares attributable to the limited partnership interests owned by Safeway were canceled. The Company received proceeds of $2.4 million for the exercise price of the options and warrants. Affiliates of KKR and the option holder received the balance of proceeds from the stock offering. FORWARD-LOOKING STATEMENTS This Annual Report contains certain forward-looking statements relating to, among other things, capital expenditures, cost reduction and operating improvements. Such statements are subject to inherent uncertainties and risks, including among others: business and economic conditions generally in the Company's operating regions; pricing pressures and other competitive factors; results of the Company's programs to reduce costs; the ability to integrate Vons and continue to achieve operating improvements; relations with union bargaining units; and the availability and terms of financing. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by such statements. 18 8 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
53 WEEKS 52 Weeks 52 Weeks (In millions, except per-share amounts) 1997 1996 1995 ------------ ------------ ------------ Sales $ 22,483.8 $ 17,269.0 $ 16,397.5 Cost of goods sold (16,069.1) (12,494.8) (11,905.1) ------------ ------------ ------------ Gross profit 6,414.7 4,774.2 4,492.4 Operating and administrative expense (5,135.0) (3,882.5) (3,765.0) ------------ ------------ ------------ Operating profit 1,279.7 891.7 727.4 Interest expense (241.2) (178.5) (199.8) Equity in earnings of unconsolidated affiliates 34.9 50.0 26.9 Other income, net 2.9 4.4 2.0 ------------ ------------ ------------ Income before income taxes and extraordinary loss 1,076.3 767.6 556.5 Income taxes (454.8) (307.0) (228.2) ------------ ------------ ------------ Income before extraordinary loss 621.5 460.6 328.3 Extraordinary loss related to early retirement of debt, net of income tax benefit of $41.1 and $1.3 (64.1) -- (2.0) ------------ ------------ ------------ Net income $ 557.4 $ 460.6 $ 326.3 ------------ ------------ ------------ Basic earnings per share: Income before extraordinary loss $ 1.35 $ 1.06 $ 0.77 Extraordinary loss (0.14) -- -- ------------ ------------ ------------ Net income $ 1.21 $ 1.06 $ 0.77 ------------ ------------ ------------ Diluted earnings per share: Income before extraordinary loss $ 1.25 $ 0.97 $ 0.68 Extraordinary loss (0.13) -- -- ------------ ------------ ------------ Net income $ 1.12 $ 0.97 $ 0.68 ------------ ------------ ------------ Weighted average shares outstanding-- basic 462.3 436.0 423.9 Weighted average shares outstanding-- diluted 497.7 475.7 481.2
See accompanying notes to consolidated financial statements 19 9 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
YEAR-END Year-End (In millions) 1997 1996 -------- -------- ASSETS Current assets: Cash and equivalents $ 77.2 $ 79.7 Receivables 180.8 160.9 Merchandise inventories, net of LIFO reserve of $73.1 and $79.2 1,613.2 1,283.3 Prepaid expenses and other current assets 158.5 130.5 -------- -------- Total current assets 2,029.7 1,654.4 -------- -------- Property: Land 722.2 438.3 Buildings 1,719.9 1,286.9 Leasehold improvements 1,247.3 957.2 Fixtures and equipment 2,663.1 2,108.5 Property under capital leases 329.2 278.7 -------- -------- 6,681.7 5,069.6 Less accumulated depreciation and amortization 2,566.4 2,313.2 -------- -------- Total property, net 4,115.3 2,756.4 Goodwill, net of accumulated amortization of $157.0 and $116.4 1,824.7 312.5 Prepaid pension costs 341.4 328.7 Investments in unconsolidated affiliates 97.7 362.4 Other assets 85.1 130.8 -------- -------- Total assets $8,493.9 $5,545.2 ======== ========
20 10 SAFEWAY INC. AND SUBSIDIARIES
YEAR-END Year-End (In millions) 1997 1996 -------- -------- LIABILITIES AND STOCKHOLDERS-EQUITY Current liabilities: Current maturities of notes and debentures $ 277.4 $ 237.3 Current obligations under capital leases 22.0 18.4 Accounts payable 1,391.8 1,153.1 Accrued salaries and wages 310.5 231.2 Other accrued liabilities 536.9 390.0 -------- -------- Total current liabilities 2,538.6 2,030.0 -------- -------- Long-term debt: Notes and debentures 2,817.8 1,568.1 Obligations under capital leases 223.1 160.4 -------- -------- Total long-term debt 3,040.9 1,728.5 Deferred income taxes 297.0 223.8 Accrued claims and other liabilities 468.4 376.1 -------- -------- Total liabilities 6,344.9 4,358.4 -------- -------- Commitments and contingencies Stockholders- equity: Common stock: par value $0.01 per share; 750 shares authorized; 537.4 and 442.8 shares outstanding 5.3 4.4 Additional paid-in capital 2,467.4 748.1 Cumulative translation adjustments 0.6 12.0 Retained earnings 1,315.0 745.0 -------- -------- 3,788.3 1,509.5 Less: Treasury stock at cost; 61.2 shares in 1997 (1,316.6) -- Unexercised warrants purchased (322.7) (322.7) -------- -------- Total stockholders-equity 2,149.0 1,186.8 -------- -------- Total liabilities and stockholders-equity $8,493.9 $5,545.2 ======== ========
See accompanying notes to consolidated financial statements. 21 11 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
53 WEEKS 52 Weeks 52 Weeks (In millions) 1997 1996 1995 -------- -------- -------- CASH FLOW FROM OPERATIONS Net income $ 557.4 $ 460.6 $ 326.3 Reconciliation to net cash flow from operations: Extraordinary loss related to early retirement of debt, before income tax benefit 105.2 -- 3.3 Depreciation and amortization 455.8 338.5 329.7 Amortization of deferred finance costs 1.7 1.8 4.0 Deferred income taxes 55.9 113.9 (15.8) LIFO (income) expense (6.1) 4.9 9.5 Equity in earnings of unconsolidated affiliates (34.9) (50.0) (26.9) Net pension (income) expense (4.1) 4.2 7.6 Contributions to Canadian pension plan (10.0) (10.6) (10.3) Increase (decrease) in accrued claims and other liabilities (13.9) (17.6) 19.0 Loss (gain) on property retirements (12.4) (12.6) 20.4 Changes in working capital items: Receivables 25.8 (8.5) (3.8) Inventories at FIFO cost 37.5 (99.3) (55.4) Prepaid expenses and other current assets 2.7 (35.1) (2.9) Payables and accruals 61.0 135.0 53.0 -------- -------- -------- Net cash flow from operations 1,221.6 825.2 657.7 -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Cash paid for property additions (758.2) (541.8) (450.9) Proceeds from sale of property and operations 75.6 60.8 54.8 Net cash acquired in acquisition of The Vons Companies, Inc. 55.3 -- -- Other 19.6 (1.3) (29.6) -------- -------- -------- Net cash flow used by investing activities (607.7) (482.3) (425.7) -------- -------- --------
22 12 SAFEWAY INC. AND SUBSIDIARIES
53 WEEKS 52 Weeks 52 Weeks (In millions) 1997 1996 1995 -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Additions to short-term borrowings $ 414.5 $ 227.2 $ 183.7 Payments on short-term borrowings (287.5) (280.4) (131.5) Additions to long-term borrowings 4,254.3 387.1 708.1 Payments on long-term borrowings (3,553.5) (552.0) (787.6) Purchase of treasury stock (1,376.0) -- -- Purchase of unexercised warrants -- (126.5) (196.2) Net proceeds from exercise of warrants and stock options 43.9 12.6 12.8 Premiums paid on early retirement of debt (97.7) -- (3.3) Other (12.6) (5.5) (4.4) -------- -------- -------- Net cash flow used by financing activities (614.6) (337.5) (218.4) -------- -------- -------- Effect of changes in exchange rates on cash (1.8) (0.5) 0.5 -------- -------- -------- Increase (decrease) in cash and equivalents (2.5) 4.9 14.1 CASH AND EQUIVALENTS Beginning of year 79.7 74.8 60.7 -------- -------- -------- End of year $ 77.2 $ 79.7 $ 74.8 ======== ======== ======== OTHER CASH FLOW INFORMATION Cash payments during the year for: Interest $ 263.6 $ 181.8 $ 203.0 Income taxes, net of refunds 214.6 156.7 213.0 NONCASH INVESTING AND FINANCING ACTIVITIES Stock issued for acquisition of The Vons Companies, Inc. 1,693.0 -- -- Tax benefit from stock options exercised 42.4 51.9 16.6 Mortgage notes assumed in property additions 0.9 -- -- Capital lease obligations entered into 37.3 15.5 13.7
See accompanying notes to consolidated financial statements. 23 13 SAFEWAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Common Stock Additional Cumulative Earnings Treasury Stock Unexercised Total ------------------ Paid-in Translation (Accumulated ---------------- Warrants Stockholders' (In millions) Shares Amount Capital Adjustments Deficit) Shares Cost Purchased Equity ----- -------- -------- -------- -------- ----- --------- -------- -------- Balance, year-end 1994 419.2 $ 4.2 $ 652.4 $ 29.1 $ (41.9) $ 643.8 Options and warrants exercised 8.0 -- 29.4 -- -- 29.4 Stock bonuses 0.2 -- 1.0 -- -- 1.0 Unexercised warrants purchased -- -- -- -- -- $ (196.2) (196.2) Net income -- -- -- -- 326.3 -- 326.3 Translation adjustments -- -- -- (8.8) -- -- (8.8) ----- -------- -------- -------- -------- ----- --------- -------- -------- Balance, year-end 1995 427.4 4.2 682.8 20.3 284.4 (196.2) 795.5 Options and warrants exercised 15.4 0.2 64.3 -- -- 64.5 Stock bonuses -- -- 1.0 -- -- -- 1.0 Unexercised warrants purchased -- -- -- -- -- (126.5) (126.5) Net income -- -- -- -- 460.6 -- 460.6 Translation adjustments -- -- -- (8.3) -- -- (8.3) ----- -------- -------- -------- -------- ----- --------- -------- -------- Balance, year-end 1996 442.8 4.4 748.1 12.0 745.0 (322.7) 1,186.8 Shares issued for acquisition of The Vons Companies, Inc. 83.2 0.8 1,692.2 -- -- -- 1,693.0 Equity in Vons' pre-merger earnings due to timing of recording earnings -- -- -- -- 12.6 -- 12.6 Treasury stock purchased -- -- -- -- -- (64.0) $(1,376.0) -- (1,376.0) Options and warrants exercised 11.4 0.1 26.8 -- -- 2.8 59.4 -- 86.3 Stock bonuses -- -- 0.3 -- -- -- -- -- 0.3 Net income -- -- -- -- 557.4 -- -- -- 557.4 Translation adjustments -- -- -- (11.4) -- -- (11.4) ----- -------- -------- -------- -------- ----- --------- -------- -------- Balance, year-end 1997 537.4 $ 5.3 $2,467.4 $ 0.6 $1,315.0 (61.2) $(1,316.6) $ (322.7) $2,149.0 ===== ======== ======== ======== ======== ===== ========= ======== ========
See accompanying notes to consolidated financial statements. 24 14 SAFEWAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Safeway Inc. ("Safeway" or the "Company") is the second largest food and drug chain in North America based on sales, with 1,368 stores, including 315 Vons stores, at year-end 1997. The Company's U.S. retail operating areas are located principally in Washington, Oregon, northern California, southern California, Arizona, Colorado and the Mid-Atlantic region. The Company also has Canadian retail operations which are located primarily in British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail operations, the Company has an extensive network of distribution, manufacturing and food processing facilities. As discussed in Note B, on April 8, 1997, Safeway acquired The Vons Companies, Inc. ("Vons") pursuant to which the Company issued 83.2 million shares of Safeway common stock for all of the shares of Vons stock that it did not already own (the "Merger"). Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial results. In addition to the Safeway and Vons operations, the Company has a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 74 food and general merchandise stores in western Mexico. STOCK SPLIT In January 1998, Safeway's Board of Directors authorized a two-for-one split of the Company's common stock. The stock split was effected by a distribution on February 25, 1998 of one additional share for each share owned by stockholders of record on February 10, 1998. Share and per-share amounts presented in the consolidated financial statements and related notes have been restated to reflect the stock split. BASIS OF CONSOLIDATION The consolidated financial statements include Safeway Inc., a Delaware corporation, and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company's investment in Casa Ley is reported using the equity method. Prior to the Merger, the Company's investment in Vons was reported using the equity method. FISCAL YEAR The Company's fiscal year ends on the Saturday nearest December 31. The last three fiscal years consist of the 53-week period ended January 3, 1998 and 52-week periods ended December 28, 1996 and December 30, 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of the Company's Canadian subsidiaries and Mexican unconsolidated affiliate are translated into U.S. dollars at year-end rates of exchange, and income and expenses are translated at average rates during the year. Adjustments resulting from translating financial statements into U.S. dollars are reported as cumulative translation adjustments and are shown net of applicable income taxes as a separate component of stockholders' equity. MERCHANDISE INVENTORIES Merchandise inventory of $1,118 million at year-end 1997 and $756 million at year-end 1996 is valued at the lower of cost on a last-in, first-out ("LIFO") basis or market value. Such LIFO inventory had a replacement or current cost of $1,191 million at year-end 1997 and $835 million at year-end 1996. The remaining inventory is valued at the lower of cost on a first-in, first-out ("FIFO") basis or market value. FIFO cost of inventory approximates replacement or current cost. In the United States, inventory on a FIFO basis includes meat, produce and inventory of manufacturing operations, except for Vons, which values all inventory on the LIFO basis. All inventories of the Canadian subsidiaries are valued on the FIFO basis. Application of the LIFO method resulted in a decrease in cost of goods sold of $6.1 million in 1997, and increases of $4.9 million in 1996 and $9.5 million in 1995. Liquidations of LIFO layers during the three years reported did not have a significant effect on the results of operations. PROPERTY AND DEPRECIATION Property is stated at cost. Property acquired in the Merger approximates fair values as of the Merger date. Depreciation expense on buildings and equipment is computed on the straight-line method using the following lives: Stores and other buildings 10 - 30 years Fixtures and equipment 3 - 15 years Property under capital leases is amortized on a straight-line basis over the remaining terms of the leases. Leasehold improve- ments include buildings constructed on leased land and improvements to leased buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the lease or the estimated useful lives of the assets. 25 15 GOODWILL Goodwill is amortized on a straight-line basis over 40 years. Goodwill amortization was $41.8 million in 1997 and $10.4 million in both 1996 and 1995. Goodwill amortization increased in 1997 due to the Merger with Vons, discussed in Note B. SELF-INSURANCE The Company is primarily self-insured for workers' compensation, automobile, and general liability costs. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The present value of such claims was accrued using a discount rate of 5.5% in both 1997 and 1996. The current portion of the self-insurance liability of $96.3 million at year-end 1997 and $65.1 million at year-end 1996 is included in other accrued liabilities in the consolidated balance sheets. The long-term portion of $230.7 million at year-end 1997 and $168.7 million at year-end 1996 is included in accrued claims and other liabilities. Claims payments were $100.0 million in 1997, $66.7 million in 1996 and $71.4 million in 1995. The total undiscounted liability was $365.5 million at year-end 1997 and $265.8 million at year-end 1996. INCOME TAXES The Company provides a deferred tax expense or benefit equal to the change in the deferred tax liability during the year in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred income taxes represent tax credit carryforwards and future net tax effects resulting from temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. STATEMENT OF CASH FLOWS Short-term investments with original maturities of less than three months are considered to be cash equivalents. Borrowings with original maturities of less than three months are presented net of related repayments. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS As discussed in Note E, the Company has entered into interest rate swap and cap agreements to limit the exposure of its floating interest rate debt to changes in market interest rates. Interest rate swap agreements involve the exchange with a counterparty of fixed and floating rate interest payments periodically over the life of the agreements without exchange of the underlying notional principal amounts. The differential to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. Interest rate cap agreements lock in a maximum rate on a notional principal amount by paying a fee to a counterparty in exchange for the counterparty's promise to pay to Safeway the difference between a fixed rate and a floating rate of interest. The Company's counterparties are major financial institutions. FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Safeway estimated the fair values presented below using appropriate valuation methodologies and market information available as of year-end. Considerable judgment is required to develop estimates of fair value, and the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, these fair values were estimated at year-end, and current estimates of fair value may differ significantly from the amounts presented. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and equivalents, accounts receivable, accounts payable and short-term debt. The carrying amount of these items approximates fair value. Long-term debt. Market values quoted on the New York Stock Exchange are used to estimate the fair value of publicly traded debt. To estimate the fair value of debt issues that are not quoted on an exchange, the Company uses those interest rates that are currently available to it for issuance of debt with similar terms and remaining maturities. At year-end 1997, the estimated fair value of debt was $3.2 billion compared to a carrying value of $3.1 billion. At year-end 1996, the estimated fair value of debt was $1.9 billion compared to a carrying value of $1.8 billion. Off-balance sheet instruments. The fair value of interest rate swap and cap agreements is the amount at which they could be settled based on estimates obtained from dealers. At year-end 1997 and 1996, net unrealized losses on such agreements were $0.4 million and $2.0 million. Since the Company intends to hold these agreements as hedges for the term of the agreements, the market risk associated with changes in interest rates should not be significant. IMPAIRMENT OF LONG-LIVED ASSETS In 1996, Safeway adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 establishes recognition and measurement criteria for impairment losses when the Company no longer expects to recover the carrying value of a long-lived asset. Upon reaching the decision to close a store or other facility, the Company accrues estimated future losses, if any, which may include lease payments or other costs of holding the facility, net of estimated future income. As of year-end 1997, Safeway had an accrued liability of $72.0 million for the anticipated future closure of 42 stores and $19.7 million for the anticipated future closure of other facilities. 26 16 STOCK-BASED COMPENSATION Safeway accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Safeway elected to adopt the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," in 1996. NEW ACCOUNTING PRONOUNCEMENT In 1997, the Financial Accounting Standards Board issued two new pronouncements, SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires companies to report by major components and as a single total, the change in its net assets during the period from non-owner sources. SFAS No. 131 establishes annual and interim reporting standards for a Company's operating segments and related disclosures about its products, services, geographic areas and major customers. SFAS Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997. Adoption of these new pronouncements will not impact the financial position, results of operations or cash flows of Safeway and any effect will be limited to the form and content of its disclosures. EARNINGS PER SHARE In the fourth quarter of 1997, Safeway adopted SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaces current reporting requirements for earnings per share ("EPS") and requires a dual presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted to common stock. Prior periods have been restated to conform to SFAS No. 128. NOTE B: MERGER WITH VONS On April 8, 1997, Safeway completed the Merger with Vons pursuant to which the Company issued 83.2 million shares of Safeway common stock for all of the shares of Vons stock that it did not already own. The Merger was accounted for using the purchase method and resulted in additional goodwill of $1.5 billion which is being amortized over 40 years. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial results. In connection with the Merger, Safeway repurchased 64.0 million shares of Safeway common stock from a partnership affiliated with KKR & Co., L.L.C. ("KKR") at $21.50 per share, for an aggregate purchase price of $1.376 billion. To finance the repurchase, Safeway used borrowings under the Bank Credit Agreement as described in Note C. The following unaudited pro forma summary financial information combines the consolidated results of operations of Safeway and Vons as if the Merger and related stock repurchase had occurred as of the beginning of each of the years presented. The following pro forma financial information is presented for informational purposes only and may not be indicative of what the actual consolidated results of operations would have been if the Merger had been effective earlier (in millions, except per-share amounts):
Pro Forma -------------------------- 53 WEEKS 52 Weeks 1997 1996 --------- --------- Sales $23,735.3 $22,625.0 Income before extraordinary loss 632.6 435.6 Net income 568.5 435.6 Diluted earnings per share: Income before extraordinary loss $ 1.25 $ 0.87 Net income 1.12 0.87 Allocation of purchase price (in millions): Fair value of assets acquired $ 3,115.8 Fair value of liabilities assumed (1,166.9) Stock issued (1,693.0) Safeway's equity investment in Vons (311.2) --------- Net cash acquired $ (55.3) =========
NOTE C: FINANCING Notes and debentures were composed of the following at year-end (in millions):
1997 1996 -------- -------- Bank Credit Agreement, unsecured $ 238.2 $ 360.6 Commercial paper 1,473.5 -- 9.30% Senior Secured Debentures due 2007 24.3 70.7 10% Senior Subordinated Notes due 2001, unsecured 79.9 241.4 9.875% Senior Subordinated Debentures due 2007, unsecured 24.2 110.0 9.65% Senior Subordinated Debentures due 2004, unsecured 81.2 228.2 9.35% Senior Subordinated Notes due 1999, unsecured 66.7 161.5 7.45% Senior Debentures due 2027, unsecured 150.0 -- 7.00% Senior Notes due 2007, unsecured 250.0 -- 6.85% Senior Notes due 2004, unsecured 200.0 -- 10% Senior Notes due 2002, unsecured 6.1 59.1 Mortgage notes payable, secured 150.8 306.4 Other notes payable, unsecured 114.8 119.0 Medium-term notes, unsecured 25.5 65.5 Short-term bank borrowings, unsecured 210.0 83.0 -------- -------- 3,095.2 1,805.4 Less current maturities (277.4) (237.3) -------- -------- Long-term portion $2,817.8 $1,568.1 ======== ========
27 17 BANK CREDIT AGREEMENT During the second quarter of 1997, the Company entered into a new $3.0 billion bank credit agreement (the "Bank Credit Agreement"). Of the $3.0 billion credit line, $2.0 billion matures in 2002 and has two one-year extension options, and $1.0 billion is renewable annually through 2004. The restrictive covenants of the Bank Credit Agreement limit Safeway with respect to, among other things, creating liens upon its assets and disposing of material amounts of assets other than in the ordinary course of business. Safeway also is required to meet certain financial tests under the Bank Credit Agreement. At year-end 1997, the Company had total unused borrowing capacity under the Bank Credit Agreement of $2.7 billion. U.S. borrowings under the Bank Credit Agreement carry interest at one of the following rates selected by the Company: (i) the prime rate; (ii) a rate based on rates at which Eurodollar deposits are offered to first-class banks by the lenders in the Bank Credit Agreement plus a pricing margin based on the Company's debt rating or interest coverage ratio (the "Pricing Margin"); or (iii) rates quoted at the discretion of the lenders. Canadian borrowings denominated in U.S. dollars carry interest at one of the following rates selected by the Company: (a) the Canadian base rate; or (b) the Canadian Eurodollar rate plus the Pricing Margin. Canadian borrowings denominated in Canadian dollars carry interest at one of the following rates selected by the Company: (i) the Canadian prime rate or (ii) the rate for Canadian bankers acceptances plus the Pricing Margin. The weighted average interest rate on borrowings under the Bank Credit Agreement was 6.00% during 1997. At year-end 1997, the weighted average interest rate on borrowings under the Bank Credit Agreement was 5.90%. COMMERCIAL PAPER During the third quarter of 1997, Safeway issued commercial paper in the U.S. The proceeds were used to pay down borrowings under the Bank Credit Agreement. Commercial paper outstanding at year-end 1997 is classified as long-term because the Company intends to and has the ability to refinance these borrowings on a long-term basis through either continued commercial paper borrowings or utilization of the Bank Credit Agreement, which matures in 2002. The weighted average interest rate on commercial paper borrowings was 5.79% during 1997 and 6.15% at year-end 1997. The Company maintains unused borrowing capacity under the Bank Credit Agreement at least equal to the amount of commercial paper outstanding. SENIOR SECURED INDEBTEDNESS The 9.30% Senior Secured Debentures due 2007 are secured by a Deed of Trust which created a lien on the land, buildings and equipment owned by Safeway at its distribution center in Tracy, California. SENIOR SUBORDINATED INDEBTEDNESS The 10% Senior Subordinated Notes due 2001, 9.875% Senior Subordinated Debentures due 2007, 9.65% Senior Subordinated Debentures due 2004 and 9.35% Senior Subordinated Notes due 1999 (collectively the "Subordinated Securities") are subordinated in right of payment to, among other things, the Company's borrowings under the Bank Credit Agreement, the 9.30% Senior Secured Indebtedness, the Senior Debt (defined below) and mortgage notes payable. SENIOR UNSECURED INDEBTEDNESS During the fourth quarter of 1997, Safeway issued new senior unsecured debt securities consisting of 7.45% Senior Debentures due 2027, 7.00% Senior Notes due 2007, and 6.85% Senior Notes due 2004 (collectively, the "Senior Debt"). The Company used the proceeds from this debt to redeem a portion of the Subordinated Securities. MORTGAGE NOTES PAYABLE Mortgage notes payable at year-end 1997 have remaining terms ranging from one to 12 years, have a weighted average interest rate of 9.97% and are secured by properties with a net book value of approximately $300 million. OTHER NOTES PAYABLE Other notes payable at year-end 1997 have remaining terms ranging from two to 14 years and a weighted average interest rate of 7.46%. REDEMPTIONS During 1997, the Company redeemed $588.5 million of the Subordinated Securities, $285.5 million of Vons' public debt and $40.0 million of medium-term notes using proceeds from the Senior Debt and commercial paper program. During 1995, Safeway retired $53.5 million of mortgage debt with proceeds from floating rate bank borrowings. In connection with these redemptions, Safeway recorded extraordinary losses of $64.1 million ($0.13 per share) in 1997 and $2.0 million in 1995. The extraordinary losses represent the payment of redemption premiums and the write-off of deferred finance costs, net of the related tax benefits. ANNUAL DEBT MATURITIES As of year-end 1997, annual debt maturities were as follows (in millions): 1998 $ 277.4 1999 99.3 2000 24.9 2001 144.3 2002 1,738.6 Thereafter 810.7 -------- $3,095.2 ========
LETTERS OF CREDIT The Company had letters of credit of $226.9 million outstanding at year-end 1997 of which $64.0 million were issued under the Bank Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company pays commitment fees ranging from 0.25% to 1.00% on the outstanding portion of the letters of credit. 28 18 NOTE D: LEASE OBLIGATIONS Approximately two-thirds of the premises that the Company occupies are leased. The Company had approximately 1,310 leases at year-end 1997, including approximately 180 which are capitalized for financial reporting purposes. Most leases have renewal options, some with terms and conditions similar to the original lease, others with reduced rental rates during the option periods. Certain of these leases contain options to purchase the property at amounts that approximate fair market value. As of year-end 1997, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of one year were as follows (in millions):
Capital Operating Leases Leases -------- -------- 1998 $ 48.7 $ 202.3 1999 44.5 198.6 2000 39.1 189.5 2001 35.4 173.5 2002 34.3 161.1 Thereafter 282.2 1,315.7 -------- -------- Total minimum lease payments 484.2 $2,240.7 Less amounts representing interest (239.1) ======== -------- Present value of net minimum lease payments 245.1 Less current obligations (22.0) -------- Long-term obligations $ 223.1 ========
Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income totalling $142.7 million. Amortization expense for property under capital leases was $21.1 million in 1997, $17.9 million in 1996 and $18.9 million in 1995. Accumulated amortization of property under capital leases was $153.4 million at year-end 1997 and $156.1 million at year-end 1996. The following schedule shows the composition of total rental expense for all operating leases (in millions). In general, contingent rentals are based on individual store sales.
1997 1996 1995 ------ ------ ------ Property leases: Minimum rentals $206.0 $138.2 $132.7 Contingent rentals 12.3 9.9 9.1 Less rental income from subleases (13.4) (11.1) (11.1) ------ ------ ------ 204.9 137.0 130.7 Equipment leases 19.3 21.0 20.8 ------ ------ ------ $224.2 $158.0 $151.5 ====== ====== ======
NOTE E: INTEREST EXPENSE Interest expense consisted of the following (in millions):
1997 1996 1995 ------ ------ ------ Bank Credit Agreement $ 36.9 $ 16.4 $ 25.2 Commercial paper 43.8 -- -- 9.30% Senior Secured Debentures 5.3 6.6 6.6 10% Senior Subordinated Notes 19.3 24.1 24.1 9.875% Senior Subordinated Debentures 8.2 10.9 10.9 9.65% Senior Subordinated Debentures 17.8 22.0 22.0 9.35% Senior Subordinated Notes 12.3 15.3 16.1 7.45% Senior Debentures 3.4 -- -- 7.00% Senior Notes 5.2 -- -- 6.85% Senior Notes 4.1 -- -- Vons Debentures 10.2 -- -- 10% Senior Notes 4.3 5.9 5.9 Mortgage notes payable 22.0 33.0 43.3 Other notes payable 9.9 11.9 11.3 Medium-term notes 4.4 6.0 7.1 Short-term bank borrowings 8.8 5.1 6.6 Obligations under capital leases 26.0 20.8 21.0 Amortization of deferred finance costs 1.7 1.8 4.0 Interest rate swap and cap agreements 3.3 3.0 0.3 Capitalized interest (5.7) (4.3) (4.6) ------ ------ ------ $241.2 $178.5 $199.8 ====== ====== ======
In May 1997, Safeway entered into interest rate cap agreements which expire in 1999 and entitle the Company to receive from counterparties the amounts, if any, by which interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized cost to purchase the cap agreements was $2.5 million at year-end 1997. Additionally, as of year-end 1997, the Company had effectively converted $135.1 million of its floating rate debt to fixed interest rate debt through the use of interest rate swap agreements. The significant terms of the swap agreements outstanding at year-end 1997 were as follows (dollars in millions):
Variable Canada Interest U.S. Fixed Fixed Rates Notional Interest Interest to be Origination Expiration Principal Rates Paid Rates Paid Received Date Date --------- ---------- ---------- -------- ----------- ---------- $100.0 6.2% 5.8% 1997 2007 35.1 6.0% 4.9 1993 1998 ------ $135.1 ======
The variable interest rate received on the U.S. swap is based on federal reserve rates quoted for commercial paper. The variable interest rate received on the Canadian swap is based on the average of bankers' acceptance rates quoted by Canadian banks. At year-end 1997 and 1996, net unrealized losses on the interest rate swap agreements totaled $0.4 million and $2.0 million. The notional principal amounts do not represent cash flows and therefore are not subject to credit risk. The Company is subject to risk from nonperformance of the counterparties to the swap and cap agreements in the amount of any interest differential to be received. Because the Company monitors the 29 19 credit ratings of its counterparties, which are limited to major financial institutions, Safeway does not anticipate nonperformance by the counterparties. Since the Company intends to hold these agreements as hedges for the terms of the agreements, the market risk associated with changes in interest rates should not be significant. NOTE F: CAPITAL STOCK SHARES AUTHORIZED AND ISSUED Authorized preferred stock consists of 25 million shares of which none was outstanding during 1997, 1996 or 1995. Authorized common stock consists of 750 million shares at $0.01 par value. Common stock outstanding at year-end 1997 was 476.2 million shares (net of 61.2 million shares of treasury stock) and 442.8 million shares at year-end 1996. Safeway's stockholders will vote at the 1998 Annual Meeting of Stockholders on a proposal to increase the authorized shares of common stock to 1.5 billion shares. STOCK OPTION PLANS Under Safeway's stock option plans, the Company may grant incentive and non-qualified options to purchase up to 98 million shares of common stock at an exercise price equal to or greater than the fair market value at the grant date, as determined by the Compensation and Stock Option Committee of the Board of Directors. Options generally vest over seven years. Vested options are exercisable in part or in full at any time prior to the expiration date of 10 to 15 years from the date of the grant. The stock option plans prohibit the transfer of options. Activity in the Company's stock option plans for the three-year period ended January 3, 1998 was as follows:
Weighted-Average Options Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding, year-end 1994 50,626,048 $ 3.09 1995 Activity: Granted 2,036,360 9.06 Canceled (1,558,648) 3.73 Exercised (6,773,116) 1.03 ---------- Outstanding, year-end 1995 44,330,644 3.52 1996 Activity: Granted 3,991,984 16.65 Canceled (724,454) 5.07 Exercised (8,825,018) 2.04 ---------- Outstanding, year-end 1996 38,773,156 5.07 1997 Activity: Granted 3,981,766 26.25 Converted Vons options 7,578,098 7.34 Canceled (962,522) 10.01 Exercised (8,373,270) 5.06 ---------- Outstanding, year-end 1997 40,997,228 7.53 ========== Exercisable, year-end 1996 23,034,640 4.25 ========== Exercisable, year-end 1997 25,887,094 4.75 ==========
Weighted-average fair value of options granted during this year: 1996 $ 7.64 1997 $12.43
The following table summarizes stock option information at year-end 1997.
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------ ------------------------------------ Range of Number Weighted-Average Weighted-Average Number Weighted Average Exercise Prices of Options Remaining Contractual Life Exercise Price of Options Exercise Price - ------------------------------------------------------------------------------------------ ------------------------------------ $ 0.50 to $ 0.50 2,320,000 7.15 years $ 0.50 2,320,000 $ 0.50 1.46 to 3.09 6,690,430 8.30 2.68 5,296,564 2.67 3.22 to 3.88 8,373,752 8.88 3.32 7,326,096 3.29 3.94 to 6.31 7,495,386 6.65 5.02 5,540,618 4.93 6.34 to 9.67 8,006,774 8.34 7.39 3,727,382 7.52 10.09 to 29.88 8,110,886 9.52 20.37 1,676,434 16.86 ---------- ---------- $ 0.50 to $29.88 40,997,228 8.00 7.53 25,887,094 4.75 ========== ==========
Options to purchase 15.2 million shares were available for grant at year-end 1997. 30 20 ADDITIONAL STOCK PLAN INFORMATION As discussed in Note A, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share as if the Company had adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: seven to nine years expected life to vesting; stock volatility of 31% in 1997, 30% in 1996 and 29% in 1995; risk-free interest rates of 6.29% in both 1997 and 1996 and 6.50% in 1995; and no dividends during the expected term. The Company's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. However, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the pro forma results presented below are not indicative of future period pro forma results. Had compensation cost for the Safeway's stock option plans been determined based on the fair value at the grant date for awards in 1995, 1996 and 1997, consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ------- ------- ------- Net income (in millions): As reported $ 557.4 $ 460.6 $ 326.3 Pro forma 553.5 459.0 325.8 Basic earnings per share: As reported $ 1.21 $ 1.06 $ 0.77 Pro forma 1.20 1.05 0.77 Diluted earnings per share: As reported $ 1.12 $ 0.97 $ 0.68 Pro forma 1.11 0.96 0.68
REPURCHASES OF COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK In connection with the Merger described in Note B, the Company repurchased 64.0 million shares of Safeway common stock from a partnership affiliated with KKR at $21.50 per share, for an aggregate purchase price of $1.376 billion. The repurchased shares are reported as treasury shares in the accompanying balance sheet. When treasury shares are reissued, any excess of the acquisition cost of the shares over the proceeds received is charged to paid-in capital. At year-end 1997, KKR owned 110.2 million shares of Safeway common stock. At year-end 1997, warrants (the "SSI Warrants") to purchase 30.7 million shares of the Company's common stock at $0.50 per share were held by SSI Equity Associates, L.P. ("SSI"), a limited partnership whose sole assets consist of the SSI Warrants. The SSI Warrants are exercisable through November 15, 2001. SSI Partners, L.P., an affiliate of KKR, is the general partner of SSI. During 1996 and 1995, the Company acquired 64.5% of the partnership interests in SSI for $322.7 million with proceeds from bank borrowings, which was accounted for as a reduction to stockholders' equity. Outstanding common stock and the effect of options and warrants at year-end 1997 are summarized as follows (in millions):
Potential Proceeds from Shares Exercise ----- ------ Common stock outstanding (net of 61.2 shares of treasury stock) 476.2 Options to purchase common stock 41.0 $308.7 SSI Warrants 10.9 5.4 ----- ------ Total 528.1 $314.1 ===== ======
NOTE G: TAXES ON INCOME The components of income tax expense are as follows (in millions):
1997 1996 1995 ------ ------ ------ Current: Federal $303.6 $162.9 $157.9 State 57.5 30.7 29.9 Foreign 37.8 (0.5) 56.2 ------ ------ ------ 398.9 193.1 244.0 ------ ------ ------ Deferred: Federal 40.4 49.3 8.2 State 8.4 12.6 (0.8) Foreign 7.1 52.0 (23.2) ------ ------ ------ 55.9 113.9 (15.8) ------ ------ ------ $454.8 $307.0 $228.2 ====== ====== ======
Extraordinary losses are presented net of related tax benefits. Therefore, 1997 and 1995 income tax expense in the above table excludes tax benefits of $41.1 million and $1.3 million on extraordinary losses related to the early retirement of debt. Tax benefits from the exercise of employee stock options of $42.4 million in 1997, $51.9 million in 1996 and $16.6 million in 1995 were credited directly to paid-in capital and, therefore, are excluded from income tax expense. 31 21 The reconciliation of the provision for income taxes at the U.S. federal statutory income tax rate to the Company's income taxes is as follows (dollars in millions):
1997 1996 1995 ------ ------ ------ Statutory rate 35% 35% 35% Income tax expense using federal statutory rate $376.7 $268.7 $194.8 State taxes on income net of federal benefit 42.8 28.1 18.9 Taxes provided on equity in earnings of unconsolidated affiliates at rates below the statutory rate (9.4) (10.5) (5.3) Taxes on foreign earnings not permanently reinvested 8.9 7.3 6.2 Withholding tax on Canadian earnings not permanently reinvested -- -- (5.8) Nondeductible expenses and amortization 13.6 3.2 4.2 Difference between statutory rate and foreign effective rate 10.6 11.1 1.0 Other accruals 11.6 (0.9) 14.2 ------ ------ ------ $454.8 $307.0 $228.2 ====== ====== ======
Significant components of the Company's net deferred tax liability at year-end were as follows (in millions):
1997 1996 1995 ------ ------ ------ Deferred tax assets: Workers' compensation and other claims $138.8 $ 91.7 $102.9 Accruals not currently deductible 80.3 48.7 59.5 Accrued claims and other liabilities 48.8 47.4 48.3 Employee benefits 18.4 9.7 34.0 Canadian operating loss carryforward -- 2.7 54.7 Other assets 14.6 6.0 14.5 ------- ------- ------- 300.9 206.2 313.9 ------- ------- ------- Deferred tax liabilities: Property (280.8) (110.5) (124.3) Prepaid pension costs (161.3) (149.9) (142.7) LIFO inventory reserves (106.0) (66.8) (53.7) Investments in unconsolidated affiliates (15.3) (48.1) (40.0) Cumulative translation adjustments (16.2) (23.0) (24.6) Other liabilities (18.3) (31.7) (37.1) ------- ------- ------- (597.9) (430.0) (422.4) ------- ------- ------- Net deferred tax liability $(297.0) $(223.8) $(108.5) ======= ======= =======
NOTE H: EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS RETIREMENT PLANS The Company maintains defined benefit, non-contributory pension plans (the "Plans") for substantially all of its U.S. and Canadian employees not participating in multi-employer pension plans. Benefits are generally based upon years of service, age at retirement date and employee's compensation during the last years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the statutory funding standards. Through year-end 1997, the assets of Safeway's U.S. Plans have been considered fully funded for purposes of contribution requirements. Accordingly, no Company contributions were made to the U.S. Plans during the last three years. In 1997, 1996 and 1995, the Company contributed $10.0 million, $10.6 million and $10.3 million to the Canadian Plan. Assets of the Plans are primarily composed of marketable equity and interest-bearing securities. The Company has assumed the obligations of Vons' benefit plan. The actuarial assumptions for the existing Vons benefit plans are comparable to the existing plans of the Company. The Vons' retirement plan has been combined with Safeway's for financial statement presentation. Actuarial assumptions used to determine year-end Plan status were as follows:
1997 1996 1995 --- --- --- Discount rate used to determine the projected benefit obligation: U.S. Plans 7.0% 7.5% 7.0% Canadian Plan 6.3 7.0 8.0 Combined weighted average rate 6.8 7.4 7.2 Long-term rate of return on Plan assets: U. S. Plans 9.0 9.0 9.0 Canadian Plan 8.0 8.0 8.0 Rate of compensation increase: U. S. Plans 5.0 5.5 5.5 Canadian Plan 4.5 5.5 5.5
Net pension plan income (expense) consisted of the following (in millions):
1997 1996 1995 ------ ------ ------ Return on plan assets: Actual return, gain $263.8 $162.4 $241.2 Deferred (gain) (145.5) (14.2) (152.9) ------ ------ ------ Actuarial assumed return 118.3 148.2 88.3 Service cost (42.5) (41.3) (36.7) Interest cost on projected benefit obligations (60.1) (51.7) (48.3) Net amortization (11.6) (56.0) (10.9) ------ ------ ------ Net pension plan income (expense) recognized in consolidated statements of income $ 4.1 $ (0.8) $ (7.6) ====== ====== ======
32 22 The funded status of the Plans at year-end was as follows (in millions):
1997 1996 -------- -------- Fair value of assets at year-end $1,662.6 $1,392.0 -------- -------- Actuarially determined present value of: Vested benefit obligations 916.7 758.9 Non-vested benefit obligations 15.8 9.3 -------- -------- Accumulated benefit obligations 932.5 768.2 Additional amounts related to projected compensation increases 124.3 98.9 -------- -------- Projected benefit obligations 1,056.8 867.1 -------- -------- Fair value of assets in excess of projected benefit obligations 605.8 524.9 Adjustment for difference in book and tax basis of assets (165.1) (165.1) Unamortized prior service costs resulting from improved Plan benefits 93.7 83.3 Net gain from actuarial experience which has not been recognized in the consolidated financial statements (193.0) (114.4) -------- -------- Prepaid pension costs $ 341.4 $ 328.7 ======== ========
RETIREMENT RESTORATION PLAN The Retirement Restoration Plan provides death benefits and supplemental income payments for senior executives after retirement. The Company recognized expense of $4.3 million in 1997, $4.4 million in 1996 and $3.4 million in 1995. The aggregate projected benefit obligation of the Retirement Restoration Plan was approximately $48.4 million at year-end 1997 and $44.9 million at year-end 1996. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to pension and the Retirement Restoration Plan benefits, the Company sponsors plans that provide postretirement medical and life insurance benefits to certain salaried employees. Retirees share a portion of the cost of the postretirement medical plans. Safeway pays all of the cost of the life insurance plans. The plans are not funded. In 1996, the Safeway postretirement medical plan was amended to restrict the types of coverage available, to change the participant contributions, and to exclude future retirees from participating in the plan. The exclusion of future retirees in the plan was considered a curtailment under the provisions of SFAS No. 88 which resulted in recognition of a curtailment gain of $14.5 million in 1996. In 1997, similar amendments were made to the Vons postretirement medical plan, resulting in a $14.0 million adjustment to the accumulated postretirement benefit obligation ("APBO") at the date of the Merger. The Company's APBO was $28.4 million at year-end 1997 and $15.9 million at year-end 1996. The APBO represents the actuarial present value of benefits expected to be paid after retirement. Postretirement benefit expense was $2.2 million in 1997, $1.7 million in 1996 and $2.5 million in 1995. The significant assumptions used to determine the periodic postretirement benefit expense and the APBO were as follows:
1997 1996 1995 ---- ---- ---- Discount rate 7.0% 7.0% 7.0% Rate of compensation increase 5.5 5.5 5.5
For 1998, a 7.5% annual rate of increase in the per capita cost of postretirement medical benefits provided under the Company's group health plan was assumed. The rate was assumed to decrease gradually to 5.5% for 2002 and remain at that level thereafter. A 5.5% annual rate of increase was assumed for 1998 and thereafter in the per capita cost of postretirement benefits provided under HMO plans. If the health care cost trend rate assumptions were increased by 1% in each year, the APBO as of year-end 1997 would increase $0.8 million, and the net periodic postretirement benefit expense for 1997 would remain unchanged. Retiree contributions have historically been adjusted when plan costs increase. The APBO for the medical plans anticipates future cost-sharing changes to the written plan that are consistent with the Company's past practice. MULTI-EMPLOYER PENSION PLANS Safeway participates in various multi-employer pension plans, covering virtually all Company employees not covered under the Company's non-contributory pension plans, pursuant to agreements between the Company and employee bargaining units which are members of such plans. These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer-contributors. Contributions of $130 million in 1997, $112 million in 1996 and $105 million in 1995 were made and charged to income. Under U.S. legislation regarding such pension plans, a company is required to continue funding its proportionate share of a plan's unfunded vested benefits in the event of withdrawal (as defined by the legislation) from a plan or plan termination. Safeway participates in a number of these pension plans, and the potential obligation as a participant in these plans may be significant. The information required to determine the total amount of this contingent obligation, as well as the total amount of accumulated benefits and net assets of such plans, is not readily available. During 1988 and 1987, the Company sold certain operations. In most cases the party acquiring the operation agreed to continue making contributions to the plans. Safeway is relieved of the obligations related to these sold operations to the extent the acquiring parties continue to make contributions. Whether such sales could result in withdrawal under ERISA and, if so, whether such withdrawals could result in liability to the Company, is not determinable at this time. 33 23 COLLECTIVE BARGAINING AGREEMENTS At year-end 1997, Safeway had approximately 147,000 full and part-time employees. Approximately 90% of Safeway's employees in the United States and Canada are covered by collective bargaining agreements negotiated with local unions affiliated with one of 12 different international unions. There are approximately 400 such agreements, typically having three-year terms, with some agreements having terms up to five years. Accordingly, Safeway negotiates a significant number of these agreements every year. Safeway concluded early negotiations and signed new labor contracts that would have been due to expire in 1998. Certain of these contracts were with employees represented by the United Food and Commercial Workers Union in northern California and Spokane, Washington. In addition, union members in British Columbia ratified a new labor contract. As a result of these early negotiations, the only significant remaining labor contracts due to expire in 1998 are in the Seattle and Winnipeg operating areas covering approximately 110 stores. Management considers the terms of these new contracts to be satisfactory. NOTE I : INVESTMENT IN UNCONSOLIDATED AFFILIATES Safeway's investment in unconsolidated affiliates consists of a 49% ownership interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operates 74 food and general merchandise stores in western Mexico. Income from Safeway's equity investment in Casa Ley, recorded on a one-quarter delay basis, increased to $22.7 million in 1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995, Mexico suffered from high interest rates and inflation which adversely affected Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa Ley's financial results have gradually improved. Casa Ley had total assets of $319.0 million and $263.1 million as of September 30, 1997 and 1996 based on financial information provided by Casa Ley. Sales and net income for Casa Ley were as follows (in millions of U.S. dollars): 12 months ended September 30,
1997 1996 1995 ------- ------- ------- Sales $ 943.8 $ 810.1 $ 861.4 ======= ======= ======= Net income $ 38.6 $ 33.8 $ 17.9 ======= ======= =======
Through April 8, 1997, the Company also owned 15.1 million common shares, or 34.4% of the total shares outstanding, of Vons. Vons is now a wholly-owned subsidiary of Safeway, and as of the beginning of the second quarter of 1997, Safeway's consolidated financial statements include Vons' financial position and results of operations. Safeway's share of Vons' earnings was $12.2 million for the first quarter of 1997 compared to $7.2 million for the first quarter of 1996, and $31.2 million for the year in 1996. NOTE J: RELATED-PARTY TRANSACTIONS KKR provides management, consulting and financial services to the Company for an annual fee. Such services include, but are not necessarily limited to, advice and assistance concerning any and all aspects of the operation, planning and financing of the Company. Payments for management fees, special services and reimbursement of expenses were $1,399,000 in 1997, $1,364,000 in 1996 and $1,355,000 in 1995. The Company holds an 80% interest in Property Development Associates ("PDA"), a partnership formed in 1987 with a company controlled by an affiliate of KKR, to purchase, manage and dispose of certain Safeway facilities which are no longer used in the retail grocery business. The financial statements of PDA are consolidated with those of the Company and a minority interest of $24.0 million and $25.1 million at year-end 1997 and 1996 is included in accrued claims and other liabilities in the accompanying consolidated balance sheets. During 1997, the Company contributed to PDA six properties no longer used in its retail grocery business which had an aggregate net book value of $4.9 million. During 1996, the Company contributed to PDA 16 properties no longer used in its retail grocery business which had an aggregate net book value of $8.4 million. The minority partner contributed cash in an amount sufficient to maintain its 20% ownership. No gains or losses were recognized on these transactions. Safeway paid PDA $1.5 million in 1997, $1.6 million in 1996 and $1.5 million in 1995 for reimbursement of expenses related to management and real estate services provided by PDA. 34 24 NOTE K: COMMITMENTS AND CONTINGENCIES LEGAL MATTERS In July 1988, there was a major fire at the Company's dry grocery warehouse in Richmond, California. Through January 3, 1998, in excess of 125,000 claims for personal injury and property damage arising from the fire have been settled for an aggregate amount of approximately $122.5 million. The Company's loss as a result of the fire damage to its property and settlement of the above claims was substantially covered by insurance. As of January 3, 1998, there were still pending approximately 3,500 claims against the Company for personal injury (including punitive damages), and approximately 460 separate claims for property damage, arising from the smoke, ash and embers generated by the fire. A substantial percentage of these claims have been asserted in lawsuits against the Company filed in the Superior Court for Alameda County, California. There can be no assurance that the pending claims will be settled or otherwise disposed of for amounts and on terms comparable to those settled to date. In early 1996, a purported class action was filed on behalf of persons allegedly injured as a result of the smoke, ash and embers generated by the fire. The complaint, which was amended after the Court sustained the Company's demurrer with leave to amend, generally alleges that the Company fraudulently (i) obtained settlements of certain claims arising out of the fire and (ii) made statements that induced claimants not to file actions within the time period under the statute of limitations. The amended complaint seeks compensatory and punitive damages. The Company has received notice from its insurance carrier denying coverage for claims asserted in this case. Safeway strongly disagrees with the insurance carrier's denial of coverage. On April 21, 1997, the Court sustained Safeway's demurrer to the second amended complaint without leave to amend. In May 1997, the Court dismissed the case, and plaintiffs have filed an appeal, which is pending. Safeway believes that coverage under its insurance policy will be sufficient and available for resolution of all remaining third-party claims arising out of the fire. On September 13, 1996, a class action lawsuit entitled McCampbell et al. v. Ralphs Grocery Company, et al., was filed in the Superior Court of San Diego County, California against Vons and two other grocery store chains operating in southern California. In the complaint it is alleged, among other things, that Vons and the other defendants conspired to fix the retail price of eggs in southern California. The plaintiffs claim that the defendants violated provisions of the California Cartwright Act and engaged in unfair competition. Plaintiffs seek damages they allege the class has sustained; the amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. In addition, plaintiffs seek an injunction against future acts that would be in restraint of trade or that would constitute unfair competition. An answer has been filed to the complaint that denies plaintiffs' allegations and sets forth several defenses. On October 3, 1997, the Court issued an order certifying a class of retail purchasers of white chicken eggs by the dozen from defendants' stores within the Counties of Los Angeles, Riverside, San Bernardino, San Diego, Imperial and Orange during the period from September 13, 1992 to the present. The Company believes that Vons has meritorious defenses to plaintiffs' claims. There are also pending against the Company various claims and lawsuits arising in the normal course of business, some of which seek damages and other relief, which, if granted, would require very large expenditures. It is management's opinion that although the amount of liability with respect to all of the above matters cannot be ascertained at this time, any resulting liability, including any punitive damages, will not have a material adverse effect on the Company's financial statements taken as a whole. COMMITMENTS The Company has commitments under contracts for the purchase of property and equipment and for the construction of buildings. Portions of such contracts not completed at year-end are not reflected in the consolidated financial statements. These unrecorded commitments were $92.5 million at year-end 1997. 35 25 NOTE L: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
United (In millions) States Canada Total --------- --------- --------- 1997 SALES $19,075.9 $ 3,407.9 $22,483.8 GROSS PROFIT 5,537.9 876.8 6,414.7 OPERATING PROFIT 1,169.6 110.1 1,279.7 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 978.4 97.9 1,076.3 NET WORKING CAPITAL (DEFICIT) (487.9) (21.0) (508.9) TOTAL ASSETS 7,613.7 880.2 8,493.9 NET ASSETS 1,712.3 436.7 2,149.0 1996 Sales $13,797.5 $ 3,471.5 $17,269.0 Gross profit 3,901.3 872.9 4,774.2 Operating profit 752.8 138.9 891.7 Income before income taxes 652.2 115.4 767.6 Net working capital (deficit) (442.7) 67.1 (375.6) Total assets 4,625.4 919.8 5,545.2 Net assets 792.4 394.4 1,186.8 1995 Sales $12,902.4 $ 3,495.1 $16,397.5 Gross profit 3,584.5 907.9 4,492.4 Operating profit 590.1 137.3 727.4 Income before income taxes and extraordinary loss 448.9 107.6 556.5 Net working capital (deficit) (490.1) 65.9 (424.2) Total assets 4,261.5 932.8 5,194.3 Net assets 462.6 332.9 795.5
36 26 NOTE M: QUARTERLY INFORMATION (UNAUDITED) The summarized quarterly fianancial data presented below reflect all adjustments which, in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.
Last 17 Third 12 Second 12 First 12 (In millions, except per-share amounts) Year Weeks Weeks Weeks Weeks ---------- ---------- ---------- ---------- ---------- 1997 SALES $ 22,483.8 $ 7,785.4 $ 5,371.4 $ 5,249.2 $ 4,077.8 GROSS PROFIT 6,414.7 2,211.3 1,552.6 1,505.3 1,145.5 OPERATING PROFIT 1,279.7 439.6 317.3 298.0 224.8 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 1,076.3 372.2 259.8 240.2 204.1 EXTRAORDINARY LOSS RELATED TO EARLY RETIREMENT OF DEBT (64.1) -- (59.9) (4.2) -- NET INCOME 557.4 214.9 90.1 129.9 122.5 EARNINGS PER SHARE: BASIC INCOME BEFORE EXTRAORDINARY LOSS $ 1.35 $ 0.46 $ 0.32 $ 0.29 $ 0.28 EXTRAORDINARY LOSS (0.14) -- (0.13) (0.01) -- ---------- ---------- ---------- ---------- ---------- NET INCOME $ 1.21 $ 0.46 $ 0.19 $ 0.28 $ 0.28 ========== ========== ========== ========== ========== DILUTED INCOME BEFORE EXTRAORDINARY LOSS $ 1.25 $ 0.43 $ 0.30 $ 0.27 $ 0.26 EXTRAORDINARY LOSS (0.13) -- (0.12) (0.01) -- ---------- ---------- ---------- ---------- ---------- NET INCOME $ 1.12 $ 0.43 $ 0.18 $ 0.26 $ 0.26 ========== ========== ========== ========== ========== PRICE RANGE, NEW YORK STOCK EXCHANGE $31 23/32 $ 31 23/32 $ 27 3/4 $ 24 13/16 $ 26 to 20 9/16 to 25 11/32 to 23 1/16 to 21 1/8 to 20 9/16
(In millions, except Last 16 Third 12 Second 12 First 12 per-share amounts) Year Weeks Weeks Weeks Weeks ---------- ---------- ---------- ---------- ---------- 1996 Sales $ 17,269.0 $ 5,486.9 $ 3,954.0 $ 3,945.4 $ 3,882.7 Gross profit 4,774.2 1,493.0 1,086.6 1,102.1 1,092.5 Operating profit 891.7 283.7 203.8 210.1 194.1 Income before income taxes 767.6 248.2 178.1 179.2 162.1 Net income 460.6 151.6 105.9 106.7 96.4 Earnings per share: Basic $ 1.06 $ 0.34 $ 0.24 $ 0.25 $ 0.22 Diluted 0.97 0.31 0.22 0.22 0.20 Price range, New York Stock Exchange $ 22 11/16 $ 22 11/16 $ 19 1/8 $ 17 13/16 $ 15 1/16 to 11 7/32 to 18 5/8 to 15 7/8 to 13 13/16 to 11 7/32
37 27 SAFEWAY INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
1997 1996 1995 ---------------------- ---------------------- -------------------- (In millions, except per-share amounts) DILUTED BASIC Diluted Basic Diluted Basic ------- ------- ------- ------- ------- ------- Income before extraordinary loss $ 621.5 $ 621.5 $ 460.6 $ 460.6 $ 328.3 $ 328.3 Extraordinary loss (64.1) (64.1) -- -- (2.0) (2.0) ------- ------- ------- ------- ------- ------- Net income $ 557.4 $ 557.4 $ 460.6 $ 460.6 $ 326.3 $ 326.3 ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding 462.3 462.3 436.0 436.0 423.9 423.9 ======= ======= ======= Common share equivalents 35.4 39.7 57.3 ------- ------- ------- Weighted average shares outstanding 497.7 475.7 481.2 ======= ======= ======= Earnings per common share and common share equivalent: Income before extraordinary loss $ 1.25 $ 1.35 $ 0.97 $ 1.06 $ 0.68 $ 0.77 Extraordinary loss (0.13) (0.14) -- -- -- -- ------- ------- ------- ------- ------- ------- Net income $ 1.12 $ 1.21 $ 0.97 $ 1.06 $ 0.68 $ 0.77 ======= ======= ======= ======= ======= ======= Calculation of common share equivalents: Options and warrants to purchase common shares 58.6 62.6 88.1 Common shares assumed purchased with potential proceeds (23.2) (22.9) (30.8) ------- ------- ------- Common share equivalents 35.4 39.7 57.3 ======= ======= ======= Calculation of common shares assumed purchased with potential proceeds: Potential proceeds from exercise of options and warrants to purchase common shares $ 597.4 $ 394.3 $ 298.9 Common stock price used under the treasury stock method $ 25.75 $ 17.22 $ 9.70 Common shares assumed purchased with potential proceeds 23.2 22.9 30.8
Share and per-share amounts reflect the two-for-one stock splits effected in February 1998 and in January 1996. Earnings per share have been restated in accordance with Statement of Financial Accounting Standard No. 128, "Earnings per Share." 38 28 MANAGEMENT'S REPORT Financial Statements Safeway Inc. is responsible for the preparation, integrity and fair presentation of its published financial statements. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts that are based on judgments and estimates made by management. Safeway also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The financial statements have been audited by Deloitte & Touche LLP, independent auditors, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Safeway believes that all representations made to the independent auditors during their audit were valid and appropriate. The report of Deloitte & Touche LLP is presented below. Internal Control System Safeway maintains a system of internal control over financial reporting, which is designed to provide reasonable assurance to management and the Board of Directors regarding the preparation of reliable published financial statements. The system includes a documented organizational structure and division of responsibility; established policies and procedures including a code of conduct to foster a strong ethical climate, which are communicated throughout Safeway; and the careful selection, training and development of employees. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board, and corrective actions are taken to address control deficiencies and other opportunities for improving the system as they are identified. The Board, operating through its Audit Committee, which is composed entirely of outside directors, provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system can change with circumstances. As of January 3, 1998, Safeway believes its system of internal controls over financial reporting was effective for providing reliable financial statements. /s/ STEVEN A. BURD /s/ JULIAN C. DAY Steven A. Burd Julian C. Day President and Executive Vice President and Chief Executive Officer Chief Financial Officer INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Safeway Inc.: We have audited the accompanying consolidated balance sheets of Safeway Inc. and subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Safeway Inc. and subsidiaries as of January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1998 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 27, 1998 39 EX-22.1 11 SCHEDULE OF SUBSIDIARIES 1 Exhibit 22.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of January 3, 1998 Registrant: Safeway Inc. Subsidiaries of Registrant (Tier I subsidiaries): Safeway Canada Holdings, Inc. Safeway Australia Holdings, Inc. Safeway Leasing, Inc. Oakland Property Brokerage, Inc. Glencourt, Inc. Milford Insurance Ltd. Pak 'N Save, Inc. Safeway Trucking, Inc. Photo Acquisition I, Inc. Photo Acquisition II, Inc. Safeway Southern California, Inc. Safeway Denver, Inc. Safeway Richmond, Inc. Safeway Dallas, Inc. Safeway Supply, Inc. Safeway Corporate, Inc. Safeway Stores 42, Inc. Safeway Stores 43, Inc. Safeway Stores 64, Inc. Safeway Claim Services, Inc. Safeway Stores, Incorporated Safeway Warehouse, Inc. Subsidiaries of Safeway Canada Holdings, Inc.: Safeway New Canada, Inc. (Continued) 2 Exhibit 22.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of January 3, 1998 SUBSIDIARIES OF TIER I SUBSIDIARIES (Tier II subsidiaries): Subsidiaries of Safeway Southern California, Inc. Safeway Stores 18, Inc. Safeway Stores 26, Inc. Safeway Stores 28, Inc. Safeway Stores 31, Inc. The Vons Companies, Inc. Subsidiaries of Safeway Denver, Inc. Safeway Stores 44, Inc. Safeway Stores 45, Inc. Safeway Stores 46, Inc. Safeway Stores 47, Inc. Safeway Stores 48, Inc. Safeway Stores 49, Inc. Safeway Stores 50, Inc. Subsidiaries of Safeway Richmond, Inc. Safeway Stores 58, Inc. Safeway Stores 59, Inc. Subsidiaries of Safeway Corporate, Inc. Safeway Stores 67, Inc. Safeway Stores 68, Inc. Safeway Stores 69, Inc. Safeway Stores 70, Inc. Subsidiaries of Safeway Supply, Inc. Safeway Stores 71, Inc. Safeway Stores 72, Inc. Safeway Stores 73, Inc. Safeway Stores 74, Inc. Safeway Stores 75, Inc. Safeway Stores 76, Inc. Safeway Stores 77, Inc. Consolidated Procurement Services, Inc. (Continued) 3 Exhibit 22.1 SAFEWAY INC. SCHEDULE OF SUBSIDIARIES As of January 3, 1998 Subsidiaries of Safeway Dallas, Inc. Safeway Stores 78, Inc. Safeway Stores 79, Inc. Safeway Stores 80, Inc. SMC Rx, Inc. Safeway Stores 82, Inc. Safeway Stores 85, Inc. Safeway Stores 86, Inc. Safeway Stores 87, Inc. Safeway Stores 88, Inc. Safeway Stores 89, Inc. Safeway Stores 90, Inc. Safeway Stores 91, Inc. Safeway Stores 92, Inc. Safeway Stores 96, Inc. Safeway Stores 97, Inc. Safeway Stores 98, Inc. Subsidiaries of Photo Acquisition I, Inc. Everett Realty Advisors, Inc. SUBSIDIARIES OF TIER I SUBSIDIARIES (Non-tier Subsidiaries): Subsidiary of Safeway New Canada, Inc.: Canada Safeway Limited and its subsidiaries: Safeway International Finance Corp. of Canada Ltd. SUBSIDIARIES OF TIER II SUBSIDIARIES (Tier III Subsidiaries): Subsidiary of Safeway Stores 58, Inc.: Safelease, Inc. 19 companies are not listed as they are maintained solely for the purpose of holding licenses. EX-23.1 12 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our report dated February 27, 1998, incorporated by reference in this Annual Report on Form 10-K of Safeway Inc. for the fiscal year ended January 3, 1998, in the following Registration Statements of Safeway Inc.: o No. 33-36753 on Form S-8 regarding the Safeway Inc. Outside Director Equity Purchase Plan, o No. 33-37207 on Form S-8 regarding the Profit Sharing Plan of Safeway Inc. and its United States Subsidiaries, o No. 33-42232 on Forms S-3 and S-8 regarding the Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc., o No. 33-48884 on Form S-8 regarding the Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc., o No. 33-51552 on Form S-3 regarding Debt Securities, o No. 33-51119 on Form S-8 regarding the Stock Option Plan for Consultants of Safeway Inc., o No. 33-54581 on Form S-8 regarding the Employee Stock Purchase Plan of Safeway Inc., o No. 33-63803 on Form S-8 regarding the 1994 Amended and Restated Stock Option and Incentive Plan for Key Employees of Safeway Inc., o No. 333-13607 on Form S-8 regarding the 1987 Plan for Consultants of Safeway Stores, Inc., o No. 333-22837 on Form S-8 regarding The Vons Companies, Inc. Management Stock Option Plan, and o No. 333-40807 on Form S-3 regarding Debt Securities. Deloitte & Touche LLP San Francisco, California March 20, 1998 EX-27 13 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets and the consolidated statements of income on pages 19 through 21 of the Company's 1997 Annual Report to Stockholders and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-03-1998 DEC-29-1996 JAN-03-1998 77,200 0 180,800 0 1,613,200 2,029,700 6,681,700 2,566,400 8,493,900 2,538,600 3,040,900 0 0 5,300 2,143,700 8,493,900 22,483,800 22,483,800 (16,069,100) (16,069,100) 0 0 (241,200) 1,076,300 (454,800) 621,500 0 (64,100) 0 557,400 1.21 1.21
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