10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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 1, 1995 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 1-8452 ---------------------- THE VONS COMPANIES, INC. (Exact name of registrant as specified in its charter) Michigan 38-1623900 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 618 Michillinda Avenue, Arcadia, California 91007 (Address of principal executive offices and zip code) Registrant's telephone number, including area code (818) 821- 7000 ---------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered -------------------- ----------------------------------------- Common Stock, $.10 par value per share New York Stock Exchange ---------------------- 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 voting stock held by non- affiliates of the registrant as of February 28, 1995: Common Stock, par value $.10 per share - $517,597,848. The number of shares of Common Stock outstanding as of February 28, 1995 - 43,383,166. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to Shareholders for fiscal year ended January 1, 1995 are incorporated by reference into Parts II and IV. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 3, 1995, are incorporated by reference into Part III, to be filed no later than April 30, 1995. PART I ITEM 1: BUSINESS General The Vons Companies, Inc. ("Vons" or the "Company") is one of the largest supermarket chains in Southern California based on sales. As of January 1, 1995, Vons operated 334 supermarkets and food and drug retail stores. Vons also operates a fluid milk processing facility, an ice cream plant, a bakery and distribution facilities for meat, grocery, produce and general merchandise. Stores operate under the "Vons" and "Pavilions" names. The Company's marketing platform is built on offering the customer greater value than found elsewhere by combining competitive pricing with superior selection, quality, service and convenience. Vons grocery business was founded in 1906. From 1969 until December 1985, it was owned, along with certain other merchandising businesses, by Household International, Inc. In 1985, these merchandising businesses were acquired in a leveraged buyout by a newly formed corporation which kept the grocery business and sold all of the other merchandising businesses. The newly formed corporation was subsequently merged in 1987 with and into Allied Supermarkets, Inc., a Michigan corporation ("Allied"), and the surviving corporation was renamed The Vons Companies, Inc., a Michigan corporation. Simultaneously with the merger, substantially all of the business previously operated by Allied was sold to a company organized by the former management of Allied, leaving the Company with operations located only in Southern California, as they existed prior to the merger. On August 29, 1988, the Company purchased substantially all of the operations of Safeway, Inc. ("Safeway") in Southern California. At the time of the acquisition (the "Safeway Acquisition"), these operations included 162 supermarkets and manufacturing and distribution facilities. As a result of the Safeway Acquisition and other purchases of Vons common stock, Safeway, through a wholly-owned subsidiary, is Vons largest shareholder, with approximately 35% of the outstanding shares of Vons common stock. Safeway is an affiliate of Kohlberg Kravis Roberts & Co. Strategic Repositioning and Restructuring In response to the weak economic environment in the regions it serves and other factors having a negative impact on sales, the Company commenced, in third quarter 1993, a strategic repositioning program which emphasized lower everyday shelf prices and improved customer service. In addition, the Company implemented a cost containment and strategic restructuring program to partially offset the costs of the strategic repositioning program. As part of the strategic repositioning program, the Company introduced the "Vons Value Program" in January 1994. This program emphasizes lower everyday shelf prices, improved customer service and increased broadcast media advertising to better inform customers as to the many ways to save money at Vons, including newly reduced prices, weekly advertised specials and free membership club savings. Double coupons remain an integral part of the Vons offering. Another important component of the Vons Value Program is an increase in the amount of labor allocated for check-out. The Company believes that customer satisfaction will increase by improving the speed of check-out. Overall store conditions have also improved as personnel from peripheral departments spend less time supporting check-out. Consistent with the Vons Value Program, the 1995 marketing campaign incorporates the slogan "Vons Is Value." This marketing campaign emphasizes the Vons Value formula which combines competitive prices with high quality products and customer service. The cost containment and strategic restructuring program, undertaken in third quarter 1993, included the accelerated closure of underperforming facilities and a reduction in administrative staff. In late 1994, the Company determined that the facility closures and reductions in workforce undertaken in 1993 would not achieve the Company's cost reduction goals. The Company undertook additional restructuring initiatives resulting in further facility closures and reductions in workforce in 1994. Importantly, the decision was made to exit the Company's warehouse store format. This decision resulted in the January 1995 closure of all eight EXPO stores, which will allow the Company to concentrate its resources on its proven store formats. Also, the Company will eliminate redundant warehousing capacity by closing its San Diego distribution facility in 1995. The new marketing and cost reduction programs are long-term strategies, the implementation of which will extend beyond 1994. In aggregate, the Company's programs are initially intended to benefit sales by funding lower prices, which in turn will improve the Company's ability to achieve strong, sustainable earnings growth. Store Formats The Company operates under the Vons and Pavilions formats. Each format is designed for a different customer segment as evidenced by the store location, appearance and product offerings. A key strategy of the Company is to tailor its store and merchandise offerings to reflect its diverse customer base. The Company supports its stores with centrally controlled marketing, advertising, buying, real estate development, management information systems, distribution, manufacturing, accounting and administration to maximize operating leverage and profitability. The vast majority of the Company's stores operate under the name "Vons." These stores offer extensive assortments of food products, including departments for dry groceries, produce, meat, seafood, dairy, wine and liquor as well as limited assortments of general merchandise, including greeting cards and health and beauty care items. Most Vons stores have in-store bakeries, service floral, service delicatessens with fresh and prepared foods and service seafood departments. Approximately one-third of the Vons stores offer full-service pharmacies and an expanded health and beauty care section. Targeted to consumers interested in contemporary food selections, "Pavilions" stores are designed for a clientele conscious of food trends who typically spend more discretionary income on food and food-related items. Pavilions stores offer expanded selections of food products and a variety of service departments. These stores generally offer selections of prepared foods, produce, wines and such service departments as hot bakeries, service floral, delicatessens, service meat departments and service seafood departments. Many Pavilions stores offer extensive general merchandise emphasizing food- related products of department store quality, a larger health and beauty care department, a cosmetics department, and a complete pharmacy. Selected stores offer a party shop, sausage and smoke shop, bagel shop, sushi bar, and high quality prepared Chinese food. The Company intends to increase the Pavilions chain by approximately 15 stores over the next three years. New Store Openings and Store Remodel Projects Another key strategy of the Company is to augment sales growth through the continuation of its new store opening program and ongoing chainwide remodel program. In 1994, the Company maintained its goal of having 80% of its stores either newly opened or remodeled within the preceding five years. The Company plans to open ten to 12 new stores in 1995. The Company's new store opening program does not include the effect of any possible store acquisition opportunities which might arise in the future. Store remodel projects enable Vons to present a store appearance consistent with Vons evolving store formats and to continuously update the store base through the introduction, where possible, of service departments and new merchandising modules, which are intended to generate higher gross margins and build store traffic. Vons remodel program includes remerchandising to reflect a contemporary design and decor package including selected fixture replacements. The Company completed 14, 59 and 68 store remodel projects in 1994, 1993 and 1992, respectively. Vons cash capital expenditures for store projects were $106.6 million and $253.7 million in 1994 and 1993, respectively. It is anticipated that 1995 capital expenditures for Vons store projects will be funded out of cash provided by operations, revolving debt and/or through operating leases. The capital expenditure program has substantial flexibility and is subject to revision based on various factors, including but not limited to business conditions, changing time constraints, cash flow requirements and competitive factors. The following table shows, by store format, the number of Vons stores in operation at the end of each of the years indicated and the number of stores opened, closed or converted during each year:
VONS PAVILIONS TIANGUIS EXPO TOTAL ------ --------- -------- ------ ------ 1992: Beginning Store Count...... 283 28 9 - 320 Stores opened.............. 4 4 - - 8 Stores acquired............ 18* - - - 18 Stores closed or sold...... (1) - - - (1) ------ --------- -------- ------ ------ Ending store count......... 304 32 9 - 345 ------ --------- -------- ------ ------ 1993: Stores opened.............. 8 - - 4 12 Stores closed or sold...... (12) - - - (12) Store format conversions... 5 - (6) 1 - ------ --------- -------- ------ ------ Ending store count......... 305 32 3 5 345 ------ --------- -------- ------ ------ 1994: Stores opened.............. 6 - - - 6 Stores closed or sold...... (17) - - - (17) Store format conversions... (1) 1 (3) 3 0 ------ --------- -------- ------ ------ Ending store count......... 293 33 0 8** 334 ------ --------- -------- ------ ------ ------ --------- -------- ------ ------ Average gross square feet per store at January 1, 1995.......... 33,900 43,000 - 65,900 35,600 ------ --------- -------- ------ ------ ------ --------- -------- ------ ------ ------------------- * Represents the Williams Bros. acquisition. ** Closed January, 1995. /TABLE Historically, the Company has closed an average of six stores per year, typically based on replacement strategies or lease renewals. Management expects this level of store closure to continue in the future. In response to negative sales trends, the Company critically assessed the performance of its entire store network in 1993 and 1994 and identified 27 underperforming stores for closure which included the Tianguis and EXPO store formats. Underperforming stores are stores which do not satisfy the Company's strategic requirements for growth, profitability, customer satisfaction, market area penetration and/or other factors. Management believed that these stores would not meet these requirements at any time in the foreseeable future, even with a significant commitment of management and financial resources. In consideration of the Company's leaner management structure as a result of its restructuring efforts and its commitment to its new store capital program, the Company determined that its available resources would be better utilized on the remaining store base. Marketing and Competition Southern California is one of the largest and most competitive markets for retail grocery sales in the United States. Vons store network ranges from Fresno on the north to the Mexican border on the south and from the Pacific Ocean on the west to Clark County, Nevada on the east. This market area includes Fresno, Imperial, Inyo, Kern, Los Angeles, Madera, Mono, Orange, Riverside, Santa Barbara, San Bernardino, San Diego, San Luis Obispo, Tulare and Ventura counties in California as well as Clark County, Nevada. Vons faces a number of major as well as smaller competitors in its market. The Company believes that in recent years the increase in the number of competitors' stores and the entrance of new competitors in its market area have intensified competition, and this trend is expected to continue. In addition, convenience stores, drug stores, mass merchandisers, specialty stores, warehouse stores, membership stores as well as discount stores and fast food and other restaurants compete for the same customers. Both store formats utilize promotional buying opportunities to pass along special values to their customers. Also, stores offer customers additional savings through the use of double coupons, advertised weekly specials and a free membership club which offers customers special values and programs and enables the Company and its vendors to target specific customer segments and better understand household buying behavior. Vons is the only operator in its market area to offer this free membership club to its customers. Vons marketing and communication strategy is based on a combination of newspaper, direct mail, television, radio and outdoor advertising. The principal competitive factors in the retail supermarket business include price, fast friendly service, quality of products, breadth of product assortment, store condition, and store location. Customers, in response to recessionary conditions in Southern California, are placing greater emphasis on price. Vons has responded to this trend through the Vons Value Program which entailed lowering prices on over 12,000 items. Vons believes that its strengths are its reputation for offering good values through a blend of high quality products, customer service and product selection at competitive prices combined with VonsClub, double coupons and weekly advertised specials. Merchandising and Store Operations An average store offers approximately 35,000 to 45,000 merchandise items. Vons has historically emphasized brand-name grocery products and quality and freshness in its produce, meat and seafood selections. In 1994, the Company set a goal of increasing private brand sales. Vons carries private brand products as well as its proprietary Jerseymaid dairy products in the grocery, delicatessen, frozen food, bakery, health and beauty care, and general merchandise departments of its stores. Vons Select was introduced in 1994. This upscale private brand offers additional opportunities for sales and profits. Vons private brand items accounted for approximately 14% of sales in 1994. The Company achieved its goal of private brand sales accounting for 16% of sales during the last four weeks of 1994. The Company intends to increase this percentage over time through marketing its branded items and the introduction of additional private brand items including those under the "Select" label. In conjunction with its restructuring program, Vons is committed to being the low cost operator in the market areas it serves. Vons strategy is to decrease over time its operating costs through: aggressive buying, introduction and maintenance of various merchandising and technological innovations and stringent cost controls. Through technological innovation, Vons has experienced improved operational efficiency. All Vons stores are equipped with an electronic receiving system for products delivered directly to stores by vendors, electronic time and attendance reporting, and computerized labor scheduling. Vons central buying office monitors warehouse inventory levels and product movement daily for buyer analysis and action. Vons utilizes a category management system which combines the buying and merchandising functions. The Company has upgraded these systems to enable category managers to more effectively analyze data. Vons has enhanced its pricing accuracy at store level by implementing an in-store shelf tag printing system and by connecting scales in the meat, delicatessen, and other service departments to the in-store database. In addition, price changes are electronically transmitted to an in-store database which controls pricing throughout each store. Vons provides detailed operational procedures to guide store management while still allowing a store manager to focus on the merchandise needs of the store. The Company improves the consistency of store operations through its policy to develop store managers internally. All store managers participate in a bonus program based upon individual store performance and are included in the Company's stock option program. Support and Other Services In 1994, the Company operated a fluid milk processing facility, an ice cream plant and a central bakery. Vons operates four distribution complexes in California, located in El Monte, San Diego, Ontario and Santa Fe Springs. The Company has announced the 1995 closure of its San Diego facility, eliminating redundant distribution capacity. The Company utilizes advanced computerized inventory and labor management systems throughout its distribution network. As of January 1, 1995, Vons operated a fleet of 427 tractors and 1,221 trailers, of which 105 and 182, respectively, were leased and the remainder were owned. The Company's transportation department utilizes on-board electronic trip recorders to monitor travel times and a sophisticated computerized routing system. Approximately 77% of store sales in 1994 represented inventories supplied by these distribution centers, and the balance was delivered directly to the stores by vendors. Governmental Regulation Vons is subject to regulation by a variety of governmental agencies, including the California Department of Alcoholic Beverage Control, the California State Board of Pharmacy, the California Department of Agriculture, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments and weights and measures agencies. In connection with the Safeway Acquisition, Vons, Safeway and certain other parties entered into a consent order (the "Consent Order") with the Federal Trade Commission (the "FTC") whereby Vons divested three retail grocery stores and Safeway divested nine retail grocery stores to competitors in Southern California. The Consent Order, among other things, also limits for ten years the acquisition by Vons of existing supermarkets from any other party in certain trade areas where both Vons and Safeway operated stores prior to the Safeway Acquisition, allowing a specified number of such acquisitions within any 12- month period in some areas and prohibiting acquisitions in others. In connection with the Williams Bros. acquisition, the Company entered into a consent order with the FTC whereby the Company divested one of the Williams Bros. store locations and among other things, agreed to seek FTC approval before acquiring any supermarket, or any interest in any company owning a supermarket, in San Luis Obispo County for ten years. Employees At January 1, 1995, Vons employed approximately 11,100 full time and 16,900 part-time employees as follows:
Non- Union Union Total ------ ------ ------- Hourly.................. 26,000 600 26,600 Salaried................ - 1,400 1,400 ------ ------ ------- Total Employees......... 26,000 2,000 28,000 ------ ------ ------- ------ ------ -------
In the fall of 1993, the Company renegotiated three-year contracts with the United Food and Commercial Workers' and Meat Cutters' unions. In the fall of 1994, the Company renegotiated four-year contracts with the International Brotherhood of Teamsters' unions. Like its major competitors, pursuant to its various collective bargaining agreements, Vons contributes to Taft- Hartley multi-employer, joint pension plans. Under pertinent law, a participating employer which totally or partially withdraws from such a pension plan could be liable for unfunded vested benefits, which could be substantial. Insurance Vons carries insurance customary in the supermarket industry to protect the Company against catastrophic loss, including earthquake insurance. The Company is approved in both California and Nevada to self-insure workers' compensation and general liability exposures and maintains third-party insurance for loss exposures in excess of self-insured retentions and deductibles. Executive Officers of the Registrant Set forth below is certain information concerning the executive officers of the Company:
Name Age Position ---- --- -------- Lawrence A. Del Santo 61 Vice Chairman of the Board and Chief Executive Officer Richard E. Goodspeed 58 President and Chief Operating Officer Roger E. Stangeland 65 Chairman of the Board Robert J. Kelly 50 Executive Vice President, Retailing Terrence J. Wallock 50 Executive Vice President, General Counsel and Secretary Pamela K. Knous 40 Senior Vice President and Chief Financial Officer
Officers are elected annually and are subject to removal at any time, with or without cause, by the Company's Board of Directors, subject to all rights under employment contracts, if any. Mr. Del Santo was appointed Director, Vice Chairman of the Board and Chief Executive Officer of the Company in April 1994. Prior to joining the Company, Mr. Del Santo was Senior Executive Vice President and Chief Operating Officer - Food of American Stores Company from March 1993 to April 1994. From April 1989 to March 1993, Mr. Del Santo was Chairman of Lucky Stores, Inc. Mr. Goodspeed was appointed President and Chief Operating Officer of the Company in April 1994. Prior to joining the Company, Mr. Goodspeed was Executive Vice President - Food of American Stores Company and President and Chief Operating Officer of Lucky Stores, Inc. a position he held since September 1988. Mr. Stangeland is Chairman of the Board. Prior to April 1994 he served as Chairman of the Board and Chief Executive Officer of the Company for more than the last five years. Mr. Kelly was appointed Executive Vice President, Retailing of the Company in April 1994. Mr. Kelly had been Executive Vice President, Procurement and Marketing of the Company since November 1993 and prior to that Executive Vice President, Buying and Merchandising of the Company from May 1991 to November 1993. Mr. Kelly was Senior Vice President, Procurement of the Company from 1989 to May 1991. Mr. Wallock was appointed Executive Vice President and General Counsel of the Company in November 1993 and continues in the position of Secretary of the Company which he has held since March 1991. Mr. Wallock was Senior Vice President, Chief Legal and Security Officer of the Company from August 1991 to November 1993. From March 1991 to August 1991, Mr. Wallock was Senior Vice President and General Counsel of the Company. From 1977 to 1991, Mr. Wallock served as counsel to Denny's Inc. rising to the position of Vice President, General Counsel and Secretary. Ms. Knous was appointed Senior Vice President and Chief Financial Officer of the Company in July 1994. Ms. Knous was Group Vice President, Finance of the Company from November 1993 to July 1994. From April 1991 to November 1993, Ms. Knous was Vice President, Finance of the Company. From 1989 to 1991, Ms. Knous served as partner at KPMG Peat Marwick LLP. ITEM 2: PROPERTIES As of January 1, 1995, Vons leased 248 of its stores and owned 86 of its stores. At January 1, 1995, 213 of Vons leases provided for contingent rental based on a percentage of sales over specified amounts, which typically range from 1.0% to 1.5% of total gross sales, less amounts expended for common area maintenance, real estate taxes and insurance; the balance had no percentage rent clauses. Store leases have various expiration dates through 2018. Renewal options range up to 40 years. The following table lists the number of such store leases for open stores that are due to expire (assuming exercise of all renewal options) in each of the specified periods:
Number of Calendar Years Expiring Leases -------------- --------------- 1995-1999.......... 7 2000-2004.......... 17 2005-2009.......... 23 2010-2014.......... 25 2015-2019.......... 26 2020 and thereafter 150
The Company has a $115.0 million mortgage loan on 51 properties requiring monthly principal and interest payments of approximately $1.0 million with a one-time payment of approximately $111.0 million in July 1997. The Company has other real estate notes and mortgages covering seven properties totalling $14.6 million due in varying monthly installments with maturity dates from 1997 to 2009. Vons stores are usually located in active shopping centers and generally have several co-tenants, which typically include a drugstore; although the newer stores, which are usually food and drug combination stores, tend to be in shopping centers without drugstores. Vons owns distribution and manufacturing facilities in El Monte, California, which are located on approximately 63 acres of land. The El Monte facilities include two warehouses with an aggregate of 764,000 square feet, and a meat cooking facility, including a warehouse with an aggregate of 256,000 square feet. Vons leases distribution operations located in Santa Fe Springs, California. These distribution operations include several warehouses and a transportation center. The operations cover approximately 1,040,000 square feet located on approximately 78 acres of land. The lease expires in 1995 with three five-year and one one-year options to extend. Vons leases a 450,000-square-foot forward buy warehouse located in the City of Industry. The lease expires in 1996 with two three-year options to extend. A 95,000-square-foot frozen food distribution facility is leased in Ontario, California. The lease expires in 1996 with four six-month options to extend. Vons leases one distribution facility and a forward buy warehouse in San Diego, California. The distribution facility is approximately 365,000 square feet and the lease expires in 2002. Vons has an operating agreement to use up to an aggregate of 231,000 square feet in the forward buy warehouse. Vons will close its San Diego facility in 1995 and terminate or otherwise dispose of its leasehold interest. Vons owns a 244,000-square-foot building in Arcadia, California, used for its corporate administrative offices. The manufacturing operations consist of a fluid milk processing facility, an ice cream plant and a bakery, all leased and located in the City of Commerce, California. The leases for the fluid milk processing facility and ice cream plant expire in 1996 with two five-year options to extend. The lease for the bakery expires in 1997 with three five-year options to extend. ITEM 3: LEGAL PROCEEDINGS In addition to routine litigation incidental to the conduct of its business, the Company has been named in a number of lawsuits in state and Federal courts in Washington, Nevada, Idaho and California arising from claims of food-borne illness that allegedly was contracted from the consumption of hamburgers at certain Jack-In-The-Box restaurants in early 1993. The restaurants involved were either directly operated by Jack-In -The-Box, a division of Foodmaker, Inc. ("Foodmaker"), or through franchisees. The suits allege that the hamburger patties in question were processed by the Company before being cooked and served by a Jack-In-The-Box outlet. The plaintiffs in these actions seek unspecified damages for illnesses ranging from minor diarrhea to serious kidney and intestinal infection. Several deaths are alleged to have resulted from the incidents and, in those cases, the plaintiffs seek damages for wrongful death. The Company is insured against various losses, including those for bodily injury. The Company also has been named as a defendant in a suit filed on July 2, 1993, in the Superior Court of the State of California for the County of San Diego, by franchisees of Foodmaker who operate Jack-In-The-Box outlets in various states. Also named as defendants were Foodmaker and a number of meat suppliers and slaughterhouses. The complaint seeks an estimated $100 million for lost profits and compensation for an alleged reduction in the value of the franchisees' businesses, as well as unspecified damages for alleged emotional distress. On July 19, 1993, Foodmaker filed a cross-complaint against the Company and subsequently voluntarily dismissed a separate action which it had previously brought. The cross-complaint asserts various tort and contract theories and seeks, among other things, indemnity as well as lost profits and compensation for a reduction in Foodmaker's stock price. Foodmaker's cross-complaint seeks unspecified damages, although the Company has been advised that Foodmaker may potentially claim damages of approximately $400 million, including the aforesaid claims of the franchisees. The Company is vigorously contesting the lawsuits against it and has filed its own cross-complaint against Foodmaker and certain of its franchisees seeking damages in an amount substantially higher than the amount of damages claimed by Foodmaker. In addition to the cases discussed above, the Company, along with the other major supermarket chains in Southern California, has been named as a defendant in three nearly identical class action lawsuits filed in late November and early December 1992 in the Superior Court of the State of California for the County of Los Angeles. In these cases the plaintiffs alleged claims for antitrust violations, restraint of trade and false advertising in connection with the pricing of fluid milk in Los Angeles County, seeking unspecified damages and injunctive relief. While admitting no liability, the Company has entered into a proposed settlement agreement with respect to these cases, subject to the approval of the court. The Company believes that the above-described lawsuits are unlikely to result in liability which would be material to the consolidated financial position of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the security holders of the Company for a vote during the quarter ended January 1, 1995. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Vons common stock is listed on the New York Stock Exchange ("NYSE") (Symbol-VON). The shares have been listed on the NYSE since March 20, 1986. As of February 28, 1995, there were approximately 7,156 shareholders of record. The table below sets forth the high and low sales prices for Vons common stock as reported on the NYSE Composite Tape during the fiscal periods specified:
52 Weeks Ended 52 Weeks Ended January 1, January 2, 1995 1994 ----------------- ----------------- High Low High Low ---- --- ---- --- First quarter..... $18 5/8 $16 1/8 $26 3/8 $22 1/2 Second quarter.... 18 3/8 16 24 1/2 21 Third quarter..... 18 5/8 15 1/8 23 3/8 16 1/4 Fourth quarter.... 21 1/2 17 3/4 18 7/8 15 3/8
The Company paid no dividends on its common stock in fiscal years 1994, 1993, and 1992. Management of the Company does not expect to pay cash dividends in the foreseeable future. Certain Company debt agreements restrict the Company from paying cash dividends or making other distributions on stock under certain circumstances. Under its most restrictive debt agreement, the Company had $74.0 million available for dividends and distributions at January 1, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 6 to the Consolidated Financial Statements contained in the Company's Annual Report to Shareholders for the fiscal year ended January 1, 1995 incorporated herein by reference. ITEM 6: SELECTED FINANCIAL DATA See "Five-Year Selected Financial Data" contained in the Company's Annual Report to Shareholders for the fiscal year ended January 1, 1995 incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report to Shareholders for the fiscal year ended January 1, 1995 incorporated herein by reference. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data as set forth in Item 14(a) of Part IV of this document are incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 1995, where it appears under the caption "Election of Directors." The information set forth under Item 1 of this Form 10-K under the caption "Executive Officers of the Registrant" is also incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 1995, where it appears under the caption "Executive Compensation." ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 1995, where it appears under the caption "Principal and Management Shareholders." ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 1995, where it appears under the captions "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Certain Transactions." PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statements and Schedules (1) Financial Statements The following items contained in the Company's Annual Report to Shareholders for the fiscal year ended January 1, 1995 are incorporated by reference into Part II of this report. Pages in Annual Report to Shareholders ------------ Financial Statements: Consolidated Statements of Operations for the fiscal years ended January 1, 1995, January 2, 1994 and January 3, 1993.............. 22 Consolidated Balance Sheets as of January 1, 1995 and January 2, 1994.............. 23 Consolidated Statements of Cash Flows for the fiscal years ended January 1, 1995, January 2, 1994 and January 3, 1993.............. 24 Consolidated Statements of Shareholders' Equity for the fiscal years ended January 1, 1995, January 2, 1994 and January 3, 1993............ 25 Notes to the Consolidated Financial Statements......... 26 - 37 Independent Auditors' Report..... 38 (2) Schedules Schedules are omitted because of the absence of the conditions under which they are required. (3) Exhibits See index to exhibits immediately following Signatures. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended January 1, 1995. 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. THE VONS COMPANIES, INC. /S/ LAWRENCE A. DEL SANTO By: -------------------------------- Lawrence A. Del Santo Vice Chairman of the Board and Chief Executive Officer Date: March 29, 1995 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 in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Chairman of March , 1995 --------------------------------- the Board Roger E. Stangeland /S/ LAWRENCE A. DEL SANTO Vice Chairman March 29, 1995 --------------------------------- of the Board Lawrence A. Del Santo and Chief Executive Officer /S/ PAMELA K. KNOUS Senior Vice March 29, 1995 --------------------------------- President and Pamela K. Knous Chief Financial Officer (Chief Accounting Officer) /S/ STEVEN A. BURD Member-Board March 29, 1995 --------------------------------- of Directors Steven A. Burd /S/ WILLIAM S. DAVILA Member-Board March 29, 1995 --------------------------------- of Directors William S. Davila Member-Board March , 1995 --------------------------------- of Directors Fritz L. Duda /S/ JAMES H. GREENE, JR. Member-Board March 29, 1995 --------------------------------- of Directors James H. Greene, Jr. /S/ JOHN M. LILLIE Member-Board March 29, 1995 --------------------------------- of Directors John M. Lillie /S/ ROBERT I. MACDONNELL Member-Board March 29, 1995 --------------------------------- of Directors Robert I. MacDonnell /S/ PETER A. MAGOWAN Member-Board March 29, 1995 --------------------------------- of Directors Peter A. Magowan /S/ CHARLES E. RICKERSHAUSER, JR. Member-Board March 29, 1995 --------------------------------- of Directors Charles E. Rickershauser, Jr. Member-Board March , 1995 --------------------------------- of Directors William Y. Tauscher THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS The following exhibits are filed as a separate section of this report: Exhibit No. Description of Exhibit Sequentially Numbered Page ------- ---------------------- -------------------------- 10.1.5 Amendment to Loan Agreement dated October 18, 1991 by and among the Registrant, the banks named therein, and Bank of America, as Agent dated December 5, 1994. 13 Portions of the Annual Report to Shareholders for the fiscal year ended January 1, 1995. 24 Independent Auditors' Consent. 27 Financial Data Schedule. THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS The following exhibits are incorporated herein by reference: Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 3.1 Amended Restated Articles of Exhibit 3.1 to Registrant's Incorporation of the Registrant Annual Report on Form 10-K for as amended on May 13, 1992. fiscal year ended January 3, 1993. 3.2 By-Laws of the Registrant as Exhibit 3.2 to Registrant's amended on November 28, 1990. Annual Report on Form 10-K for fiscal year ended December 30, 1990. 4.1 Indenture by and among the Exhibit 4.2 to Registrant's Registrant and Chemical Bank, Statement No. 33-45430 on Form as Trustee, dated February 15, S-3. 1992. 4.1.1 Officers' Certificate and Note Exhibits 4.1 and 4.2 to regarding the 9-5/8% Senior Registrant's Report on Form Subordinated Notes due April 1, 8-K dated March 17, 1992. 2002. 4.1.2 Officers' Certificate and Note Exhibits 4.1 and 4.3 regarding the 8-3/8% Senior to Registrant's Report on Form Subordinated Notes due 8-K dated September 24, 1992. October 1, 1999. 4.2 Indenture between Registrant Exhibit 2 to Registrant's and National Bank of Detroit, Report on Form 8-K dated as Trustee, dated May 15, 1986, May 15, 1986. including form of 6-5/8% Senior Subordinated Debentures due 1998 attached as Exhibit A thereto. THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 10.1 Loan Agreement by and among the Exhibit 10.1 to Registrant's Registrant, the banks named Annual Report on Form 10-K for therein, and Security Pacific fiscal year ended December 29, National Bank, as Agent, dated 1991. October 18, 1991. 10.1.1 Amendment to Loan Agreement Exhibit 10.1.1 to Registrant's dated October 18, 1991, by and Annual Report on Form 10-K for among the Registrant, the banks fiscal year ended January 3, named therein, and Bank of 1993. America, as Agent dated June 24, 1992. 10.1.2 Amendment to Loan Agreement Exhibit 10.1.2 to Registrant's dated October 18, 1991, by and Annual Report on Form 10-K for among the Registrant, the banks fiscal year ended January 3, named therein, and Bank of 1993. America, as Agent, dated December 16, 1992. 10.1.3 Amendment to Loan Agreement Exhibit 10.1.3 to Registrant's dated October 18, 1991, by Annual Report on Form 10-K and among the Registrant, the for fiscal year ended banks named therein, and Bank January 2, 1994. of America, as Agent, dated March 11, 1993. 10.1.4 Amendment to Loan Agreement Exhibit 10.1.4 to Registrant's dated October 18, 1991 by and Annual Report on Form 10-K among the Registrant, the banks for fiscal year ended named therein, and Bank of January 2, 1994. America, as Agent, dated December 7, 1993. 10.2 Term Loan Agreement by and Exhibit 10.2 to Registrant's among the Registrant, the Annual Report on Form 10-K banks named therein, and for fiscal year ended Bank of America, as Agent, January 2, 1994. dated December 13, 1993. THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 10.3 Metropolitan Life Insurance Exhibit 10.13 to Registrant's Company loan to the Registrant Annual Report on Form 10-K for represented by Deed of Trust fiscal year ended January 3, and Security Agreement 1988. Assignment of Rents and Fixture Filing dated July 22, 1987 by and among the Registrant, as Trustor, Ticor Title Insurance Company, as Trustee and Metropolitan Life Insurance Company, as Beneficiary. 10.4 Standstill Agreement dated Exhibit 10.20 to Registrant's December 3, 1987 by and among Annual Report on Form 10-K for the Registrant, Safeway fiscal year ended January 3, Southern California, Inc., 1988. Safeway Stores, Incorporated, Kohlberg Kravis Roberts & Co., Safeway U.S. Holdings, Inc., and KKR Associates. 10.4.1 Amendment to Standstill Exhibit 28.7 to Registrant's Agreement dated December 3, Quarterly Report on Form 10-Q 1987 by and among the for quarter ended June 18, Registrant, Safeway Stores, 1989. Incorporated and other parties thereto, dated April 5, 1989. 10.4.2 Amendment to Standstill Exhibit 10.13.2 to Registrant's Agreement dated December 3, Annual Report on Form 10-K for 1987 by and among the fiscal year ended December 30, Registrant, Safeway Inc., 1990. and other parties thereto, dated December 21, 1990. 10.5 Asset Purchase Agreement dated Exhibit 2.2 to Registration March 20, 1987 between Allied Statement No. 33-12886 on Form Supermarkets, Inc., and S-4. Meadowdale Foods, Inc., as amended (without exhibits). THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 10.6 Amended and Restated Exhibit B to Registrant's Proxy Acquisition Agreement and Plan Statement for Annual Meeting of of Merger and Reorganization Shareholders on November 10, dated December 3, 1987 by and 1988. among the Registrant, Safeway Southern California, Inc., Safeway Stores, Incorporated, Safeway Stores 23, Inc., Safeway Stores 27, Inc., Safeway Stores 29, Inc., Safeway Stores 30, Inc., Vons Merger Sub 1, Inc., Vons Merger Sub 2, Inc., Vons Merger Sub 3, Inc., and Vons Merger Sub 4, Inc., (without exhibits or schedules). 10.7 Registration Rights Agreement Exhibit 28.8 to Registrant's with Roger Stangeland dated Quarterly Report on Form 10-Q April 7, 1989. for quarter ended March 26, 1989. 10.8 Registration Rights Agreement Exhibit 28.9 to Registrant's with Fritz Duda dated Quarterly Report on Form 10-Q April 7, 1989. for quarter ended March 26, 1989. 10.9 Registration Rights Agreement Exhibit 28.10 to Registrant's with William Tauscher dated Quarterly Report on Form 10-Q April 7, 1989. for quarter ended March 26, 1989. 10.10 Amendment 1994-1 to The Vons Exhibit 10.12 to Registrant's Companies, Inc. Pension Plan, Annual Report on Form 10-K dated March 23, 1994. for fiscal year ended January 2, 1994. THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ Management Contracts or Compensatory Plans or Arrangements: 10.11 Management Stock Option Plan Exhibit 10.3 to Registrant's of the Registrant dated Annual Report on Form 10-K for July 22, 1987. fiscal year ended January 3, 1988. 10.12 1987 Deferred Income Plan Exhibit 10.17 to Registrant's adopted April 1, 1987 on Annual Report on Form 10-K for behalf of Registrant, fiscal year ended January 3, including forms of 1988. Participation Agreements for Base Salary and Bonus Award. 10.13 1990 Stock Option and Appendix A to Registrant's Restricted Stock Plan dated Proxy Statement for Annual January 24, 1990. Meeting of Shareholders on May 17, 1990. 10.13.1 Amendment dated February 17, Exhibit 10.13.1 to Registrant's 1993 to 1990 Stock Option Quarterly Report on Form 10-Q and Restricted, Stock Plan for the quarter ended March 28, dated January 24, 1990. 1993. 10.14 Directors' Stock Option Plan Appendix A to Registrant's dated September 17, 1991. Proxy Statement for Annual Meeting of Shareholders on May 13, 1992. 10.15 Severance Agreement between The Registrant's Proxy the Registrant and Senior Statement for Annual Meeting of Management and Key Employees Shareholders on May 13, 1992, dated February 19, 1992. where it appears under the caption "Compensation through Plans - Severance Agreements." THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 10.16 Letter dated April 25, 1991 Exhibit 10.25 to Registrant's confirming employment Annual Report on Form 10-K for arrangements between the fiscal year ended December 29, Registrant and Neill Crowley, 1991. as amended by a Letter Agreement dated March 17, 1992 between the Registrant and Mr. Crowley. 10.17 1992 Supplemental Executive Exhibit 10.19 to Registrant's Retirement Plan by and among Annual Report on Form 10-K for the Registrant and certain fiscal year ended January 3, officers effective April 30, 1993. 1992. 10.18 The Vons Companies, Inc. Exhibit 10.20 to Registrant's Officer Short-Term Incentive Annual Report on Form 10-K for Compensation Plan by and fiscal year ended January 3, among the Registrant and 1993. certain officers. 10.19 The Vons Companies, Inc. Exhibit 10.27 to Registrant's 401(k) Wrap-Around Plan Annual Report on Form-K effective October 18, 1993. for fiscal year ended January 2, 1994. 10.20 Employment Agreement between Exhibit 10.28 to Registrant's the Registrant and Lawrence A. Quarterly Report on Form-Q Del Santo dated April 26, 1994. for Quarter ended June 19, 1994. 10.21 Employment Agreement between Exhibit 10.29 to Registrant's the Registrant and Richard E. Quarterly Report on Form-10-Q Goodspeed dated April 26, 1994. for quarter ended June 19, 1994. 10.22 Letter Agreement confirming Exhibit 10.30 to Registrant's employment and separation Quarterly Report on Form 10-Q agreements between the for quarter ended October 9, Registrant and Peter M. Horn, 1994. III dated July 21, 1994. THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit No. Description of Exhibit Incorporated By Reference From ------- ---------------------- ------------------------------ 10.23 Retirement Agreement Exhibit 10.31 to Registrant's confirming employment and Quarterly Report on Form 10-Q retirement agreements for quarter ended October 9, between the Registrant and 1994. Roger E. Stangeland, dated July 28, 1994. EX-10 2 Exhibit 10.1.5 AMENDMENT NO. 5 --------------- Reference is made to that certain Loan Agreement dated as of October 18, 1991, as amended (the "Loan Agreement") among The Vons Companies, Inc., Bank of America National Trust and Savings Association (as successor by merger to Security Pacific National Bank), as Agent, and the Banks party thereto. Terms defined in the Loan Agreement are used herein with the same meanings. RECITALS -------- A. Borrower has requested the Banks to agree to an amendment of Section 6.1(b) of the Loan Agreement in order to purchase up to $25 Million face value of Borrower's 6 5/8% Senior Subordinated Debentures due May 15, 1998 representing the May 15, 1996 sinking fund requirement for the Restricted Subordinated Debt. B. Borrower has also requested the Banks to agree to an amendment of the definition of "Qualified Sale/Leaseback Property" in the Loan Agreement in order to complete a sale and leaseback transaction of Borrower's Store #29, located at 403 West Avenue L, Lancaster, California, which has been open for more than one year. AGREEMENT --------- Borrower, the Agent and the Banks hereby agree as follows: 1. Section 6.1(b). Section 6.1(b) of the Loan -------------- ------ Agreement is amended to read as follows: "(b) (i) mandatory redemption and sinking fund payments under the Restricted Subordinated Debt and (ii) the early purchase of up to $25,000,000 face value of the Restricted Subordinated Debt representing the May 15, 1996 sinking fund requirement for the Restricted Subordinated Debt; provided that i) the amount expended by Borrower shall not exceed the amount required thereunder and (ii) if, giving effect to any such redemption or payment, the aggregate amount so expended, when added to the amount expended for the Unrestricted Subordinated Debt, exceeds $250,000,000, Borrower shall have received Cash proceeds in an amount at least equal to such excess amount either from the issuance of Common Stock or the incurrence of Refinancing Indebtedness;" 2. "Qualified Sale/Leaseback Property". The terms ----------------------------------- "Qualified Sale/Leaseback Property" defined in Section 1.1 of --- the Loan Agreement is amended to read as follows: "Qualified Sale/Leaseback Property" means, with ---------------------------------- respect to any sale and leaseback transaction, real Property acquired, whether directly or as a result of an Acquisition, by Borrower or any of its Subsidiaries subsequent to the Closing Date that consists of (a) unimproved real Property or (b) improved real Property and related personal Property, provided that such sale and leaseback transaction occurs within the one year period immediately following the date such improved real Property is first placed in service in the business of Borrower or its Subsidiary or (c) Borrower's Store #29, located at 403 West Avenue L, Lancaster, California." 3. Confirmation. In all other respects, the Loan ------------ Agreement is hereby confirmed. 4. Counterparts. This Amendment may be executed in ------------ counterparts in accordance with Section 11.7 of the Loan ---- Agreement. Dated as of December 5, 1994. THE VONS COMPANIES, INC. By /s/ V. L. MILLER ------------------------------------------- VIRGINIA L. MILLER Vice President and Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By /s/ D. M. TERRANCE ------------------------------------------- David M. Terrance Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank /s/ MARK F. MILNER By Mark F. Milner ------------------------------------------- Its Managing Director ---------------------------------------- [Printed Name and Title] BANK OF AMERICA ILLINOIS, as a Bank /s/ MARK F. MILNER By Mark F. Milner ------------------------------------------- Its Managing Director ---------------------------------------- [Printed Name and Title] NATIONSBANK OF TEXAS, N.A., as a Bank /s/ M. M. SHAFROTH By Michele M. Shafroth ------------------------------------------- Its Senior Vice President ---------------------------------------- [Printed Name and Title] THE BANK OF NOVA SCOTIA, as a Bank By /s/ M. VAN OTTERLOO ------------------------------------------- Its Senior Relationship Manger ---------------------------------------- [Printed Name and Title] CIBC, INC., as a Bank By ------------------------------------------- Its ---------------------------------------- [Printed Name and Title] UNION BANK, as a Bank By /s/ CECILIA M. VALENTE ------------------------------------------- Its ---------------------------------------- [Printed Name and Title] Cecilia M. Valente, Vice President CITICORP USA, INC., as a Bank By /s/ W. P. STENGEL ------------------------------------------- W. P. Stengel Its Vice President ---------------------------------------- [Printed Name and Title] SOCIETE GENERALE, as a Bank By /s/ MAUREEN KELLY ------------------------------------------- Its Vice President ---------------------------------------- [Printed Name and Title] THE FIRST NATIONAL BANK OF CHICAGO, as a Bank By /s/ L. GENE BEUBE ------------------------------------------- Its L. Gene Beube, Senior Vice President ---------------------------------------- [Printed Name and Title] ABN AMRO BANK, N.V., Los Angeles International Branch, as a Bank By /s/ELLEN M. COLEMAN /s/J.A. MILLER ------------------------------------------- Ellen M. Coleman John A. Miller Its Assistant Vice President Vice President --------------------------------------- [Printed Name and Title] THE CHASE MANHATTAN BANK, N.A., as a Bank By /s/ JOHN J. COYLE ------------------------------------------- Its Vice President ---------------------------------------- [Printed Name and Title] FIRST INTERSTATE BANK OF CALIFORNIA, as a Bank By /s/ W.J. BAIRD ------------------------------------------- WILLIAM J. BAIRD Its Vice President ---------------------------------------- [Printed Name and Title] BANK OF HAWAII, as a Bank /s/ PETER S. HO By Peter S. Ho ------------------------------------------- Its Vice President ---------------------------------------- [Printed Name and Title] THE TOKAI BANK, LTD. LOS ANGELES AGENCY, as a Bank By /s/ M. SAITO ----------------------------------------- Its Masahiko Saito, Asst. General Manager ---------------------------------------- [Printed Name and Title] EX-13 3 Exhibit 13 Five-Year Selected Financial Data --------------------------------- The Vons Companies, Inc. and Subsidiaries ----------------------------------------- The following five-year selected financial data should be read in conjunction with the Consolidated Financial Statements. The operations acquired from Williams Bros. are included in operating results from January 28, 1992. During 1992, the Company changed its method of accounting for income taxes to comply with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The change in accounting method has been applied retroactively to June 28, 1987 by restating prior years' consolidated financial statements. During 1992, the Company implemented the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 3, 1993.
As of and for the As of and As of and for 52 Weeks Ended for the 53 the 52 Weeks Ended (in millions of -------------------------- Weeks Ended -------------------------- dollars except January 1, January 2, January 3, December 29, December 30, share data) 1995 1994 1993 1991 1990 ------------ ------------ ------------ ------------ ------------ Summary of Operations: Sales $ 4,996.6 $ 5,074.5 $ 5,595.5 $ 5,350.2 $ 5,333.9 Restructuring charges 33.0 56.9 - - - Operating income 125.8 135.8 219.1 197.1 181.0 Interest expense, net 70.8 66.0 71.5 86.4 97.6 Income before income tax provision 55.0 69.8 147.6 110.7 83.4 Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits 26.6 33.0 82.1 66.4 42.6 Income before cumulative effect of change in accounting for retiree medical benefits 26.6 31.6 69.3 60.1 42.6 Net income 26.6 31.6 53.8 60.1 42.6 Income applicable to common shareholders 26.6 31.6 53.8 60.1 42.6 Income per common share before extraordinary item and cumulative effect of change in accounting for retiree medical benefits .61 .76 1.89 1.60 1.10 Income per common share before cumulative effect of change in accounting for retiree medical benefits .61 .73 1.60 1.45 1.10 Net income per common share .61 .73 1.24 1.45 1.10 Dividends paid on common stock - - - - - Financial Position: Working capital (deficit) (96.1) (69.3) (74.9) (64.2) (91.4) Total assets 2,222.0 2,249.5 2,066.0 1,863.2 1,799.5 Long-term debt: Capital lease obligations 58.0 62.7 56.4 42.3 46.1 Senior debt 426.2 497.2 389.2 272.2 290.6 Subordinated debt, net 319.6 322.1 342.5 376.8 437.9 Common shareholders' equity 552.4 524.9 493.2 437.7 255.7 Shareholders' equity per common share 12.73 12.11 11.38 10.12 6.60 Other Data: Weighted average common shares during year, including common share equivalents 43,560,000 43,501,000 43,512,000 41,583,000 38,819,000 Outstanding common shares at year end 43,383,000 43,342,000 43,335,000 43,246,000 38,748,000 /TABLE Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- The Vons Companies, Inc. and Subsidiaries ----------------------------------------- Results of Operations During 1992, the Company implemented the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 3, 1993. The following table sets forth the consolidated statements of operations data (in millions of dollars and as a percentage of sales except share data):
Fifty-Two Weeks Fifty-Two Weeks Fifty-Three Weeks Ended Ended Ended January 1, 1995 January 2, 1994 January 3, 1993 ----------------- ----------------- ----------------- Sales $4,996.6 100.0% $5,074.5 100.0% $5,595.5 100.0% Costs and expenses: Cost of sales, buying and occupancy 3,767.2 75.4 3,801.4 74.9 4,200.3 75.1 Selling and administrative expenses 1,055.5 21.1 1,065.4 21.0 1,161.2 20.8 Amortization of excess cost over net assets acquired 15.1 .3 15.0 .3 14.9 .2 Restructuring charges 33.0 .7 56.9 1.1 - - Operating income 125.8 2.5 135.8 2.7 219.1 3.9 Interest expense, net 70.8 1.4 66.0 1.3 71.5 1.3 Income before income tax provision 55.0 1.1 69.8 1.4 147.6 2.6 Income tax provision 28.4 .6 36.8 .7 65.5 1.1 Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits 26.6 .5 33.0 .7 82.1 1.5 Extraordinary item - - (1.4) (.1) (12.8) (.2) Cumulative effect of change in accounting for retiree medical benefits - - - - (15.5) (.3) Net income 26.6 .5 31.6 .6 53.8 1.0 Income per common share: Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits .61 .76 1.89 Extraordinary item - (.03) (.29) Cumulative effect of change in accounting for retiree medical benefits - - (.36) Net income .61 .73 1.24
On January 13, 1994, the Company introduced the "Vons Value Program." This program emphasizes lower everyday shelf prices, improved customer service and increased broadcast media advertising to better inform customers as to the many ways to save money at Vons, including newly reduced prices, weekly advertised specials and free membership club savings. This program represents a strategic repositioning of the Company's market focus. The Company plans to substantially offset the cost of the program over time through aggressive cost and expense reductions designed to permanently lower the Company's expense structure and enhance competitiveness. This cost containment and strategic restructuring program commenced in 1993 and included the accelerated closure of underperforming facilities, the elimination of administrative and support positions, the reorganization of store district operations and other cost reduction programs. The closure of the Tianguis store format was part of the restructuring program. The Northridge earthquake occurred four days following the introduction of the Vons Value Program. This event substantially disrupted the initial phase of the new program as both the Company and the communities it serves were focused on recovering from this tragic event. As a result, the Company undertook a costly relaunch of the new program late in first quarter 1994 which continued through second quarter 1994. In total, prices were reduced on over 12,000 items. By accelerating price reductions planned for later in the program and offering attractive promotions and advertised specials to reintroduce the program to consumers, gross margin and operating income were significantly reduced in second quarter 1994. In late 1994, the Company determined that the facility closures and reductions in work force undertaken in 1993 would not achieve the Company's cost reduction goals. The Company undertook additional restructuring initiatives resulting in further facility closures and reductions in work force in 1994. Importantly, the decision was made to exit the warehouse store format and eliminate redundant warehouse capacity. This decision resulted in the January 1995 closure of the eight EXPO stores, which will allow the Company to concentrate its resources on proven store formats. The San Diego distribution facility will close in 1995. The new marketing and cost and expense reduction programs are long-term strategies, the implementation of which will extend beyond 1994. The Company believes that its results for the last half of 1994, before restructuring charges, reflect the benefits of the new programs as improving sales trends, better inventory management, more effective purchasing and continued expense reductions offset the effects of the price reductions and increased store labor expenses. In aggregate, the Company's programs are initially intended to benefit sales and reduce its overall cost structure, which in turn will improve the Company's ability to achieve strong, sustainable earnings growth. The proposed 1995 merger of two of the Company's major competitors, Food 4 Less and Ralphs, will result in a change in the composition of the Company's competitors as certain trade names are eliminated and store format conversions occur. However, the Company does not believe that the merger or its effect on the already competitive marketplace will have a material impact on the Company's sales and earnings prospects. Comparison of Fifty-Two Weeks Ended January 1, 1995 with Fifty- Two Weeks Ended January 2, 1994 Sales Sales for 1994 were $5.0 billion, a decrease of $77.9 million, or 1.5%, from 1993. Same store sales decreased 2.4% from 1993 sales. Although same stores sales were negative for 1994, the Company has experienced five consecutive quarters of improving same store sales trends with a fourth quarter 1994 increase in same store sales of 0.4%. Sales reflect reduced prices as a result of the Vons Value Program, deflation in perishables, the continuing weak overall economic environment in Southern California, competitive new store and remodel activity and the diminished customer base in neighborhoods impacted by the Northridge earthquake. In 1994, the Company opened six new stores, closed 17 stores and completed 14 store remodel projects. Costs and Expenses Costs and expenses for 1994 were $4.9 billion, a decrease of $67.9 million, or 1.4%, from 1993. Cost of sales, buying and occupancy expenses as a percentage of sales for 1994 were 75.4%, an increase of 0.5 percentage points over 1993. The increase reflects the impact of lower prices, increased promotional activities, and higher occupancy costs, primarily depreciation expense related to the capital expenditure program. The impact of price reductions in 1994 was partially offset by better inventory management and more effective purchasing initiatives undertaken in connection with the strategic restructuring program. Selling and administrative expenses as a percentage of sales were 21.1% in 1994, an increase of 0.1 percentage points over 1993. This increase reflects a $5.0 million insurance deductible charge related to the Northridge earthquake. Increased store labor expenses, related to the Vons Value Program, were substantially offset by a decrease in administrative expenses as a result of the reductions in work force and other cost savings initiatives in connection with the strategic restructuring program. The Company recorded restructuring charges of $33.0 million, or $.45 per share, and $56.9 million, or $.77 per share, in 1994 and 1993, respectively. As of year end 1994, approximately 700 administrative and support positions had been eliminated; underperforming facilities, including 20 of the 27 identified stores, had been closed; and the San Diego distribution facility had been designated for closure in connection with the strategic restructuring program. Operating Income Operating income for 1994 was $125.8 million, a decrease of $10.0 million, or 7.4%, from 1993. Operating margin decreased to 2.5% in 1994 versus 2.7% in 1993. Excluding restructuring charges, results for 1994 were $158.8 million, or 3.2% of sales, compared with $192.7 million, or 3.8% of sales for 1993. These decreases were due primarily to lower sales and lower gross margin as a result of price reductions and increased promotional activity. Operating income before depreciation and amortization of property, amortization of goodwill and other assets, LIFO charge, earthquake deductible and restructuring charges ("FIFO EBITDA") was $284.3 million, or 5.7% of sales, in 1994 compared with $305.8 million, or 6.0% of sales, in 1993. Interest Expense Net interest expense for 1994 was $70.8 million, an increase of $4.8 million, or 7.3%, over 1993. This increase was due to higher weighted average interest cost on revolving debt and higher average debt borrowings partially offset by repurchases of higher interest cost subordinated debt. The ratio of FIFO EBITDA to net interest expense decreased to 4.0 times in 1994 versus 4.6 times in 1993. Income Tax Provision The income tax provision in 1994 was $28.4 million, or a 51.6% effective tax rate. The income tax provision in 1993 was $36.8 million, or a 52.7% effective tax rate. The effective tax rate in both years was impacted by a decrease in earnings before restructuring charges, which was not offset by a comparable decrease in amortization of excess cost over net assets acquired, the majority of which is not deductible for tax purposes. The 1993 effective tax rate was also impacted by a $2.0 million deferred tax provision which increased the prior year deferred income tax balance to the new Federal statutory tax rate. Income Net income for 1994 was $26.6 million, or $.61 per share, compared with net income of $31.6 million, or $.73 per share, for 1993. Net income includes restructuring charges of $33.0 million, or $.45 per share, and $56.9 million, or $.77 per share, in 1994 and 1993, respectively. The decrease in net income excluding restructuring charges was caused by the decline in sales and gross margin, primarily due to price decreases and increased promotional activity. Net income for 1993 included an extraordinary after tax charge of $1.4 million, or $.03 per share, arising from debt refinancing. Comparison of Fifty-Two Weeks Ended January 2, 1994 with Fifty- Three Weeks Ended January 3, 1993 Sales Sales for 1993 were $5.1 billion, a decrease of $521.0 million, or 9.3%, from 1992. Sales in 1992 reflected an additional week. On a comparable 52-week basis, same store sales decreased 9.0% from 1992 sales. Same store sales have been adversely impacted by the continuing weak overall economic environment in Southern California, ongoing competitive new store and remodel activity, pricing and promotional changes by certain competitors and adverse publicity associated with the Foodmaker food poisoning epidemic and related events. In 1993, the Company opened 12 new stores, closed 12 stores and completed 59 store remodel projects. Costs and Expenses Costs and expenses for 1993 were $4.9 billion, a decrease of $437.7 million, or 8.1%, from 1992. Cost of sales, buying and occupancy expenses as a percentage of sales declined by 0.2 percentage points to 74.9% in 1993. Cost of sales, buying and occupancy expenses benefited from the Company's favorable purchasing opportunities, the pass through of market-wide cost increases in the form of higher prices, and other improvements in margins where allowed by competitive conditions. In addition, this improvement reflected the benefits of the Company's ongoing remodel and new store programs, which incorporate a larger number of higher margin departments in affected stores, as well as the benefits of capital spending for other merchandising projects designed to enhance gross margin. This improvement was offset by increased occupancy costs, primarily higher depreciation expense related to the capital expenditure program. Selling and administrative expenses as a percentage of sales increased by 0.2 percentage points to 21.0% in 1993. This increase was due primarily to market-wide negotiated union wage increases and higher blended wage rates and costs associated with a soft sales environment, offset by increased sales per labor hour. The $56.9 million, or $.77 per share, restructuring charge primarily reflects expenses relating to the accelerated closure of underperforming facilities, including 11 stores, and a reduction of approximately 300 administrative and support positions. Operating Income Operating income was $135.8 million, a decrease of $83.3 million, or 38.0%, from 1992. FIFO EBITDA was $305.8 million, or 6.0% of sales, in 1993 compared with $321.1 million, or 5.7% of sales, in 1992. Interest Expense Net interest expense for 1993 was $66.0 million, a decrease of $5.5 million, or 7.7%, from 1992. In spite of higher average revolving debt borrowings, interest expense decreased due to lower weighted average interest cost on revolving debt and repurchases of higher interest cost subordinated debt. The ratio of FIFO EBITDA to total interest expense increased to 4.6 times in 1993 versus 4.5 times in 1992. Income Tax Provision The income tax provision in 1993 was $36.8 million, or a 52.7% effective tax rate. The income tax provision in 1992 was $65.5 million, or a 44.4% effective tax rate. The 1993 increase in the effective tax rate was due to a decrease in earnings before restructuring charges, which was not offset by a comparable decrease in amortization of excess cost over net assets acquired, the majority of which is not deductible for tax purposes. The 1993 effective tax rate was also impacted by an increase in the Federal statutory tax rate from 34% to 35% and a $2.0 million, or $.05 per share, deferred tax provision which increased the prior year deferred income tax balance to the new Federal statutory tax rate. Income Income before extraordinary item and cumulative effect of change in accounting for 1993 was $33.0 million, a decrease of $49.1 million, or 59.8%, from 1992. Income before extraordinary item and cumulative effect of change in accounting in 1993 was $.76 per share compared with $1.89 per share in 1992. These decreases were due to the $56.9 million charge associated with the Company's restructuring program and a decline in sales. Net income for 1993 reflected an extraordinary after tax charge of $1.4 million, or $.03 per share, arising from debt refinancing. Net income for 1992 included an extraordinary after tax charge of $12.8 million, or $.29 per share, arising from debt refinancing and an after tax charge of $15.5 million, or $.36 per share, reflecting the cumulative effect of the change in accounting for retiree medical benefits. Net income for 1993 was $31.6 million, or $.73 per share, compared with net income of $53.8 million, or $1.24 per share, in 1992. Labor Contract Status In the fall of 1993, the Company renegotiated three-year contracts with the United Food and Commercial Workers' and Meat Cutters' Unions, and in the fall of 1994, the Company renegotiated a four-year contract with the International Brotherhood of Teamsters Union. The Food Employers Council of Southern California, which had formerly negotiated contracts on behalf of a multi-employer bargaining unit comprised of most major supermarket chains in the area, has substantially reduced its scope and no longer will provide multi-employer bargaining services. Consequently, future contracts will not be negotiated on a multi-employer basis. The Company does not believe that the change in bargaining process will have a material impact on its ability to achieve its labor goals. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flows from operations and available credit under its Revolving Credit Facility. As of February 17, 1995, the Company entered into a new loan agreement with a group of banks for a $625 million revolving credit facility to replace its $475 million Revolving Credit Facility and related $150 million Term Loan Facility. Management believes that these sources adequately provide for its working capital, capital expenditure and debt service needs. Net cash provided by operating activities was $179.8 million in 1994 compared with $185.6 million in 1993. This change primarily reflects a decrease in earnings before restructuring charges. The ratio of current assets to current liabilities was 0.83 to 1 at January 1, 1995, compared with 0.87 to 1 at January 2, 1994. Net cash used by investing activities was $117.5 million in 1994 compared with $262.2 million in 1993. This decrease reflects a reduction in the Company's capital expenditure program. Cash capital expenditures for 1994 totaled $128.0 million. Total capital expenditures in 1994, including the present value of commitments under operating leases, were $143.9 million. The Company anticipates that total 1995 capital expenditures will be approximately $175 million, of which approximately $155 million will be cash capital expenditures and approximately $20 million will represent the present value of commitments under operating leases. This capital expenditure level contemplates the opening of approximately ten new stores, including five replacement stores, and the completion of approximately 65 store remodel projects. The capital expenditure program has substantial flexibility and is subject to revision based on various factors; including, but not limited to, business conditions, changing time constraints, cash flow requirements and competitive factors. It is anticipated that 1995 cash capital expenditures will be funded out of cash provided by operations, the revolving credit facility, and/or through operating leases, although no assurance can be given that such sources will be sufficient. In the near term, if Vons were to reduce substantially or postpone its capital expenditure program, there would be no substantial impact on current operations and it is likely that more cash would be available for debt servicing. In the long term, if this program were substantially reduced, in the Company's opinion, its operating business and ultimately its cash flow would be adversely impacted. Net cash used by financing activities was $61.8 million in 1994 compared with net cash provided by financing activities of $76.8 million in 1993. The level of borrowings under the Company's revolving debt is dependent primarily upon cash flows from operations, the timing of disbursements, long-term borrowing activity and capital expenditure requirements. In 1994 and 1993, the Company repurchased and/or redeemed $6.8 million and $27.1 million, respectively, of subordinated debt. At January 1, 1995, revolving debt borrowings totaled $149.8 million and the Company had available unused credit of $251.2 million. The weighted average interest cost for 1994 on the Company's revolving debt was 5.5%. At January 1, 1995, the corresponding bank prime rate was 8.5%. The Company's involvement with derivative financial instruments has been limited to interest rate cap contracts to reduce the impact of increases in interest rates on the revolving credit facility. Impact of Changing Prices Vons primary costs, inventory and labor, are affected by a number of factors that are beyond the Company's control including availability and price of merchandise, the competitive climate and regional economic conditions. As is typical of the supermarket industry, the Company has generally been able to maintain margins by adjusting its retail prices, but competitive conditions may from time to time render it unable to do so while maintaining its market share. Consolidated Statements of Operations ------------------------------------- The Vons Companies, Inc. and Subsidiaries -----------------------------------------
Fiscal Year Ended ----------------------------------------- All amounts except share data January 1, January 2, January 3, in millions of dollars 1995 1994 1993 ------------- ------------ ------------ Sales $ 4,996.6 $ 5,074.5 $ 5,595.5 ------------- ------------ ------------ Costs and expenses: Cost of sales, buying and occupancy 3,767.2 3,801.4 4,200.3 Selling and administrative expenses 1,055.5 1,065.4 1,161.2 Amortization of excess cost over net assets acquired 15.1 15.0 14.9 Restructuring charges 33.0 56.9 - ------------- ------------ ------------ 4,870.8 4,938.7 5,376.4 ------------- ------------ ------------ Operating income 125.8 135.8 219.1 Interest expense, net 70.8 66.0 71.5 ------------- ------------ ------------ Income before income tax provision 55.0 69.8 147.6 Income tax provision 28.4 36.8 65.5 ------------- ------------ ------------ Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits 26.6 33.0 82.1 Extraordinary item - debt refinancing, net of tax benefit of $1.0 million and $8.6 million, respectively - (1.4) (12.8) ------------- ------------ ------------ Income before cumulative effect of change in accounting for retiree medical benefits 26.6 31.6 69.3 Cumulative effect of change in accounting for retiree medical benefits, net of tax benefit of $10.2 million - - (15.5) ------------- ------------ ------------ Net income $ 26.6 $ 31.6 $ 53.8 ------------- ------------ ------------ ------------- ------------ ------------ Income per common share: Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits $ .61 $ .76 $ 1.89 Extraordinary item - (.03) (.29) Cumulative effect of change in accounting for retiree medical benefits - - (.36) ------------- ------------ ------------ Net income $ .61 $ .73 $ 1.24 ------------- ------------ ------------ ------------- ------------ ------------ Weighted average common shares and common share equivalents 43,560,000 43,501,000 43,512,000 ------------- ------------ ------------ ------------- ------------ ------------ Dividends paid on common stock None None None ------------- ------------ ------------ ------------- ------------ ------------ See accompanying notes to these consolidated financial statements.
Consolidated Balance Sheets --------------------------- The Vons Companies, Inc. and Subsidiaries -----------------------------------------
January 1, January 2, All amounts except share data in millions of dollars 1995 1994 ------------ ------------ Assets Current assets: Cash $ 9.0 $ 8.5 Accounts receivable 45.4 36.3 Inventories 359.3 383.5 Deferred taxes 35.4 23.2 Other 18.7 21.9 ------------ ------------ Total current assets 467.8 473.4 Property and equipment, net 1,203.0 1,215.6 Excess of cost over net assets acquired, net of accumulated amortization of $103.7 million and $88.6 million, respectively 497.8 512.9 Other 53.4 47.6 ------------ ------------ Total Assets $ 2,222.0 $ 2,249.5 ------------ ------------ ------------ ------------ Liabilities and Shareholders' Equity Current liabilities: Current maturities of capital lease obligations and long-term debt $ 8.7 $ 8.6 Accounts payable 308.4 314.5 Accrued liabilities 246.8 219.6 ------------ ------------ Total current liabilities 563.9 542.7 Accrued self-insurance 110.9 102.3 Deferred income taxes 121.9 111.2 Other noncurrent liabilities 69.1 86.4 Capital lease obligations 58.0 62.7 Senior debt 426.2 497.2 Subordinated debt, net 319.6 322.1 ------------ ------------ Total liabilities 1,669.6 1,724.6 ------------ ------------ Shareholders' equity: Preferred stock - $.01 par value; authorized 20,000,000 shares; issued and outstanding - none - - Common stock - $.10 par value; authorized 100,000,000 shares; issued and outstanding - January 1, 1995: 43,383,000 shares; January 2, 1994: 43,342,000 shares 4.3 4.3 Paid-in capital 340.4 339.5 Retained earnings 207.8 181.2 Notes receivable for stock (.1) (.1) ------------ ------------ Total shareholders' equity 552.4 524.9 ------------ ------------ Total Liabilities and Shareholders' Equity $ 2,222.0 $ 2,249.5 ------------ ------------ ------------ ------------ See accompanying notes to these consolidated financial statements.
Consolidated Statements of Cash Flows ------------------------------------- The Vons Companies, Inc. and Subsidiaries -----------------------------------------
Fiscal Year Ended -------------------------------------------------- January 1, January 2, January 3, All amounts in millions of dollars 1995 1994 1993 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 26.6 $ 31.6 $ 53.8 Adjustments to reconcile net income to net cash provided by operating activities: Debt refinancing - 1.4 12.8 Cumulative effect of change in accounting for retiree medical benefits - - 15.5 Restructuring charges 33.0 56.9 - Depreciation and amortization of property and capital leases 102.1 90.9 75.7 Amortization of excess cost over net assets acquired and other assets 16.1 18.6 19.8 Amortization of debt discount and deferred financing costs 6.2 6.2 6.4 LIFO charge 2.3 3.6 6.5 Deferred income taxes (1.5) 15.9 (.3) Change in assets and liabilities, net of effect of acquisition: (Increase) decrease in accounts receivable (9.1) 5.4 (5.2) (Increase) decrease in inventories at FIFO costs 21.9 (15.4) 10.2 (Increase) decrease in other current assets 3.2 (.1) (2.4) (Increase) decrease in noncurrent assets (9.3) (11.5) 2.1 Increase (decrease) in accounts payable (25.5) 14.3 25.0 Increase (decrease) in accrued liabilities 23.3 (31.8) 36.0 Increase (decrease) in noncurrent liabilities (9.5) (.4) 12.8 ------------ ------------ ------------ Net cash provided by operating activities 179.8 185.6 268.7 ------------ ------------ ------------ Cash flows from investing activities: Addition of property, plant and equipment (128.0) (268.9) (217.6) Disposal of property, plant and equipment 10.5 6.7 .2 Acquisition of Williams Bros. Markets, Inc. supermarket business - - (49.1) ------------ ------------ ------------ Net cash used by investing activities (117.5) (262.2) (266.5) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings (payments) on revolving debt (67.9) (37.0) 114.0 Proceeds from issuance of senior subordinated notes - - 250.0 Proceeds from Term Loan Facility - 150.0 - Repurchases of senior subordinated and subordinated debentures (6.2) (27.1) (304.0) Increase (decrease) in net outstanding drafts 19.4 .5 (43.5) Payments on other debt and capital lease obligations (8.0) (9.3) (9.2) Other .9 (.3) (7.9) ------------ ------------ ------------ Net cash provided (used) by financing activities (61.8) 76.8 (.6) ------------ ------------ ------------ Net cash increase .5 .2 1.6 Cash at beginning of year 8.5 8.3 6.7 ------------ ------------ ------------ Cash at end of year $ 9.0 $ 8.5 $ 8.3 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 64.9 $ 60.0 $ 73.3 ------------ ------------ ------------ ------------ ------------ ------------ Income taxes $ 33.7 $ 26.1 $ 49.9 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosure of non-cash investing and financing activity: Capital leases $ .3 $ 13.3 $ 18.1 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes to these consolidated financial statements.
Consolidated Statements of Shareholders' Equity ----------------------------------------------- The Vons Companies, Inc. and Subsidiaries -----------------------------------------
Number of Common Paid-In Retained All amounts in millions Shares Stock Capital Earnings Notes Total ------ ------ ------- --------- ------ ------ Balance at December 29, 1991 43.2 $ 4.3 $ 337.6 $ 95.8 $ - $437.7 Net income - - - 53.8 - 53.8 Stock options exercised .1 - 1.8 - - 1.8 Issuance of notes receivable - - - - (.1) (.1) ------ ------ ------- --------- ------ ------ Balance at January 3, 1993 43.3 4.3 339.4 149.6 (.1) 493.2 Net income - - - 31.6 - 31.6 Stock options exercised - - .1 - - .1 ------ ------ ------- --------- ------ ------ Balance at January 2, 1994 43.3 4.3 339.5 181.2 (.1) 524.9 Net income - - - 26.6 - 26.6 Stock options exercised .1 - .9 - - .9 ------ ------ ------- --------- ------ ------ Balance at January 1, 1995 43.4 $ 4.3 $ 340.4 $ 207.8 $ (.1) $552.4 ------ ------ ------- --------- ------ ------ ------ ------ ------- --------- ------ ------ See accompanying notes to these consolidated financial statements.
Notes to the Consolidated Financial Statements ---------------------------------------------- The Vons Companies, Inc. and Subsidiaries ----------------------------------------- Note 1. Basis of Presentation At January 1, 1995, the Company operated 334 supermarkets and food and drug combination retail stores under the names Vons, Pavilions and EXPO. The Company also operates a fluid milk processing facility, an ice cream plant, a bakery, and distribution facilities for meat, grocery, produce and general merchandise. On January 28, 1992, the Company acquired the supermarket business of Williams Bros. Markets, Inc. which included 18 supermarkets, five of which were subsequently closed. The Company's fiscal year is based on a 52-53 week fiscal year ending on the Sunday closest to December 31. Fiscal years 1994 and 1993 included 52 weeks which ended on January 1, 1995 and January 2, 1994, respectively. Fiscal year 1992 included 53 weeks which ended on January 3, 1993. Note 2. Summary of Significant Accounting Policies Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Inventories Inventories are stated at the lower of cost or market. The cost of substantially all inventories is determined using the last-in, first-out (LIFO) method. Property and Depreciation Property and equipment, including assets under capital leases, are recorded at cost and depreciated or amortized over forty years for buildings, up to ten years for fixtures and equipment and generally between fifteen and twenty-five years, but not to exceed the lease term, for leasehold improvements using principally the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Major renewals and improvements are capitalized. Maintenance and repairs which do not improve or extend the life of the respective assets are charged to expense. Amortization of Intangible Assets The excess of cost over net assets acquired is amortized on a straight-line basis over forty years. The Company assesses the recoverability of the excess of cost over net assets acquired based on projected future operating results. Other noncurrent assets include an agreement not to compete acquired in connection with the acquisition of the Williams Bros. Markets, Inc. supermarket business. The agreement not to compete is amortized on a straight-line basis over five years. Income Tax Provision The income tax provision includes amounts related to current taxable income and deferred income taxes. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversals of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. The deferred income tax provision is measured by the change in the net deferred income tax asset or liability during the year. The Company accounts for general business tax credits using the flow-through method. Income per Common Share Income per common share is based on the weighted average number of common shares outstanding during each year and includes common stock equivalents arising from stock options when the effect is dilutive. Disclosure About Fair Value of Financial Instruments The fair value of the Company's financial instruments is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for financial instruments of the same remaining maturities. Derivatives Premiums paid for purchased interest rate cap contracts are amortized to interest expense over the terms of the contracts. Unamortized premiums are included in other assets in the accompanying consolidated balance sheets. Amounts earned under the interest rate cap contracts are reflected as a reduction of interest expense. Note 3. Inventories The excess of estimated current cost over LIFO carrying value of inventories was $27.4 million and $25.1 million at January 1, 1995 and January 2, 1994, respectively. Application of the LIFO method resulted in a charge to cost of sales, buying and occupancy of $2.3 million, $3.6 million and $6.5 million for 1994, 1993 and 1992, respectively. Note 4. Property and Equipment The components of property and equipment at January 1, 1995 and January 2, 1994 were as follows (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Land $ 233.7 $ 220.0 Buildings 357.0 325.7 Leasehold improvements 302.2 302.3 Fixtures and equipment 682.3 658.2 ------------ ------------ 1,575.2 1,506.2 Less: accumulated depreciation and amortization (421.5) (345.5) ------------ ------------ Net property owned 1,153.7 1,160.7 ------------ ------------ Capital leases 75.1 76.4 Less: accumulated amortization (25.8) (21.5) ------------ ------------ Net capital leases 49.3 54.9 ------------ ------------ Property and equipment, net $ 1,203.0 $ 1,215.6 ------------ ------------ ------------ ------------
Note 5. Accrued Current Liabilities The components of accrued current liabilities at January 1, 1995 and January 2, 1994 were as follows (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Accrued payroll, benefits and related taxes $ 118.1 $ 85.7 Accrued self-insurance 42.2 47.2 Other 86.5 86.7 ------------ ------------ Accrued current liabilities $ 246.8 $ 219.6 ------------ ------------ ------------ ------------
Note 6. Senior and Subordinated Debt Senior and subordinated debt as of January 1, 1995 and January 2, 1994 were as follows (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Senior debt: Revolving Credit Facility, interest at prime, certificate of deposit or Eurodollar rate plus designated amounts, due 1996 $ 149.8 $ 217.7 Term Loan Facility, interest at prime, certificate of deposit or Eurodollar rate plus designated amounts, due 1996 150.0 150.0 Mortgage, 9.25%, secured by real property, due in monthly installments of $1.0 million including interest, due 1997 115.0 116.7 Mortgages, 6.00% to 12.25%, secured by real property, due in varying monthly installments with maturity dates from 1997 to 2009 14.6 16.1 ------------ ------------ Total 429.4 500.5 Less: current portion 3.2 3.3 ------------ ------------ Long-term portion $ 426.2 $ 497.2 ------------ ------------ ------------ ------------ Subordinated debt: Senior subordinated debentures, 6-5/8%, less unamortized discount of $11.1 million and $15.4 million at January 1, 1995 and January 2, 1994, respectively, based on an effective interest rate of 12.5%, interest due in semiannual installments $ 69.6 $ 72.1 Senior subordinated notes, 9-5/8%, interest due in semiannual installments 150.0 150.0 Senior subordinated notes, 8-3/8%, interest due in semiannual installments 100.0 100.0 ------------ ------------ Total $ 319.6 $ 322.1 ------------ ------------ ------------ ------------
In October 1991, the Company entered into a loan agreement with a group of banks for a $475 million revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility was to mature on January 31, 1996 and was comprised of two separate lines: Line A - a $300 million revolving line; and Line B - a $175 million standby and commercial letters of credit line. At January 1, 1995, borrowings under Line A were $149.8 million and standby letters of credit under Line B were $74.0 million. Available unused credit under the Revolving Credit Facility was $251.2 million at January 1, 1995. In December 1993, the Company entered into a loan agreement with a group of banks for a $150 million Senior Unsecured Term Loan Facility (the "Term Loan Facility"). The Term Loan Facility was to mature on January 31, 1996. On February 17, 1995, the Company entered into an agreement with a group of banks for a $625 million revolving credit facility, replacing the Revolving Credit Facility and Term Loan Facility. The facility expires on February 17, 2000; however, it provides that the Company may request that the banks extend the maturity date by one year beginning in September 1997 and each year thereafter. Interest for the facility is at prime or Eurodollar rate plus designated amounts. At the Company's option, the facility may be used to support commercial paper borrowings, other unsecured bank borrowings and standby letters of credit outside the facility. The Company's involvement with derivative financial instruments has been limited to interest rate cap contracts to reduce the impact of increases in interest rates on the revolving credit facility. During 1992, the Company purchased three interest rate cap contracts with two, three and five year maturity dates. All of the interest rate cap contracts became effective on January 1, 1993. The contracts hedge principal amounts of $250 million for 1993 and 1994, $200 million for 1995, and $100 million for 1996 and 1997 of interest rate exposure in excess of an approximate 8.5% effective borrowing rate under the revolving credit facility. The Company records interest expense or interest income related to interest rate cap contracts on a monthly basis. Weighted average interest costs, including commitment fees, for the Revolving Credit Facility and for the Term Loan Facility for 1994 were 5.4%. At January 1, 1995, the corresponding bank prime rate was 8.5%. Commitment fees under the Revolving Credit and Term Loan Facilities were $1.5 million per year for 1994, 1993 and 1992. The Company's $115.0 million mortgage loan requires monthly principal and interest payments of approximately $1 million with a one-time payment of approximately $111 million in July 1997. The indenture related to the 6-5/8% Senior Subordinated Debentures (the "6-5/8% Debt") provides for mandatory redemptions. As of January 1, 1995, $18.2 million, $25.0 million and $37.5 million are due on May 15, 1996, May 15, 1997 and May 15, 1998, respectively. Interest on the 6-5/8% Debt is payable semiannually on May 15 and November 15. The 6-5/8% Debt may be redeemed at any time at 100% of the principal amount plus accrued interest. The 6-5/8% Debt was issued at a discount which is being amortized over the related term of the indebtedness. The indenture related to the 9-5/8% Senior Subordinated Notes (the "9-5/8% Debt") due April 1, 2002 provides for principal repayment at maturity. Interest on the 9-5/8% Debt is payable semiannually on April 1 and October 1. The 9-5/8% Debt may be redeemed at the Company's option any time on or after April 1, 1997, at varying percentages above par of the principal amount plus accrued interest. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 9-5/8% Debt prior to maturity. The indenture related to the 8-3/8% Senior Subordinated Notes (the "8-3/8% Debt") due October 1, 1999 provides for principal repayment at maturity. Interest on the 8-3/8% Debt is payable semiannually on October 1 and April 1. The 8-3/8% Debt may be redeemed at the Company's option any time on or after October 1, 1997, at 100% of the principal amount plus accrued interest. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 8-3/8% Debt prior to maturity. At January 1, 1995 and January 2, 1994, the carrying value of financial instruments approximated fair value. During 1994, 1993 and 1992, the Company early retired through repurchase and/or redemption $6.8 million, $27.1 million and $289.7 million, respectively, of subordinated debt. These repurchases resulted in an extraordinary after tax charge of $1.4 million and $12.8 million in 1993 and 1992, respectively. The Company's debt agreements contain various restrictions on the incurrence of additional indebtedness, payment or prepayment of senior subordinated and subordinated debt, investments, acquisitions, capital expenditures, dividends, common stock redemptions and purchases and dispositions of assets. The covenants also require the Company to meet certain shareholders' equity levels, debt leverage levels and fixed charge coverage ratios which can vary each fiscal year. The Company is in compliance with these covenants as of January 1, 1995. Under its most restrictive debt agreement, the Company had $74.0 million available for dividends and distributions at January 1, 1995. Management of the Company does not expect to pay cash dividends in the foreseeable future. Principal payments required in future years are as follows (in millions of dollars):
Principal Payments ---------- 1995 $ 3.2 1996 21.6 1997 137.0 1998 38.6 1999 101.1 2000-2004 457.3 2005-2009 1.3 ---------- Total principal payments 760.1 Less: current portion 3.2 ---------- Long-term portion $ 756.9 ---------- ----------
Note 7. Leases The Company currently leases certain of its stores, distribution facilities, vehicles and equipment for periods up to 45 years with various renewal options. The majority of such leases are noncancellable operating leases. Certain operating and capital leases require contingent rentals based upon a percentage of sales over a specified amount. Rental expense under operating leases was as follows (in millions of dollars):
Fiscal Year Ended ------------------------------------------ January 1, January 2, January 3, 1995 1994 1993 ------------ ------------ ------------ Minimum rentals $ 60.9 $ 76.9 $ 73.2 Contingent rentals 7.5 8.3 10.2 Sublease rentals received (4.7) (4.2) (3.7) ------------ ------------ ------------ Rental expense, net $ 63.7 $ 81.0 $ 79.7 ------------ ------------ ------------ ------------ ------------ ------------
Capital lease obligations, relating primarily to buildings, vary in amounts with interest rates ranging from 6.7% to 12.5%. Contingent rentals associated with capital leases were $1.4 million, $2.0 million and $2.7 million for 1994, 1993 and 1992, respectively. Future minimum lease payments under noncancellable operating and capital leases, together with the present value of the net minimum lease payments, at January 1, 1995 were as follows (in millions of dollars):
Operating Capital Leases Leases --------- ------- 1995 $ 61.1 $ 10.7 1996 56.9 9.8 1997 53.4 9.2 1998 51.9 7.1 1999 50.4 6.5 2000-2004 223.7 31.6 2005-2009 146.9 29.0 2010-2014 51.9 10.8 2015-2019 7.1 6.4 2020-2024 .9 - Thereafter .7 - --------- ------- Total minimum lease commitments $ 704.9 121.1 --------- --------- Less: interest portion 57.6 ------- Present value of net minimum lease commitments 63.5 Less: current portion 5.5 ------- Long-term portion $ 58.0 ------- -------
Minimum sublease rentals to be received in the future under noncancellable operating and capital leases totaled $33.4 million at January 1, 1995. Effective September 1993, the Company became a partner of a California general partnership. This partnership has obligations for 21 retail leases for periods up to 20 years with various renewal options. It is the partnership's intent to dispose of its leasehold interest in all of these sites. Future minimum lease payments of the partnership under noncancellable operating leases at January 1, 1995 were as follows (in millions of dollars):
January 1, 1995 ---------- 1995 $ 4.2 1996 4.2 1997 4.1 1998 3.9 1999 3.9 2000-2004 16.4 2005-2009 10.0 2010-2013 3.0 ---------- Total minimum lease commitments $ 49.7 ---------- ----------
Minimum sublease rentals to be received by the partnership under noncancellable operating leases totaled $5.7 million at January 1, 1995. Note 8. Employee Benefit Plans The Company sponsors a defined benefit pension plan for all nonunion employees. An employee's benefit is based on years of credited service and the employee's final average pay calculated on the highest five years of compensation during the last ten years of employment. The Company's funding policy is to contribute at least the minimum annual contribution required by Internal Revenue Service regulations. The following table sets forth the defined benefit pension plan's funded status and amounts recognized in the Company's consolidated balance sheets at January 1, 1995 and January 2, 1994 (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefit of $35.5 million at January 1, 1995 and $32.7 million at January 2, 1994 $ 37.8 $ 35.0 ------------ ------------ ------------ ------------ Projected benefit obligation for service rendered to date $ (49.7) $ (52.9) Plan assets at fair value, primarily listed stocks and U.S. bonds 46.2 44.9 ------------ ------------ Projected benefit obligation in excess of plan assets (3.5) (8.0) Unrecognized net loss from past experience different from that assumed, unrecognized prior service cost and effects of changes in assumptions 12.6 17.7 ------------ ------------ Pension asset included in other noncurrent assets $ 9.1 $ 9.7 ------------ ------------ ------------ ------------
The discount rate used in determining the actuarial present value of the projected benefit obligation was 8.5% at January 1, 1995 and 7.5% at January 2, 1994. The expected long-term rate of return on assets and rate of increase in compensation levels were 9.0% and 4.5%, respectively, at January 1, 1995 and 10.0% and 4.5%, respectively, at January 2, 1994. Net pension cost under the defined benefit pension plan for 1994, 1993 and 1992 included the following components (in millions of dollars):
Fiscal Year Ended -------------------------------------------- January 1, January 2, January 3, 1995 1994 1993 ------------ ------------ ------------ Service cost $ 3.4 $ 2.5 $ 2.2 Interest cost on projected benefit obligation 4.0 3.6 3.0 Actual return on plan assets .9 (3.0) (1.9) Net amortization and deferral (4.4) (.7) (1.6) ------------ ------------ ------------ Net pension cost $ 3.9 $ 2.4 $ 1.7 ------------ ------------ ------------ ------------ ------------ ------------
During 1992, the Company adopted a supplemental executive retirement plan which provides supplemental income payments for certain officers during retirement. Total pension expense for all plans was $5.1 million, $3.6 million and $2.8 million for 1994, 1993 and 1992, respectively. The Company's contributory profit sharing plan for nonunion employees qualifies under Section 401(k) of the Internal Revenue Code. Under the profit sharing plan, the Company's contribution is determined annually by the Chairman of the Board of Directors. Total expense related to the Company's profit sharing plan was $5.3 million, $4.3 million and $7.9 million for the 1994, 1993 and 1992 plan years, respectively. The Company sponsors a retiree medical plan covering substantially all nonunion employees who retire under certain age and service requirements. The retiree medical plan provides outpatient, inpatient and various other covered services. Participants in the retiree medical plan who retire after June 30, 1990 receive a benefit based upon years of service and a benefit value at the time of retirement. Each retiree's benefit account may be indexed each year to the social security cost of living, up to a maximum of 4.0%. Such benefits are funded from the Company's general assets. The Company has the right to modify or terminate the plan. The Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS No. 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 3, 1993. SFAS No. 106 requires that the cost of these benefits be recognized in the consolidated financial statements over an employee's service period. The Company elected to immediately recognize in the first quarter of 1992 a transition obligation of $15.5 million, net of a deferred income tax benefit of $10.2 million in accordance with the provisions of SFAS No. 106. The accumulated benefit obligation for the retiree medical plan as of January 1, 1995 and January 2, 1994 was as follows (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Accumulated retiree medical benefit obligation: Retirees $ 9.9 $ 16.4 Fully eligible active plan participants 3.5 4.0 Other active plan participants 12.0 12.5 Unrecognized net gain (loss) 6.9 (3.0) ------------ ------------ Accrued retiree medical benefit obligation $ 32.3 $ 29.9 ------------ ------------ ------------ ------------
For measurement purposes, an 8.0% increase in the cost of covered retiree medical benefits was assumed for 1994. The rate was assumed to decline gradually to 6.0% in 1996, and remain at that level thereafter. A 1.0% increase in the retiree medical cost trend rate would increase the retiree medical benefit obligation at January 1, 1995 by $0.6 million and the 1994 annual expense by $0.1 million. The weighted average discount rate used in determining the accumulated retiree medical benefit obligation was 8.5% and 7.5% at January 1, 1995 and January 2, 1994, respectively. The net retiree medical plan cost for 1994, 1993 and 1992 included the following components (in millions of dollars):
Fiscal Year Ended ------------------------------------------ January 1, January 2, January 3, 1995 1994 1993 ------------ ------------ ------------ Service cost $ 1.2 $ .8 $ .8 Interest cost 2.1 2.4 2.4 ------------ ------------ ------------ Net retiree medical plan costs $ 3.3 $ 3.2 $ 3.2 ------------ ------------ ------------ ------------ ------------ ------------
The Company contributes to multi-employer joint pension plans and health and welfare plans administered by various trustees. Contributions to these plans are based upon negotiated labor contracts. The pension plans may be deemed to be defined benefit plans. Information relating to accumulated benefits and fund assets as they may be allocable to the Company at January 1, 1995 is not available. Total pension expense for the union plans was $22.3 million, $30.3 million and $12.1 million for 1994, 1993 and 1992, respectively. The health and welfare plans provide medical, dental and other benefits to certain employees covered by union contracts. Total health and welfare expense for these plans was $125.9 million, $107.1 million and $153.9 million for 1994, 1993 and 1992, respectively. Note 9. Income Taxes During 1992, the Company changed its method of accounting for income taxes to comply with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This standard requires, among other things, recognition of future tax consequences, measured by enacted tax rates, attributable to temporary differences between financial statement and income tax bases of assets and liabilities. The change in accounting method has been applied retroactively to June 28, 1987 by restating prior years' consolidated financial statements. The provision for income taxes for 1994, 1993 and 1992 was comprised of the following amounts (in millions of dollars):
Fiscal Year Ended -------------------------------------------- January 1, January 2, January 3, 1995 1994 1993 ------------ ------------ ------------ Current: Federal $ 24.7 $ 13.3 $ 49.3 State 5.2 7.6 16.5 ------------ ------------ ------------ Total current income tax provision 29.9 20.9 65.8 ------------ ------------ ------------ Deferred: Federal (.7) 15.7 1.1 State (.8) .2 (1.4) ------------ ------------ ------------ Total deferred income tax provision (1.5) 15.9 (.3) ------------ ------------ ------------ Total income tax provision $ 28.4 $ 36.8 $ 65.5 ------------ ------------ ------------ ------------ ------------ ------------
Reconciliation of the Federal statutory rate and effective rate for 1994, 1993 and 1992 was as follows (in millions of dollars):
Fiscal Year Ended ------------------------------------------ January 1, January 2, January 3, 1995 1994 1993 ------------ ------------ ------------ Federal statutory expected provision $ 19.3 $ 24.4 $ 50.2 Amortization of excess of cost over net assets acquired 5.0 5.1 5.1 State income taxes, net of Federal income tax benefit 3.1 5.1 10.0 Effect to beginning of year deferred income tax balance for increase in Federal statutory tax rate - 2.0 - Other 1.0 .2 .2 ------------ ------------ ------------ Total income tax provision $ 28.4 $ 36.8 $ 65.5 ------------ ------------ ------------ ------------ ------------ ------------
Deferred income taxes consisted of future tax liabilities (assets) attributable to the following (in millions of dollars):
January 1, January 2, 1995 1994 ------------ ------------ Deferred tax liabilities: Excess of book over tax bases $ 141.2 $ 140.0 Excess of tax over book depreciation 84.1 72.3 ------------ ------------ Deferred tax liabilities 225.3 212.3 ------------ ------------ Deferred tax assets: Cash versus accrual basis (136.6) (113.8) Other, net (2.2) (10.5) ------------ ------------ Deferred tax assets (138.8) (124.3) ------------ ------------ Deferred income taxes, net $ 86.5 $ 88.0 ------------ ------------ ------------ ------------ /TABLE The tax returns for all of the Company's fiscal periods ended subsequent to and including December 31, 1989 are open for examination by the Internal Revenue Service (the "IRS") and/or various state tax authorities. Additionally, certain tax returns of entities acquired by the Company for earlier tax years are open for examination by the IRS. Management believes that any adjustments arising out of the examinations for which the Company would be liable would not have a material effect on the Company's consolidated financial position. Note 10. Related Party Transactions The Company leases a distribution facility from a California general partnership whose general partners are Vons and a Texas general partnership, of which a director of the Company is a general partner. Vons and the Texas general partnership each have a 50% interest in the California general partnership. During 1994, 1993 and 1992, the Company paid rent of $1.9 million per year from which the partnership distributed $70,000, $160,000 and $188,000 to the Texas general partnership in such years, respectively. A wholly owned subsidiary of Safeway owns approximately 35% of the outstanding voting stock of the Company. Safeway and its affiliates sold certain inventory and other items to the Company for an aggregate amount during 1994, 1993 and 1992 of approximately $21.3 million, $2.5 million and $5.7 million, respectively. The Company sold certain inventory items to Safeway and its affiliates for an aggregate amount during 1994, 1993 and 1992 of approximately $6.6 million, $2.4 million and $6.7 million, respectively. Three directors of the Company are also directors of Safeway and a fourth director of the Company is both a director and an officer of Safeway. The Company leases eight properties from a partnership that is 80% owned by a subsidiary of Safeway and 20% owned by the principal stockholder of Safeway. The rentals under the leases were $0.7 million, $0.7 million and $0.6 million in 1994, 1993 and 1992, respectively. In addition, the Company is secondarily liable to this partnership under four leases for which the annual minimum rental is $0.2 million, all of which is currently being paid by assignees. Another California general partnership whose general partners include directors and management of the Company had the right to purchase several leaseholds of the Company. The Company paid the California general partnership $2.2 million in 1993 to cancel this purchase right. A director of the Company is affiliated with an entity which was engaged to provide buying services. These buying services were terminated in June 1992. During 1992, the entity was paid $324,000 for buying services rendered. A director of the Company borrowed a total of $118,000 from the Company for the purchase of 5,000 shares of the Company's common stock by notes dated January 3, 1992 and July 22, 1992. The notes are secured by a pledge of the 5,000 shares of common stock. The notes accrue interest at the Federal mid term rate in effect under Internal Revenue Code Section 1274(d), compounded semiannually. All payments of principal and interest are due and payable on December 31, 1997. Note 11. Contingencies The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, management believes that their final outcome should not have a material adverse effect on the Company's consolidated financial position. As a result of the disposal of certain assets and leasehold interests by the Company and by a partnership of which the Company is a general partner, the Company is contingently liable to certain landlords and pension funds. Note 12. Shareholders' Equity The Company has various stock option plans. Options under the 1987 Stock Option Plan are fully vested. Options under the 1990 Stock Option Plan vest as determined by the Compensation Committee of the Board of Directors. Generally, options vest 25% one year from the date of grant and 25% per year thereafter. However, a limited number of options vest 20% at the date of grant and 20% per year thereafter and others vest 33-1/3% per year beginning one year after grant. Options under the Directors' Stock Option Plan vest 25% six months from the date of grant and 25% on the anniversary of the date of grant thereafter. For all plans, the options expire ten years from the date of grant. Information regarding the Company's stock option plans is summarized below:
1987 1990 Directors' Stock Option Stock Option Stock Option Plan Plan Plan ------------ ------------ ------------ Shares authorized 175,227 4,000,000 225,000 ------------ ------------ ------------ ------------ ------------ ------------ Shares under option: Outstanding at December 29, 1991 80,394 1,184,500 - Granted - 575,015 71,693 Exercised 26,125 62,875 - Forfeited - 17,900 - ------------ ------------ ------------ Outstanding at January 3, 1993 54,269 1,678,740 71,693 Granted - 584,642 44,192 Exercised 5,750 1,000 - Forfeited - 218,985 16,842 ------------ ------------ ------------ Outstanding at January 2, 1994 48,519 2,043,397 99,043 Granted - 1,164,009 52,028 Exercised 7,000 34,240 - Forfeited 11,250 484,152 20,144 ------------ ------------ ------------ Outstanding at January 1, 1995 30,269 2,689,014 130,927 ------------ ------------ ------------ ------------ ------------ ------------ Range of option prices per share: At January 3, 1993 $ 9.28 $ 2.50-27.55 $22.04-27.55 At January 2, 1994 $ 9.28 $ 2.50-27.55 $17.51-27.55 At January 1, 1995 $ 9.28 $ 2.50-27.55 $14.23-27.55 Options exercisable: At January 3, 1993 54,269 401,751 17,923 At January 2, 1994 48,519 765,054 37,022 At January 1, 1995 30,269 991,426 69,241 Average price of options exercised: Year ended January 3, 1993 $ 9.28 $ 3.36 $ - Year ended January 2, 1994 $ 9.28 $ 21.35 $ - Year ended January 1, 1995 $ 9.28 $ 2.50 $ -
Effective January 1, 1991, the Company adopted the Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan allows employees to purchase the Company's stock through payroll deductions. The source of stock is weekly open market purchases by a third party administrator. Administrative and purchase commission costs associated with the Stock Purchase Plan are borne and paid by the Company according to the agreement with the third party administrator. Note 13. Earthquake Loss On January 17, 1994, Southern California was struck by a major earthquake which resulted in the temporary closure of 45 of the Company's stores. All of the closed stores reopened within approximately one week of the earthquake. The Company carries insurance to protect against earthquake loss. The estimated total loss is approximately $25.0 million which, after insurance recoveries, resulted in a first quarter 1994 pre-tax nonrecurring selling and administrative charge of $5.0 million, or $.07 per share. As of January 1, 1995, the accompanying consolidated financial statements include a $10.0 million receivable for insurance recoveries. Note 14. Restructuring Charges During 1993, the Company recorded a restructuring charge of $56.9 million, or $.77 per share. The 1993 charge reflected anticipated costs associated with a program to accelerate the closing of underperforming facilities, including 11 stores, and to eliminate approximately 300 administrative and support positions, which included 18 officers. The 1993 restructuring charge included $42.7 million for expenses relating to facility closures and $14.2 million for severance and other related expenses. In late 1994, the Company determined that the facility closures and reductions in work force undertaken in 1993 would not achieve the Company's cost reduction goals. The Company undertook additional restructuring initiatives resulting in further facility closures and reductions in work force. During 1994, the Company recorded restructuring charges of $33.0 million, or $.45 per share. The 1994 restructuring charges included $27.4 million for expenses related to facility closures. These facility closures include 16 stores, the majority of which were closed by year end 1994, and the San Diego distribution facility, to be closed in 1995. The remaining $5.6 million of the charges relates to severance and other costs associated with the elimination of approximately 400 administrative and support positions, the majority of which were eliminated during third quarter 1994. Of the total $89.9 million restructuring reserve, $55.9 million of costs and payments have been charged against the reserve as of January 1, 1995, representing asset write offs and lease obligations for closed facilities of $39.4 million and severance and other related expenses of $16.5 million. Note 15. Quarterly Financial Data (Unaudited) The results of operations for 1994 and 1993 were as follows (in millions of dollars except share data):
First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year 1994 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks) ----------- ----------- ----------- ----------- Sales $ 1,144.0 $ 1,160.2 $ 1,516.2 $ 1,176.2 Gross profit (1) 286.8 267.5 373.3 301.8 Amortization of excess cost over net assets acquired 3.5 3.5 4.6 3.5 Restructuring charges - - 19.0 14.0 Operating income 32.7 25.3 32.1 35.7 Interest expense, net 15.7 16.8 21.7 16.6 Income before extraordinary item 9.0 4.5 4.0 9.1 Extraordinary item - - - - Net income $ 9.0 $ 4.5 $ 4.0 $ 9.1 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income per common share: Income before extraordinary item $ .21 $ .10 $ .09 $ .21 Extraordinary item - - - - ----------- ----------- ----------- ----------- Net income $ .21 $ .10 $ .09 $ .21 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares and common share equivalents 43,475,000 43,516,000 43,533,000 43,717,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year 1993 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks) ----------- ----------- ----------- ----------- Sales $ 1,194.2 $ 1,175.3 $ 1,534.5 $ 1,170.5 Gross profit (1) 302.4 297.2 376.5 297.0 Amortization of excess cost over net assets acquired 3.5 3.5 4.6 3.4 Restructuring charge - - 56.9 - Operating income (loss) 43.5 47.1 (4.4) 49.6 Interest expense, net 14.9 15.2 20.6 15.3 Income (loss) before extraordinary item 15.9 17.7 (19.5) 18.9 Extraordinary item - - (1.4) - Net income (loss) $ 15.9 $ 17.7 $ (20.9) $ 18.9 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) per common share: Income (loss) before extraordinary item $ .37 $ .40 $ (.45) $ .44 Extraordinary item - - (.03) - ----------- ----------- ----------- ----------- Net income (loss) $ .37 $ .40 $ (.48) $ .44 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares and common share equivalents 43,549,000 43,512,000 43,474,000 43,469,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (1) Gross profit represents sales net of cost of sales, buying and occupancy costs.
Independent Auditors' Report ---------------------------- The Vons Companies, Inc. and Subsidiaries ----------------------------------------- The Board of Directors The Vons Companies, Inc.: We have audited the accompanying consolidated balance sheets of The Vons Companies, Inc. and subsidiaries as of January 1, 1995 and January 2, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for the fifty-two week periods ended January 1, 1995 and January 2, 1994 and the fifty-three week period ended January 3, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Vons Companies, Inc. and subsidiaries at January 1, 1995 and January 2, 1994 and the results of their operations and cash flows for the fifty-two week periods ended January 1, 1995 and January 2, 1994 and the fifty-three week period ended January 3, 1993, in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in the fifty-three week period ended January 3, 1993. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Los Angeles, California February 20, 1995 EX-24 4 Exhibit 24 [This page appears on KPMG Peat Marwick LLP letterhead] INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors The Vons Companies, Inc.: We consent to incorporation by reference in the Registration Statements (No. 33-42913, No. 33-39246, No. 33-41539, No. 33- 55744 and No. 33-50957) on Form S-8 of The Vons Companies, Inc. of our report dated February 20, 1995, relating to the consolidated balance sheets of The Vons Companies, Inc. and subsidiaries as of January 1, 1995 and January 2, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for the fifty-two week periods ended January 1, 1995 and January 2, 1994 and the fifty-three week period ended January 3, 1993, which report appears in the Annual Report to Shareholders and is incorporated by reference in the January 1, 1995 annual report on Form 10-K of The Vons Companies, Inc. Our report refers to the Company's adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in the fifty-three week period ended January 3, 1993, as discussed in Note 8 to the consolidated financial statements. /s/ KPMG PEAT MARWICK LLP Los Angeles, California March 29, 1995 EX-27 5
5 This schedule contains summary financial information extracted from the Company's Consolidated Statements of Operations for the fifty-two weeks ended January 1, 1995, the Consolidated Balance Sheets as of January 1, 1995 and the accompanying notes thereto and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JAN-01-1995 JAN-03-1994 JAN-01-1995 9,000 0 45,400 0 359,300 467,800 1,650,300 447,300 2,222,000 563,900 803,800 4,300 0 0 548,100 2,222,000 4,996,600 4,996,600 3,767,200 4,870,800 0 0 70,800 55,000 28,400 26,600 0 0 0 26,600 0.61 0.61