-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RCgIDjhFYh+/tWigVIIRZSN12wcenb5bjCAjUIZGj5TXgjJt7N0IvkQuRCHyoFbj AkL2lkYMJNdzCqe3wS6x0Q== 0000715633-97-000002.txt : 19970329 0000715633-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000715633-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VONS COMPANIES INC CENTRAL INDEX KEY: 0000715633 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 381623900 STATE OF INCORPORATION: MI FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08452 FILM NUMBER: 97567418 BUSINESS ADDRESS: STREET 1: 618 MICHILLINDA AVE CITY: ARCADIA STATE: CA ZIP: 91007 BUSINESS PHONE: 8188217000 MAIL ADDRESS: STREET 1: 618 MICHILLINDA AVENUE CITY: ARCADIA STATE: CA ZIP: 91007 FORMER COMPANY: FORMER CONFORMED NAME: ALLIED SUPERMARKETS INC /MI//NEW/ DATE OF NAME CHANGE: 19870805 10-K405 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 December 29, 1996 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: 6-5/8% Senior Subordinated Debentures 9-5/8% Senior Subordinated Notes 8-3/8% Senior Subordinated Notes 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.[X] Aggregate market value of voting stock held by non- affiliates of the registrant as of March 10, 1997: Common Stock, par value $.10 per share - $1,972,545,355. The number of shares of Common Stock outstanding as of March 10, 1997 - 44,174,285. Documents incorporated by reference: To the extent required to be filed, the registrant will file an amendment to this Form 10-K within 120 days of the end of its fiscal year to provide the information required by Part III of this Form 10-K. PART I ITEM 1: BUSINESS General The Vons Companies, Inc. ("Vons" or the "Company") is the second largest supermarket chain in Southern California based on sales. As of December 29, 1996, Vons operated 320 supermarket and food and drug combination 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. The Company's 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 service, quality, selection 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 Southern California operations of Safeway, Inc. ("Safeway"). 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 34.3% of the outstanding shares of Vons common stock. Safeway is currently an affiliate of Kohlberg Kravis Roberts & Co. The Proposed Merger On December 15, 1996, Vons entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement"), with Safeway for a business combination in which, among other things, Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock that Safeway does not currently own and Vons will be merged with and into a wholly owned subsidiary of Safeway (the "Merger"). The transaction, which was unanimously approved by a special committee of the Vons Board of Directors, comprised of directors who are not affiliated with Safeway, is subject to approval by a majority of the outstanding Vons common shares not held by Safeway and its affiliates, and certain other conditions. The combined company will be the second largest grocery chain in North America, with 1,377 stores and sales in excess of $22 billion. The proposed merger is expected to close early in the second quarter of 1997. Safeway, Inc. is one of the world's largest food retailers, operating 1,052 stores in the United States and Canada at the end of fiscal 1996. Store Formats The Company operates its stores 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 centralized functions for marketing, advertising, buying, real estate development, management information systems, distribution, manufacturing, accounting and administration to maximize operating leverage and profitability. Both store formats, Vons and Pavilions, offer extensive assortments of food products, including departments for dry groceries, produce, meat, seafood, dairy, wine and liquor. The majority of stores also offer service departments such as hot bakeries, service floral, delicatessens, service meat departments and banking facilities. Selected Pavilions stores offer an expanded greeting card department, a health and beauty care department including cosmetics, a sausage and smoke shop, bagel shop, sushi bar and high quality prepared Chinese food. Approximately one-third of the Company's stores offer full-service pharmacies. New Store Openings and Store Remodel Projects The Company expects to continue to augment sales growth through the continuation of its new store opening program and ongoing chainwide remodel program. The Company currently plans to open 13 new stores, including 5 replacement stores, in 1997, subject to changes by Safeway following the proposed Merger. In 1996, the Company maintained its goal of having 80% of its stores either newly opened or remodeled within the preceding five years. 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 remodeling program includes remerchandising to reflect a contemporary design and decor package including selected fixture replacements. The Company completed 68, 37 and 14 store remodeling projects in fiscal 1996, 1995 and 1994, respectively. Vons capital expenditures for store projects were $185.4 million and $130.5 million in fiscal 1996 and 1995, respectively. It is anticipated that 1997 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 ------ --------- -------- ------ ------ 1994: Beginning store count...... 305 32 3 5 345 Stores opened.............. 6 - - - 6 Stores closed or sold...... (17) - - - (17) Store format conversions... (1) 1 (3) 3 - ------ --------- -------- ------ ------ Ending store count......... 293 33 0 8 334 ------ --------- -------- ------ ------ 1995: Stores opened.............. 13 - - - 13 Stores closed or sold...... (11) - - (8) (19) ------ --------- -------- ------ ------ Ending store count......... 295 33 0 0 328 ------ --------- -------- ------ ------ 1996: Stores opened.............. 10 - - - 10 Stores closed or sold...... (17) (1) - - (18) ------ --------- -------- ------ ------ Ending store count......... 288 32 0 0 320 ------ --------- -------- ------ ------ ------ --------- -------- ------ ------ Average gross square feet per store at December 29, 1996........ 36,200 43,300 - - 36,900 ------ --------- -------- ------ ------ ------ --------- -------- ------ ------
The Company closes stores based on replacement strategies or lease renewals. Following completion of the Merger, Vons management expects to continue these types of store closures in the future. 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, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, 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 addition of convenience stores, drug stores, mass merchandisers, specialty stores, warehouse stores, membership stores as well as discount stores and fast food and other restaurants which compete for the same customers has resulted in intensified competition. This trend is expected to continue. Both of the Company's 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 loyalty club known as VonsClub. This club 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 with an established free membership loyalty club offered to its customers. Vons marketing and communication strategy is based on a combination of direct mail, newspaper, television and radio. 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. Vons believes that customers are placing greater emphasis on price and overall value. The Company's marketing campaign has incorporated the slogan "Vons Is Value" since 1994. These campaigns emphasize the Vons Value formula which combines competitive prices with customer service and high quality products. Low prices, advertised weekly specials, free membership club savings and double coupons are integral parts of the Vons offering. Another important component of the Vons Value offering is the amount of labor allocated for customer service and check-out which the Company believes has increased customer satisfaction. Vons believes that its strength is its ability to deliver a high value shopping experience through a blend of high quality products, superior customer service and product assortments at competitive prices combined with VonsClub, double coupons and advertised weekly specials. Merchandising and Store Operations An average store offers approximately 30,000 to 40,000 merchandise items. Vons carries a full assortment of brand-name grocery products and emphasizes quality and freshness in its produce, meat and seafood selections. Brand name items are complimented by an extensive line of private brand products in all categories. In addition to its proprietary Jerseymaid line of dairy products, the Company carries the private brand "SELECT." This upscale private brand was first introduced in 1994. The Company intends to increase its private brand penetration as a percent of sales by marketing its branded items and introducing additional private brand items, including those under the "SELECT" label. In 1996, private brand sales accounted for approximately 19% of sales. Vons is committed to being the low cost operator in the market areas it serves. Vons strategy is to continue to decrease its operating costs through aggressive buying, introduction and maintenance of various merchandising and technological innovations and stringent cost controls. As part of its effort to improve efficiency and reduce operating costs, the Company is actively pursuing an industry-wide effort known as Efficient Consumer Response ("ECR"). This effort includes a review of the Company's products by category to achieve an efficient assortment which reduces the number of products offered without compromising customer satisfaction. A neighborhood-specific product assortment with efficient space management improves in-stock conditions and reduces inventory. The Company has also implemented systems to allow for more efficient replenishment of inventory such as continuous replenishment systems and electronic ordering and invoicing. In addition, the Company is committed to neighborhood marketing and merchandising to serve the diverse needs of its customer base. Over the past few years, Vons has developed systems to give store managers more control over store merchandising needs. The Company improves the consistency of store operations through its policy to develop store managers internally. All store managers participate in a bonus program which is based primarily upon their individual store sales and profit and are included in the Company's stock option program. 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. Support and Other Services The Company operates a fluid milk processing facility, an ice cream plant and a central bakery. Vons operates two distribution facilities in Southern California. The Company utilizes computerized inventory and labor management systems throughout its distribution network. As of December 29, 1996, Vons operated a fleet of 414 tractors and 1,162 trailers, of which 105 and 322, 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 75% of store sales in 1996 represented inventories supplied by these distribution facilities, 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 1988 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 1992, 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 December 29, 1996, Vons employed approximately 11,100 full-time and 19,300 part-time employees as follows:
Non- Union Union Total ------ ------ ------- Hourly.................. 28,600 500 29,100 Salaried................ - 1,300 1,300 ------ ------ ------- Total Employees......... 28,600 1,800 30,400 ------ ------ ------- ------ ------ -------
In the fall of 1994, the Company negotiated a four-year contract with the International Brotherhood of Teamsters' Union which will expire on September 13, 1998. In the fall of 1995, the Company negotiated a four-year contract with the United Food and Commercial Workers' International Unions which will expire on October 3, 1999. 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 which it believes to be 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 as of March 27, 1997:
Name Age Position - ---- --- -------- Lawrence A. Del Santo 63 Chairman of the Board and Chief Executive Officer Richard E. Goodspeed 60 President and Chief Operating Officer Susan M. Klug 37 Senior Vice President Marketing Pamela K. Knous 42 Executive Vice President, Chief Financial Officer and Treasurer Terry R. Peets 52 Executive Vice President Harold E. Rudnick 48 Senior Vice President Retail Purchasing Terrence J. Wallock 52 Executive Vice President, General Counsel and Secretary
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 Chairman of the Board in May 1995. He served as Director and Vice Chairman of the Board from April 1994 to May 1995. Mr. Del Santo continues to serve as Chief Executive Officer of the Company, a position he has held since 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 elected a Director of the Company in February 1996. Mr. Goodspeed also continues in the position of President and Chief Operating Officer of the Company, to which he was appointed 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. Ms. Klug was appointed Senior Vice President, Marketing of the Company in October 1994. Prior to joining the Company, Ms. Klug had been with Catalina Marketing in various positions since 1989, rising to the position of Vice President of Western United States. Ms. Knous was appointed Treasurer of the Company in December 1995 and continues in the position of Executive Vice President and Chief Financial Officer of the Company, which she has held since May 1995. Ms. Knous served as Senior Vice President and Chief Financial Officer from July 1994 to May 1995. 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. Mr. Peets was appointed Executive Vice President of the Company in September 1995. Prior to joining the Company, Mr. Peets had been with Ralphs Grocery Company in various positions since 1977, rising to the position of Executive Vice President. Mr. Rudnick was appointed Senior Vice President, Retail Purchasing of the Company in May 1995. Mr. Rudnick served as Senior Vice President, Procurement of the Company from April 1994 to May 1995. Mr. Rudnick was Group Vice President, National Accounts of the Company from June 1992 to April 1994. From October 1985 to June 1992, Mr. Rudnick was Vice President, Grocery/Frozen Food Service of the Company. 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. ITEM 2: PROPERTIES As of December 29, 1996, the Company leased 228 of its stores and owned 92 of its stores. At December 29, 1996, 195 of the Company's leases provided for contingent rental payments based on a percentage of such rental property's 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 2021. 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 -------------- --------------- 1997-2001.......... 7 2002-2006.......... 13 2007-2011.......... 20 2012-2016.......... 21 2017-2021.......... 29 2022 and thereafter 138
The Company has a $110.8 million mortgage loan on 51 properties requiring monthly principal and interest payments of approximately $1.0 million with a one-time principal and interest payment of $110.7 million in July 1997. The Company has other real estate notes and mortgages covering seven properties totaling $23.8 million due in varying monthly installments with maturity dates from 1997 to 2009. The Company's 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. The Company 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. The Company leases a distribution facility located in Santa Fe Springs, California. This distribution facility includes several warehouses and a maintenance operation. The facility covers approximately 1,040,000 square feet located on approximately 78 acres of land. The lease for such facility expires in 2000 with two five-year and one one-year options to extend. The Company operates a 450,000-square-foot forward buy warehouse located in the City of Industry, California under a lease which expires in 1999, with one three-year option to extend. The Company also leases a 95,000-square-foot frozen food distribution facility in Ontario, California under a lease which expires in March 1998. The Company closed its owned distribution facility in San Diego, California in third quarter 1995. The Company is in the process of disposing of this property. See Note 15 to the Consolidated Financial Statements included elsewhere herein. The Company 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 2001, with one five-year option 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. Trial is currently scheduled to commence in July of 1997. On September 13, 1996, a class action lawsuit titled McCampbell, et al. v. Ralphs Grocery Company, et al. was - ---------------------------------------------------- filed in the Superior Court of the State of California, County of San Diego, against the Company and two other grocery store chains operating in the Southern California area. The complaint alleges, among other things, that the Company and others conspired to fix the retail price of eggs in Southern California. The plaintiffs claim that the defendants' actions violate provisions of the California Cartwright Act and constitute unfair competition. Plaintiffs seek damages they purport to have sustained as a result of the defendants' alleged actions, which damages may be trebled under the applicable statute, and an injunction from future acts in restraint of trade and unfair competition. Because the case was recently filed, discovery has just commenced. Management of the Company intends to defend this action vigorously and the Company has filed an answer to the complaint denying the plaintiffs' allegations and setting forth several defenses. 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 December 29, 1996. 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, Inc. ("NYSE") (Symbol-VON). The shares have been listed on the NYSE since March 20, 1986. As of February 20, 1997, there were approximately 6,311 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 December 29, December 31, 1996 1995 ----------------- ----------------- High Low High Low ---- --- ---- --- First quarter..... $33 $25 $20 3/4 $17 5/8 Second quarter.... 38 3/4 29 7/8 21 7/8 19 1/4 Third quarter..... 44 3/8 34 24 3/8 20 1/4 Fourth quarter.... 57 7/8 40 1/8 28 1/4 22 7/8
The Company paid no dividends on its common stock in fiscal years 1996, 1995, and 1994. 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 $119.0 million available for dividends and distributions at December 29, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 7 to the Consolidated Financial Statements contained in the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996 included elsewhere herein. ITEM 6: SELECTED FINANCIAL DATA Five-Year Selected Financial Data 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 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 53 As of and for the 52 Weeks Ended Weeks Ended (in millions of ----------------------------------------------------- ------------ dollars except December 29, December 31, January 1, January 2, January 3, share data) 1996 1995 1995 1994 1993 ------------ ------------ ------------ ----------- ------------ Summary of Operations: Sales $ 5,407.4 $ 5,070.7 $ 4,996.6 $ 5,074.5 $ 5,595.5 Restructuring charges - - 33.0 56.9 - Operating income 241.1 194.1 125.8 135.8 219.1 Interest expense, net 55.6 67.3 70.8 66.0 71.5 Income before income tax provision 185.5 126.8 55.0 69.8 147.6 Income before extraordinary item and cumulative effect of change in accounting for retiree medical benefits 104.7 68.1 26.6 33.0 82.1 Income before cumulative effect of change in accounting for retiree medical benefits 104.7 68.1 26.6 31.6 69.3 Net income 104.7 68.1 26.6 31.6 53.8 Income applicable to common shareholders 104.7 68.1 26.6 31.6 53.8 Income per common and common equivalent share before extraordinary item and cumulative effect of change in accounting for retiree medical benefits 2.34 1.55 .61 .76 1.89 Income per common and common equivalent share before cumulative effect of change in accounting for retiree medical benefits 2.34 1.55 .61 .73 1.60 Net income per common and common equivalent share 2.34 1.55 .61 .73 1.24 Dividends paid on common stock - - - - - Financial Position: Working capital (deficit) (294.9) (141.1) (96.1) (69.3) (74.9) Total assets 2,185.4 2,186.5 2,222.0 2,249.5 2,066.0 Long-term debt: Capital lease obligations 50.3 53.4 58.0 62.7 56.4 Senior debt 15.0 298.8 426.2 497.2 389.2 Subordinated debt, net 284.5 305.7 319.6 322.1 342.5 Common shareholders' equity 738.4 623.3 552.4 524.9 493.2 Shareholders' equity per common share 16.79 14.32 12.73 12.11 11.38 Other Data: Weighted average common shares during year, including common share equivalents 44,800,000 43,900,000 43,600,000 43,500,000 43,500,000 Outstanding common shares at year end 43,987,000 43,533,000 43,383,000 43,342,000 43,335,000
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 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 Ended --------------------- December 29, 1996 December 31, 1995 January 1, 1995 ----------------- ----------------- ----------------- Sales $5,407.4 100.0% $5,070.7 100.0% $4,996.6 100.0% Costs and expenses: Cost of sales, buying and occupancy 4,032.7 74.5 3,790.2 74.8 3,767.2 75.4 Selling and administrative expenses 1,118.6 20.7 1,071.4 21.1 1,055.5 21.1 Amortization of excess cost over net assets acquired 15.0 .3 15.0 .3 15.1 .3 Restructuring charges - - 33.0 .7 Operating income 241.1 4.5 194.1 3.8 125.8 2.5 Interest expense, net 55.6 1.1 67.3 1.3 70.8 1.4 Income before income tax provision 185.5 3.4 126.8 2.5 55.0 1.1 Income tax provision 80.8 1.5 58.7 1.2 28.4 .6 Net income 104.7 1.9 68.1 1.3 26.6 .5 Income per common and common equivalent share: Net income 2.34 1.55 .61 /TABLE Overview On December 15, 1996, Vons entered into a Merger Agreement with Safeway for a business combination in which, among other things, Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock that Safeway does not currently own and Vons will be merged with and into a wholly owned subsidiary of Safeway (the "Merger"). The transaction, which was unanimously approved by a special committee of the Vons Board of Directors, comprised of directors who are not affiliated with Safeway, is subject to approval by a majority of the outstanding Vons common shares not held by Safeway and its affiliates, and certain other conditions. The combined company will be the second largest grocery chain in North America based on sales, with 1,377 stores and revenues in excess of $22 billion. The proposed merger is expected to close early in the second quarter of 1997. Safeway, Inc. is one of the world's largest food retailers, operating 1,052 stores in the United States and Canada at the end of fiscal 1996. Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995 Certain statements contained in the following discussion and elsewhere in this Form 10-K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied in such forward-looking statements. Potential risks and uncertainties include, but are not limited to, competitive pressures from other major supermarket operators and economic conditions in the Company's primary markets, the risks associated with the proposed merger involving Safeway and the other uncertainties detailed from time-to-time in the Company's filings with the Securities and Exchange Commission. Comparison of Fifty-Two Weeks Ended December 29, 1996 with Fifty-Two Weeks Ended December 31, 1995 Sales. Sales for 1996 were $5,407.4 million, an increase of $336.7 million, or 6.6%, over 1995. Same store sales increased 4.9% over 1995 sales. The increase in sales reflects the favorable consumer response to superior customer service, the "Vons Is Value" marketing campaign and a strengthening economy in Southern California. In 1996, the Company opened ten new stores, closed 18 stores and completed 68 store remodel projects. Costs and Expenses. Costs and expenses for 1996 were $5,166.3 million, an increase of $289.7 million, or 5.9%, over the comparable 1995 period. Cost of sales and buying and occupancy expenses as a percentage of sales for 1996 were 74.5%, a decrease of 0.3 of a percentage point from 1995. The cost of increased promotional activities in 1996 was offset by benefits achieved from category management and increased private brand sales. The improvement in cost of sales and buying and occupancy expenses as a percentage of sales also reflects decreased occupancy costs. Selling and administrative expenses as a percentage of sales were 20.7% in 1996, compared with 21.1% in 1995. The cost of maintaining store service levels was more than offset by a more efficient mix of store labor and improved sales per labor hour. The improvement in selling and administrative expenses also reflects the success of continued efforts to control expenses as a percentage of sales. Operating Income. Operating income for 1996 was $241.1 million, an increase of $47.0 million, or 24.2%, over 1995. Operating margin increased to 4.5% in 1996 versus 3.8% in 1995. These increases primarily reflect an increase in gross margin and a reduction in selling administrative expenses as a percentage of sales. Operating income before depreciation and amortization of property, amortization of goodwill and other assets, LIFO charge, earthquake deductible and restructuring charges ("FIFO EBITDA") was $361.9 million, or 6.7% of sales, in 1996 compared with $315.0 million, or 6.2% of sales, in 1995. Interest Expense. Net interest expense for 1996 was $55.6 million, a decrease of $11.7 million, or 17.4%, from 1995. This decrease was due to lower average revolving debt borrowings. The ratio of FIFO EBITDA to net interest expense increased to 6.5 times in 1996 versus 4.7 times in 1995. Income Tax Provision. The income tax provision in 1996 was $80.8 million, or a 43.6% effective tax rate. The income tax provision in 1995 was $58.7 million, or a 46.3% effective tax rate. The decrease in the 1996 effective tax rate reflects the increase in income before income tax provision. The effective tax rate is impacted by amortization of excess of cost over net assets acquired, the majority of which is not deductible for tax purposes. Income. Net income for 1996 was $104.7 million, or $2.34 per share, compared with net income of $68.1 million, or $1.55 per share, for 1995. Net income increased due to the factors described above. Comparison of Fifty-Two Weeks Ended December 31, 1995 with Fifty-Two Weeks Ended January 1, 1995 Sales. Sales for 1995 were $5,070.7 million, an increase of $74.1 million, or 1.5%, over 1994. Same store sales increased 3.5% over 1994 sales. The increase in sales reflects the favorable consumer response to improved customer service, the "Vons Is Value" marketing campaign and the slowly improving economic environment in Southern California offset by competitive new store, remodel and conversion activity. In 1995, the Company opened 13 new stores, closed 19 stores and completed 37 store remodel projects. Costs and Expenses. Costs and expenses for 1995 were $4,876.6 million, an increase of $5.8 million, or 0.1%, over the comparable 1994 period. Cost of sales and buying and occupancy expenses as a percentage of sales for 1995 were 74.8%, a decrease of 0.6 of a percentage point from 1994. The impact of lower prices has been more than offset by decreased product costs achieved through better utilization of category management, more effective promotional offerings and increased private brand sales. Selling and administrative expenses as a percentage of sales were 21.1% in 1995, comparable to 1994, which included a $5.0 million insurance deductible charge related to the Northridge earthquake. This reflects higher service levels in the stores as well as negotiated union wage rate increases which were offset by a more efficient mix of store labor. The Company recorded restructuring charges of $33.0 million, or $.45 per share, in 1994 (see Note 15 to the Consolidated Financial Statements included elsewhere herein). Operating Income. Operating income for 1995 was $194.1 million, an increase of $68.3 million, or 54.3%, over 1994. Operating margin increased to 3.8% in 1995 versus 2.5% in 1994. Excluding the 1994 restructuring charges, results for 1994 were $158.8 million, or 3.2% of sales. These increases primarily reflect an increase in gross margin. FIFO EBITDA was $315.0 million, or 6.2% of sales, in 1995 compared with $284.3 million, or 5.7% of sales, in 1994. Interest Expense. Net interest expense for 1995 was $67.3 million, a decrease of $3.5 million, or 4.9%, from 1994. This decrease was due to lower average revolving debt borrowings partially offset by higher weighted average interest cost on revolving debt. The ratio of FIFO EBITDA to net interest expense increased to 4.7 times in 1995 versus 4.0 times in 1994. Income Tax Provision. The income tax provision in 1995 was $58.7 million, or a 46.3% effective tax rate. The income tax provision in 1994 was $28.4 million, or a 51.6% effective tax rate. Excluding the restructuring charge, the effective tax rate for 1994 was 48%. The decrease in the 1995 effective tax rate reflects the increase in income before income tax provision. The effective tax rate is impacted by amortization of excess of cost over net assets acquired, the majority of which is not deductible for tax purposes. Income. Net income for 1995 was $68.1 million, or $1.55 per share, compared with net income of $26.6 million, or $.61 per share, for 1994. In addition to improved operating results, this increase reflects the impact of the 1994 restructuring charges of $33.0 million, or $.45 per share. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flows from operations and available credit under its revolving debt. Management believes that these sources adequately provide for its working capital, capital expenditure and debt service needs. Net cash provided by operating activities was $260.4 million in 1996 compared with $239.4 million in 1995. This change primarily reflects an increase in net income. The ratio of current assets to current liabilities was 0.61 to 1 at December 29, 1996 compared with 0.76 to 1 at December 31, 1995. The decrease in the ratio of current assets to current liabilities reflects the maturity of the Company's $110.8 million mortgage in July 1997. Net cash used for investing activities was $99.3 million in 1996 compared with $91.2 million in 1995. Total capital expenditures in 1996, including the present value of commitments under operating leases, were $193.5 million. Subject to completion of the proposed Merger with Safeway, the Company currently anticipates that total 1997 capital expenditures will be approximately $215 million, of which approximately $150 million will be cash capital expenditures and approximately $65 million will represent the present value of commitments under operating leases. This capital expenditure level contemplates the opening of approximately 13 new stores, including five replacement stores, and the completion of approximately 24 store remodeling 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, as well as Safeway's plans following the Merger. Subject to completion of the proposed Merger with Safeway, the Company currently anticipates that 1997 cash capital expenditures will be funded out of cash provided by operations, the Revolving Loan, and/or through operating leases. In the near term, if Vons were to reduce substantially or postpone its capital expenditure program, Vons believes that there would be no substantial impact on current operations. In the long-term, if these programs 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 $161.2 million in 1996 compared with $147.8 million in 1995. The level of borrowings under the Company's revolving debt is dependent primarily upon cash flows from operations and capital expenditure requirements. At December 29, 1996, the Company's revolving debt borrowings totaled $6.0 million and the Company had available unused credit of $616.8 million. The weighted average interest cost for 1996 on the Company's revolving debt was 7.0% excluding commitment fees on unused borrowings. At December 29, 1996, the corresponding bank prime rate was 8.25%. The Company's involvement with derivative financial instruments has been limited to interest rate cap contracts to reduce the potential impact of increases in interest rates on revolving debt. On March 24, 1997, the Company requested the redemption of all outstanding 9-5/8% Senior Subordinated Notes effective April 28, 1997. The Company's liquidity and capital resources are likely to change significantly following completion of the proposed Merger. 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. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are as set forth in the Index to Consolidated Financial Statements beginning immediately following signatures. 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 To the extent required to be filed, the registrant will file an amendment to this Form 10-K within 120 days of the end of its fiscal year to provide the information required by Part III of this Form 10-K. ITEM 11: EXECUTIVE COMPENSATION To the extent required to be filed, the registrant will file an amendment to this Form 10-K within 120 days of the end of its fiscal year to provide the information required by Part III of this Form 10-K. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT To the extent required to be filed, the registrant will file an amendment to this Form 10-K within 120 days of the end of its fiscal year to provide the information required by Part III of this Form 10-K. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS To the extent required to be filed, the registrant will file an amendment to this Form 10-K within 120 days of the end of its fiscal year to provide the information required by Part III of this Form 10-K. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statements and Schedules (1) Financial Statements See Index to Consolidated Financial Statements. (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 Notes to Consolidated financial Statements. (b) Reports on Form 8-K A report on Form 8-K dated December 15, 1996 was filed by the Registrant to disclose that the Registrant had entered into an Agreement and Plan of Merger, dated as of December 15, 1996 by and among the Registrant, Safeway Inc. and SSCI Merger Sub., Inc. 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 Chairman of the Board and Chief Executive Officer Date: March 28, 1997 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 --------- ----- ---- /S/ LAWRENCE A. DEL SANTO Chairman March 28, 1997 - --------------------------------- of the Board Lawrence A. Del Santo and Chief Executive Officer /S/ PAMELA K. KNOUS Executive Vice March 28, 1997 - --------------------------------- President, Pamela K. Knous Chief Financial Officer (Chief Accounting Officer) and Treasurer /S/ STEVEN A. BURD Member-Board March 28, 1997 - --------------------------------- of Directors Steven A. Burd /S/ WILLIAM S. DAVILA Member-Board March 28, 1997 - --------------------------------- of Directors William S. Davila /S/ FRITZ L. DUDA Member-Board March 28, 1997 - --------------------------------- of Directors Fritz L. Duda /S/ RICHARD E. GOODSPEED Member-Board March 28, 1997 - --------------------------------- of Directors Richard E. Goodspeed /S/ JAMES H. GREENE, JR. Member-Board March 28, 1997 - --------------------------------- of Directors James H. Greene, Jr. /S/ JOHN M. LILLIE Member-Board March 28, 1997 - --------------------------------- of Directors John M. Lillie /s/ ROBERT I. MACDONNELL Member-Board March 28, 1997 - --------------------------------- of Directors Robert I. MacDonnell /S/ PETER A. MAGOWAN Member-Board March 28, 1997 - --------------------------------- of Directors Peter A. Magowan /S/ CHARLES E. RICKERSHAUSER, JR. Member-Board March 28, 1997 - --------------------------------- of Directors Charles E. Rickershauser, Jr. /S/ ROGER E. STANGELAND Member-Board March 28, 1997 - --------------------------------- of Directors Roger E. Stangeland Member-Board March , 1997 - --------------------------------- of Directors William Y. Tauscher THE VONS COMPANIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-1 Financial Statements: Consolidated Statements of Operations for the fiscal years ended December 29, 1996, December 31, 1995, and January 1, 1995.................. F-2 Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995 ................ F-3 Consolidated Statements of Shareholders' Equity for the fiscal years ended December 29, 1996, December 31, 1995 and January 1, 1995 .................. F-4 Consolidated Statements of Cash Flows for the fiscal years ended December 29, 1996, December 31, 1995 and January 1, 1995 ........................................ F-5 Notes to the Consolidated Financial Statements............ 1 [This page appears on KPMG Peat Marwick letterhead.] INDEPENDENT AUDITORS' REPORT 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 December 29, 1996 and December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the fifty-two week periods ended December 29, 1996, December 31, 1995 and January 1, 1995. 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 December 29, 1996 and December 31, 1995 and the results of their operations and cash flows for the fifty-two week periods ended December 29, 1996, December 31, 1995 and January 1, 1995, in conformity with generally accepted accounting principles. As described in note 13 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." /S/ KPMG Peat Marwick LLP January 17, 1997, except for the penultimate sentence in paragraph five of note 7 which is as of March 27, 1997 F-1 THE VONS COMPANIES, INC. AND SUBSIDIARIES - ----------------------------------------- Consolidated Statements of Operations
Fiscal Year Ended ----------------------------------------- All amounts except per share data December 29, December 31, January 1, in millions of dollars 1996 1995 1995 ------------- ------------ ------------ Sales $ 5,407.4 $ 5,070.7 $ 4,996.6 ------------- ------------ ------------ Costs and expenses: Cost of sales, buying and occupancy 4,032.7 3,790.2 3,767.2 Selling and administrative expenses 1,118.6 1,071.4 1,055.5 Amortization of excess cost over net assets acquired 15.0 15.0 15.1 Restructuring charges - - 33.0 ------------- ------------ ------------ 5,166.3 4,876.6 4,870.8 ------------- ------------ ------------ Operating income 241.1 194.1 125.8 Interest expense, net 55.6 67.3 70.8 ------------- ------------ ------------ Income before income tax provision 185.5 126.8 55.0 Income tax provision 80.8 58.7 28.4 ------------- ------------ ------------ Net income $ 104.7 $ 68.1 $ 26.6 ------------- ------------ ------------ ------------- ------------ ------------ Income per common and common equivalent share: Net income $ 2.34 $ 1.55 $ .61 ------------- ------------ ------------ ------------- ------------ ------------ Weighted average common and common equivalent shares 44.8 43.9 43.6 ------------- ------------ ------------ ------------- ------------ ------------ Dividends paid on common stock None None None ------------- ------------ ------------ ------------- ------------ ------------ See accompanying notes to these consolidated financial statements.
F-2 THE VONS COMPANIES, INC. AND SUBSIDIARIES - ----------------------------------------- Consolidated Balance Sheets
December 29, December 31, All amounts except share data in millions of dollars 1996 1995 ------------ ------------ Assets Current assets: Cash $ 9.3 $ 9.4 Accounts receivable 45.0 31.7 Inventories 335.3 350.7 Deferred taxes 32.5 30.9 Other 42.8 29.6 ------------ ------------ Total current assets 464.9 452.3 Property and equipment, net 1,194.2 1,192.5 Excess of cost over net assets acquired, net of accumulated amortization of $133.7 million and $118.7 million, respectively 467.8 482.8 Other 58.5 58.9 ------------ ------------ Total Assets $ 2,185.4 $ 2,186.5 ------------ ------------ ------------ ------------ Liabilities and Shareholders' Equity Current liabilities: Current maturities of capital lease obligations and long-term debt $ 154.9 $ 25.7 Accounts payable 339.2 304.2 Accrued liabilities 265.7 263.5 ------------ ------------ Total current liabilities 759.8 593.4 Accrued self-insurance 143.4 128.0 Deferred income taxes 131.7 118.9 Other noncurrent liabilities 62.3 65.0 Capital lease obligations 50.3 53.4 Senior debt 15.0 298.8 Subordinated debt, net 284.5 305.7 ------------ ------------ Total liabilities 1,447.0 1,563.2 ------------ ------------ 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 - December 29, 1996: 43,987,000 shares; December 31, 1995: 43,533,000 shares 4.4 4.3 Paid-in capital 353.5 343.2 Retained earnings 380.6 275.9 Notes receivable for stock (.1) (.1) ------------ ------------ Total shareholders' equity 738.4 623.3 ------------ ------------ Total Liabilities and Shareholders' Equity $ 2,185.4 $ 2,186.5 ------------ ------------ ------------ ------------ See accompanying notes to these consolidated financial statements.
F-3 THE VONS COMPANIES, INC. AND SUBSIDIARIES - ----------------------------------------- Consolidated Statements of Cash Flows
Fiscal Year Ended -------------------------------------------------- December 29, December 31, January 1, All amounts in millions of dollars 1996 1995 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 104.7 $ 68.1 $ 26.6 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charges - - 33.0 Depreciation and amortization of property and capital leases 99.6 100.0 102.1 Amortization of excess cost over net assets acquired and other assets 16.4 16.0 16.1 Amortization of debt discount and deferred financing costs 6.2 6.8 6.2 LIFO charge 4.8 4.9 2.3 Deferred income taxes 11.2 1.5 (1.5) Change in assets and liabilities: (Increase) decrease in accounts receivable (13.3) 13.7 (9.1) (Increase) decrease in inventories at FIFO costs 10.6 3.7 21.9 (Increase) decrease in other current assets 1.7 (10.9) 3.2 (Increase) decrease in noncurrent assets (3.6) (7.5) (9.3) Increase (decrease) in accounts payable 7.2 11.7 (25.5) Increase (decrease) in accrued liabilities 2.2 16.7 23.3 Increase (decrease) in noncurrent liabilities 12.7 14.7 (9.5) ------------ ------------ ------------ Net cash provided by operating activities 260.4 239.4 179.8 ------------ ------------ ------------ Cash flows from investing activities: Addition of property, plant and equipment (117.8) (110.2) (128.0) Disposal of property, plant and equipment 18.5 19.0 10.5 ------------ ------------ ------------ Net cash used by investing activities (99.3) (91.2) (117.5) ------------ ------------ ------------ Cash flows from financing activities: Net payments on revolving debt (171.8) (122.1) (67.9) Redemption and repurchases of senior subordinated debentures (15.6) (2.4) (6.2) Increase (decrease) in net outstanding drafts 27.8 (15.9) 19.4 Payments on other debt and capital lease obligations (12.0) (8.2) (8.0) Other 10.4 .8 .9 ------------ ------------ ------------ Net cash used by financing activities (161.2) (147.8) (61.8) ------------ ------------ ------------ Net cash increase (decrease) (0.1) .4 .5 Cash at beginning of year 9.4 9.0 8.5 ------------ ------------ ------------ Cash at end of year $ 9.3 $ 9.4 $ 9.0 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 51.3 $ 59.8 $ 64.9 ------------ ------------ ------------ ------------ ------------ ------------ Income taxes $ 72.0 $ 56.0 $ 33.7 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes to these consolidated financial statements.
F-4 THE VONS COMPANIES, INC. AND SUBSIDIARIES - ----------------------------------------- Consolidated Statements of Shareholders' Equity
Number of Common Paid-In Retained All amounts in millions Shares Stock Capital Earnings Notes Total ------ ------ ------- --------- ------ ------ 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 Net income - - - 68.1 - 68.1 Stock options exercised .1 - 2.8 - - 2.8 ------ ------ ------- --------- ------ ------ Balance at December 31, 1995 43.5 4.3 343.2 275.9 (.1) 623.3 Net income - - - 104.7 - 104.7 Stock options exercised .5 0.1 10.3 - - 10.4 ------ ------ ------- --------- ------ ------ Balance at December 29, 1996 44.0 $ 4.4 $ 353.5 $ 380.6 $ (.1) $738.4 ------ ------ ------- --------- ------ ------ ------ ------ ------- --------- ------ ------ See accompanying notes to these consolidated financial statements.
F-5 THE VONS COMPANIES, INC. AND SUBSIDIARIES - ----------------------------------------- Notes to the Consolidated Financial Statements Note 1. Basis of Presentation At December 29, 1996, the Company operated 320 supermarkets and food and drug combination retail stores under the names Vons and Pavilions. The Company's marketing territory includes Southern and Central California and Clark County, Nevada. 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 to support the store network. The Company's fiscal year is based on a 52-53 week fiscal year ending on the Sunday closest to December 31. Fiscal years 1996, 1995 and 1994 included 52 weeks which ended on December 29, 1996, December 31, 1995 and January 1, 1995, respectively. Note 2. Summary of Significant Accounting Policies The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of December 29, 1996 and the reported amounts of income and expenses for the fiscal year ended December 29, 1996. Actual results could differ from those estimates. 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. Revenue Recognition. Sales are recorded when payment is tendered at check-out. 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 forecasted operating income. Other noncurrent assets include an agreement not to compete acquired in connection with the 1992 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 and Common Equivalent Share. Income per common and common equivalent share is based on the weighted average number of common shares outstanding during each year and common equivalent shares 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. Proposed Merger On December 15, 1996, Vons entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement"), with Safeway for a business combination in which, among other things, Safeway will issue 1.425 shares of Safeway common stock for each share of Vons common stock that Safeway does not currently own and Vons will be merged with and into a wholly owned subsidiary of Safeway (the "Merger"). The transaction, which was unanimously approved by a special committee of the Vons Board of Directors, comprised of directors who are not affiliated with Safeway, is subject to approval by a majority of the outstanding Vons common shares not held by Safeway and its affiliates, and certain other conditions. The combined company will be the second largest grocery chain in North America, with 1,377 stores and sales in excess of $22 billion. The proposed merger is expected to close early in the second quarter of 1997. Note 4. Inventories The excess of estimated current cost over LIFO carrying value of inventories was $37.1 million and $32.3 million at December 29, 1996 and December 31, 1995, respectively. Application of the LIFO method resulted in a charge to cost of sales, buying and occupancy of $4.8 million, $4.9 million and $2.3 million for 1996, 1995 and 1994, respectively. Note 5. Property and Equipment The components of property and equipment at December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Land $ 237.5 $ 225.3 Buildings 412.1 386.6 Leasehold improvements 329.6 319.1 Fixtures and equipment 738.6 714.6 ------------ ------------ 1,717.8 1,645.6 Less: accumulated depreciation and amortization (563.4) (496.6) ------------ ------------ Net property owned 1,154.4 1,149.0 ------------ ------------ Capital leases 68.9 69.4 Less: accumulated amortization (29.1) (25.9) ------------ ------------ Net capital leases 39.8 43.5 ------------ ------------ Property and equipment, net $ 1,194.2 $ 1,192.5 ------------ ------------ ------------ ------------
Note 6. Accrued Current Liabilities The components of accrued current liabilities at December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Accrued payroll, benefits and related taxes $ 147.8 $ 134.6 Accrued self-insurance 33.2 37.2 Other 84.7 91.7 ------------ ------------ Accrued current liabilities $ 265.7 $ 263.5 ------------ ------------ ------------ ------------
Note 7. Senior and Subordinated Debt Senior and subordinated debt as of December 29, 1996 and December 31, 1995 were as follows (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Senior debt: Revolving Loan, interest at prime or Eurodollar rate plus designated amounts, due 2000 $ 6.0 $ 177.8 Mortgage, 9.25%, secured by real property, due in monthly installments of $1.0 million including interest, due 1997 110.8 113.0 Mortgages, 6.00% to 11.50%, secured by real property, due in varying monthly installments with maturity dates from 1997 to 2009 23.8 13.5 ------------ ------------ Total 140.6 304.3 Less: current portion 125.6 5.5 ------------ ------------ Long-term portion $ 15.0 $ 298.8 ------------ ------------ ------------ ------------ Subordinated debt: Senior subordinated debentures, 6-5/8%, less unamortized discount of $3.6 million and $7.2 million at December 29, 1996 and December 31, 1995, respectively, based on an effective interest rate of 12.5%, interest due in semiannual installments $ 58.9 $ 70.9 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 308.9 320.9 Less: current portion 24.4 15.2 ------------ ------------ Long-term portion $ 284.5 $ 305.7 ------------ ------------ ------------ ------------
On February 17, 1995, the Company entered into an agreement with a group of banks for a $625 million Revolving Loan Agreement (the "Revolving Loan"). The Revolving Loan 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 revolving debt is at prime or Eurodollar rate plus designated amounts. At the Company's option, the revolving debt may be used to support commercial paper borrowings, other unsecured bank borrowings and standby letters of credit outside the revolving debt. At December 29, 1996, borrowings under the Revolving Loan were $6.0 million and available unused credit under the Revolving Loan was $616.8 million. Weighted average interest costs for 1996, for the Revolving Loan were 7.0% excluding commitment fees on unused borrowings. At December 29, 1996, the corresponding bank prime rate was 8.25%. Commitment fees under the Revolving Loan and Revolving Credit and Term Loan Facilities were $.8 million, $1.2 million and $1.5 million for 1996, 1995 and 1994, respectively. 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 revolving debt. The contracts were purchased in 1992 to hedge principal amounts of $250 million for 1994, $200 million for 1995, and $100 million for 1996 and 1997 of interest rate exposure in excess of an approximate 8.225% effective borrowing rate under the revolving debt. The Company records interest expense or interest income related to interest rate cap contracts on a monthly basis. The Company's $110.8 million mortgage loan requires monthly principal and interest payments of approximately $1 million with a one-time principal and interest payment of $110.7 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 December 29, 1996, $25.0 million and $37.5 million are due on 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. On March 24, 1997, the Company requested the redemption of all outstanding 9-5/8% Debt effective April 28, 1997. 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 April 1 and October 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 December 29, 1996, and December 31, 1995, the carrying value of all financial instruments approximated fair value. 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 December 29, 1996. Under its most restrictive debt agreement, the Company had $119.0 million available for dividends and distributions at December 29, 1996. Principal payments required in future years are as follows (in millions of dollars):
Principal Payments ---------- 1997 $ 150.6 1998 38.5 1999 101.1 2000 7.2 2001 1.3 2002-2006 153.7 2007-2011 .7 ---------- Total principal payments 453.1 Less: current portion 150.6 ---------- Long-term portion $ 302.5 ---------- ----------
Standby letters of credit, primarily for self-insurance purposes, not reflected in the accompanying consolidated financial statements, were approximately $72.2 million and $73.3 million at December 29, 1996 and December 31, 1995 respectively. Note 8. Leases The Company currently leases certain of its stores, distribution facilities, vehicles and equipment for periods up to 50 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 ------------------------------------------ December 29, December 31, January 1, 1996 1995 1995 ------------ ------------ ------------ Minimum rentals $ 57.1 $ 55.7 $ 60.9 Contingent rentals 7.8 7.3 7.5 Sublease rentals received (7.8) (6.4) (4.7) ------------ ------------ ------------ Rental expense, net $ 57.1 $ 56.6 $ 63.7 ------------ ------------ ------------ ------------ ------------ ------------
Capital lease obligations, relating primarily to buildings, vary in amounts with interest rates ranging from 7.5% to 12.5%. Contingent rentals associated with capital leases were $1.6 million, $1.5 million and $1.4 million for 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating and capital leases, together with the present value of the net minimum lease payments, at December 29, 1996 were as follows (in millions of dollars):
Operating Capital Leases Leases --------- ------- 1997 $ 62.1 $ 9.8 1998 61.7 7.9 1999 60.1 7.3 2000 57.6 7.2 2001 54.3 6.0 2002-2006 247.6 29.8 2007-2011 158.2 20.2 2012-2016 81.5 11.2 2017-2021 9.6 5.4 Thereafter 1.5 - --------- ------- Total minimum lease commitments $ 794.2 104.8 --------- --------- Less: interest portion 49.6 ------- Present value of net minimum lease commitments 55.2 Less: current portion 4.9 ------- Long-term portion $ 50.3 ------- -------
Minimum sublease rentals to be received in the future under noncancellable operating and capital leases totaled $76.6 million at December 29, 1996. Effective September 1993, the Company became a partner of a California general partnership. This partnership has obligations for 16 retail leases for periods up to 21 years with various renewal options. It is the partnership's intent to assign or sublease its leasehold interest in all of these sites. Future minimum lease payments of the partnership under noncancellable operating leases at December 29, 1996 were as follows (in millions of dollars):
December 29, 1996 ------------ 1997 $ 3.4 1998 3.5 1999 3.4 2000 3.1 2001 2.9 2002-2006 12.8 2007-2011 7.7 2012-2016 2.8 ------------ Total minimum lease commitments $ 39.6 ------------ ------------
Minimum sublease rentals to be received by the partnership under noncancellable operating leases totaled $25.2 million at December 29, 1996. Note 9. 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 December 29, 1996 and December 31, 1995 (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefit of $47.9 million at December 29, 1996 and $44.1 million at December 31, 1995 $ 50.0 $ 46.2 ------------ ------------ ------------ ------------ Projected benefit obligation for service rendered to date $ (68.0) $ (63.6) Plan assets at fair value, primarily listed stocks and U.S. bonds 64.2 56.4 ------------ ------------ Projected benefit obligation in excess of plan assets (3.8) (7.2) Unrecognized net (gain) loss from past experience different from that assumed, unrecognized prior service cost and effects of changes in assumptions 10.2 15.0 ------------ ------------ Pension asset included in other noncurrent assets $ 6.4 $ 7.8 ------------ ------------ ------------ ------------
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% at December 29, 1996 and December 31, 1995. The expected long-term rate of return on assets and rate of increase in compensation levels were 9.0% and 4.5%, respectively, at December 29, 1996 and December 31, 1995. Net pension cost under the defined benefit pension plan for 1996, 1995 and 1994 included the following components (in millions of dollars):
Fiscal Year Ended -------------------------------------------- December 29, December 31, January 1, 1996 1995 1995 ------------ ------------ ------------ Service cost $ 2.9 $ 2.3 $ 3.4 Interest cost on projected benefit obligation 4.5 4.0 4.0 Actual return on plan assets (8.3) (10.6) .9 Net amortization and deferral 3.9 6.9 (4.4) ------------ ------------ ------------ Net pension cost $ 3.0 $ 2.6 $ 3.9 ------------ ------------ ------------ ------------ ------------ ------------
The Company's supplemental executive retirement plan provides supplemental income payments for certain officers during retirement. Total pension expense for all plans was $4.3 million, $3.4 million and $5.1 million for 1996, 1995 and 1994, respectively. The Company's contributory profit sharing plan for nonunion employees qualifies under Section 401(k) of the Internal Revenue Code. In 1996, the Company's contribution was five percent of each eligible employee's pay plus a one percent matching contribution for each eligible employee who elected to contribute at least one percent of their pay. For 1996, 1995, and 1994 total expense related to the Company's profit sharing plan was $6.3 million, $7.6 million and $5.3 million, 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 determined by the Company at the time of retirement. Effective December 31, 1995, the Company adopted modifications in its retiree medical plan which reduced the net retiree medical plan cost. Unused benefits 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 accumulated postretirement benefit obligation for the retiree medical plan as of December 29, 1996 and December 31, 1995 was as follows (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Accumulated retiree medical benefit obligation: Retirees $ 10.7 $ 10.4 Fully eligible active plan participants 1.5 1.7 Other active plan participants 5.7 5.9 Unrecognized net gain from unrecognized prior service cost and changes in assumptions 13.3 13.5 ------------ ------------ Accrued retiree medical benefit obligation $ 31.2 $ 31.5 ------------ ------------ ------------ ------------
For measurement purposes, a 6.0% annual increase in the cost of covered retiree medical benefits was assumed. A 1.0% increase in the retiree medical cost trend rate would increase the retiree medical benefit obligation at December 29, 1996 by $.6 million and the 1996 annual expense by $.1 million. The weighted average discount rate used in determining the accumulated retiree medical benefit obligation was 7.25% at December 29, 1996 and December 31, 1995. The net retiree medical plan cost for 1996, 1995 and 1994 included the following components (in millions of dollars):
Fiscal Year Ended ------------------------------------------ December 29, December 31, January 1, 1996 1995 1995 ------------ ------------ ------------ Service cost $ .3 $ .3 $ 1.2 Interest cost 1.2 1.3 2.1 Net amortization and deferral (.7) (.9) - ------------ ------------ ------------ Net retiree medical plan costs $ .8 $ .7 $ 3.3 ------------ ------------ ------------ ------------ ------------ ------------
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 December 29, 1996 is not available. Total pension expense for the union plans was $42.0 million, $19.8 million and $22.3 million for 1996, 1995 and 1994, 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 $108.7 million, $108.6 million and $125.9 million for 1996, 1995 and 1994, respectively. Note 10. Income Taxes The provision for income taxes for 1996, 1995 and 1994 was comprised of the following amounts (in millions of dollars):
Fiscal Year Ended -------------------------------------------- December 29, December 31, January 1, 1996 1995 1995 ------------ ------------ ------------ Current: Federal $ 55.5 $ 44.5 $ 24.7 State 14.1 12.7 5.2 ------------ ------------ ------------ Total current income tax provision 69.6 57.2 29.9 ------------ ------------ ------------ Deferred: Federal 8.1 .7 (.7) State 3.1 .8 (.8) ------------ ------------ ------------ Total deferred income tax provision 11.2 1.5 (1.5) ------------ ------------ ------------ Total income tax provision $ 80.8 $ 58.7 $ 28.4 ------------ ------------ ------------ ------------ ------------ ------------
Reconciliation of the Federal statutory rate and effective rate for 1996, 1995 and 1994 was as follows (in millions of dollars):
Fiscal Year Ended ------------------------------------------ December 29, December 31, January 1, 1996 1995 1995 ------------ ------------ ------------ Federal statutory expected provision $ 64.9 $ 44.4 $ 19.3 Amortization of excess of cost over net assets acquired 5.2 5.0 5.0 State income taxes, net of Federal income tax benefit 10.3 8.1 3.1 Other .4 1.2 1.0 ------------ ------------ ------------ Total income tax provision $ 80.8 $ 58.7 $ 28.4 ------------ ------------ ------------ ------------ ------------ ------------
Deferred income taxes consisted of future tax liabilities (assets) attributable to the following (in millions of dollars):
December 29, December 31, 1996 1995 ------------ ------------ Deferred tax liabilities: Excess of book over tax bases $ 146.9 $ 143.8 Excess of tax over book depreciation 95.2 92.8 ------------ ------------ Deferred tax liabilities 242.1 236.6 ------------ ------------ Deferred tax assets: Cash versus accrual basis (138.7) (144.0) Other, net (4.2) (4.6) ------------ ------------ Deferred tax assets (142.9) (148.6) ------------ ------------ Deferred income taxes, net $ 99.2 $ 88.0 ------------ ------------ ------------ ------------ /TABLE The Federal 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"). 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 11. Related Party Transactions Prior to July 1996, the Company leased 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 had a 50% interest in the California general partnership. In June 1996, the Company paid the Texas general partnership $2.9 million to acquire the Texas general partnership's interest in the assets of the California general partnership and the California general partnership was dissolved. During 1996, 1995 and 1994, the Company paid rent of $.8 million, $1.9 million and $1.9 million, respectively from which the partnership distributed $80,000, $250,000 and $70,000 to the Texas general partnership in such years, respectively. This distribution facility was closed in third quarter 1995. See Note 15 to the Consolidated Financial Statements. A wholly owned subsidiary of Safeway owns approximately 34.3% 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 1996, 1995 and 1994 of approximately $25.5 million, $27.0 million and $21.3 million, respectively. During 1995 and 1994, the Company sold certain inventory items to Safeway and its affiliates for an aggregate amount of approximately $6.4 million and $6.6 million, respectively. In 1996, the Company entered into a purchasing joint venture with Safeway and purchased $28.4 million of certain inventory and other items from the joint venture. 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 $.5 million, $.6 million and $.7 million in 1996, 1995 and 1994, respectively. In addition, the Company is secondarily liable to this partnership under four leases for which the annual minimum rental is $.2 million, all of which is currently being paid by assignees. 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 midterm 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 12. 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 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. Note 13. 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, options granted in May 1995 vest 15% per year beginning one year from the date of grant and 15% per year thereafter until the options are 100% vested. Options granted in May 1996 vest 15% per year beginning two years from the date of grant and 15% per year through the sixth year and 25% in the seventh year. Additionally, 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. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB25") and related Interpretations in accounting for its employee stock options. Under APB25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant no compensation expense is recognized. In 1996, the Company issued employee stock options with an exercise price below the market price of the underlying stock on the date of grant. In accordance with APB25, $1.3 million, $1.4 million and $1.5 million has been charged against income in 1996, 1995 and 1994, respectively. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards "Accounting for Stock-Based Compensation", ("SFAS No. 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.54% and 6.69%; dividend yields of 0% and 0%; volatility factors of the expected market price of the Company's common stock of 28.0% and 31.1% and a weighted-average expected life of the option of 6 years and 6 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option vesting period. The Company's pro forma information follows (in millions except for earnings per share information):
1996 1995 -------- -------- Net Income As reported $ 104.7 $ 68.1 Pro forma $ 104.3 $ 67.8 Primary earnings per share As reported $ 2.34 $ 1.55 Pro forma $ 2.33 $ 1.54 The effects of applying SFAS No. 123 for pro forma disclosure purposes are not likely to be representative of the effects on future years disclosure due to the timing of option vesting. /TABLE
Information regarding the Company's stock option plans is summarized below: 1987 Weighted Weighted Weighted Stock Average 1990 Average Directors' Average Option Exercise Stock Option Exercise Stock Option Exercise Plan Price Plan Price Plan Price -------- -------- ------------ -------- ------------ -------- Shares authorized 175,227 4,000,000 225,000 -------- ------------ ------------ -------- ------------ ------------ Shares under option: Outstanding at January 2, 1994 48,519 $ 9.28 1,991,229 $ 23.34 99,043 $ 23.81 Granted - - 1,164,009 13.77 52,028 15.83 Exercised 7,000 9.28 34,240 2.50 - Forfeited - - 416,142 23.11 20,144 25.32 -------- -------- ------------ -------- ------------ -------- Outstanding at January 1, 1995 41,519 $ 9.28 2,704,856 $ 19.53 130,927 $ 20.41 Granted - - 500,040 20.16 47,140 17.64 Exercised 22,801 9.28 130,666 8.28 - Forfeited - - 273,922 23.33 - -------- -------- ------------ -------- ------------ -------- Outstanding at December 31, 1995 18,718 $ 9.28 2,800,308 $ 19.79 178,067 $ 19.68 Granted - - 515,030 31.55 22,458 28.83 Exercised 15,843 9.28 434,945 23.75 - - Forfeited - - 50,135 20.99 - - -------- -------- ------------ -------- ------------ -------- Outstanding at December 29, 1996 2,875 $ 9.28 2,830,258 $ 21.30 200,525 $ 20.70 -------- -------- ------------ -------- ------------ -------- -------- -------- ------------ -------- ------------ -------- Weighted-average fair value of options granted during the year: 1995 $ - $ 8.96 $ 9.83 1996 $ - $ 20.18 $ 14.64 Options exercisable: At January 1, 1995 40,394 1,143,966 62,864 At December 31, 1995 17,593 1,372,726 109,290 At December 29, 1996 2,875 1,439,816 147,678
The following table summarizes information about stock options outstanding at December 29, 1996:
Options Outstanding Options Exercisable --------------------------------- ----------------------- Number Number Outstanding Weighted Weighted Exercisable Weighted At Average Average At Average December 29, Remaining Exercise- December 29, Exercise Range of Exercise Prices 1996 Life Price 1996 Price - ------------------------ ------------ --------- --------- ------------ -------- $ 4.00 - 6.00 272,500 7.3 years $ 4.15 181,666 $ 4.15 9.00 - 13.50 2,875 .6 9.28 2,875 9.28 14.23 - 21.35 1,390,115 7.2 18.13 675,565 17.97 $21.89 - 33.00 1,368,168 7.1 27.85 730,263 25.92 ------------ ------------ 3,033,658 7.2 21.25 1,590,369 20.03 ------------ ------------ ------------ ------------ /TABLE The Company's Employee 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 14. Advertising Expense The Company expenses the costs of advertising as incurred. Total advertising expense was $40.3 million, $44.1 million and $42.8 million in 1996, 1995 and 1994, respectively. Note 15. 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, including 16 stores and the San Diego distribution facility. 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. All of the cost containment and strategic restructuring initiatives have been executed. Of the total $89.9 million restructuring reserve, $83.9 million of costs and payments have been charged against the reserve as of December 29, 1996, representing asset write-offs and lease obligations for closed facilities of $64.1 million and severance and other related expenses of $19.8 million. Note 16. Quarterly Financial Data (Unaudited) The results of operations for 1996 and 1995 were as follows (in millions except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year 1996 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks) ----------- ----------- ----------- ----------- Sales $ 1,205.6 $ 1,261.0 $ 1,676.6 $ 1,264.2 Gross profit (1) 307.3 323.6 419.9 323.9 Amortization of excess cost over net assets acquired 3.5 3.4 4.7 3.4 Operating income 45.3 53.1 68.2 74.5 Interest expense, net 13.5 13.3 16.6 12.2 Net income $ 17.5 $ 22.7 $ 29.4 $ 35.1 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income per common and common equivalent share: Net income $ .39 $ .51 $ .66 $ .78 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares 44.5 44.6 44.7 45.0 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year 1995 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks) ----------- ----------- ----------- ----------- Sales $ 1,142.5 $ 1,139.5 $ 1,565.3 $ 1,223.4 Gross profit (1) 291.5 289.6 390.7 308.7 Amortization of excess cost over net assets acquired 3.4 3.5 4.7 3.4 Operating income 42.2 42.8 54.4 54.7 Interest expense, net 16.1 15.7 20.1 15.4 Net income $ 14.0 $ 14.5 $ 18.5 $ 21.1 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income per common and common equivalent share: Net income $ .32 $ .33 $ .42 $ .48 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares 43.8 43.8 44.0 44.3 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (1) Gross profit represents sales net of cost of sales, buying and occupancy costs.
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 - ------- ---------------------- -------------------------- 24 Independent Auditors' Consent. 27 Financial Data Schedule. Management Contracts or Compensatory Plans or Arrangements: 10.7.2 Amendment dated December 13, 1996 to 1990 Stock Option and Restricted Stock Plan dated January 24, 1990. 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 - ------- ---------------------- ------------------------------ 2.1 Agreement and Plan of Merger Exhibit 2.1 to Registrant's dated as of December 15, 1996 Report on Form 8-K dated by and among Safeway, Inc., December 15, 1996. SSCI Merger Sub, Inc. and The Vons Companies, Inc. 2.1.1 Amendment to Agreement and Exhibit 2.1 to Safeway, Inc. Plan of merger dated as of Report on Form 8-K dated December 15, 1996 by and January 8, 1997. among Safeway, Inc., SSCI Merger Sub, Inc. and The Vons Companies, Inc. 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. 10.1 Revolving Loan Agreement Exhibit 10.1.6 to Registrant's dated February 17, 1995 Quarterly Report on Form 10-Q by and among the Registrant, for quarter ended March 26, 1995. the banks named therein, and Bank of America NT & SA and The Chase Manhattan Bank, N.A. as managing agents. 10.1.1 Amendment to Revolving Loan Exhibit 10.1.7 to Registrant's Agreement dated February 17, Quarterly Report on Form 10-Q 1995 by and among the for quarter ended October 8, Registrant, the banks named 1995. therein, and Bank of America NT & SA and The Chase Manhattan Bank, N.A. as managing agents. 10.2 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. 10.3 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. 10.3.1 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. 10.3.2 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. 10.4 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. 10.5 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. Management Contracts or Compensatory Plans or Arrangements: 10.6 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. 10.7 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. 10.7.1 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. 10.8 Directors' Stock Option Plan Appendix A to Registrant's dated September 17, 1991. Proxy Statement for Annual Meeting of Shareholders on May 13, 1992. 10.9 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." 10.9.1 The Vons Companies, Inc. Exhibit 10.9.1 to Registrant's Amended and Restated Severance Quarterly Report on Form 10-Q Plan for Senior Management and for quarter ended October 6, Key Employees dated July 15, 1996. 1996. 10.10 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. 10.11 The Vons Companies, Inc. Exhibit 10.27 to Registrant's 401(k) Wrap-Around Plan Annual Report on Form 10-K effective October 18, 1993. for fiscal year ended January 2, 1994. 10.11.1 Amendment 1994-1 dated Exhibit 10.11.1 to Registrant's December 23, 1994 to The Annual Report on Form 10-K for Vons Companies, Inc. 401(k) fiscal year ended December 31, Wrap-Around Plan effective 1995. October 18, 1993. 10.11.2 Amendment 1996-1 dated Exhibit 10.11.2 to Registrant's February 20, 1996 to The Quarterly Report on Form 10-Q Vons Companies, Inc., 401(k) for quarter ended March 24, 1996. Wrap-Around Plan effective January 1, 1996. 10.12 Employment Agreement between Exhibit 10.28 to Registrant's the Registrant and Lawrence A. Quarterly Report on Form 10-Q Del Santo dated April 26, 1994. for quarter ended June 19, 1994. 10.13 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. 10.14 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. 10.15 Employment Arrangement Exhibit 10.24 to Registrant's between the Registrant Quarterly Report on Form 10-Q and Terry R. Peets for quarter ended October 8, dated September 6, 1995. 1995. 10.16 Severance Agreement Exhibit 10.25 to Registrant's between the Registrant Quarterly Report on Form 10-Q and Terry R. Peets for quarter ended October 8, dated September 6, 1995. 1995. 10.17 The Vons Companies, Inc. 1996 Exhibit 10.17 to Registrant's Officer and Administrative Annual Report on Form 10-K for Bonus Plan. fiscal year ended December 31, 1995. EX-24 2 Exhibit 24 [This page appears on KPMG Peat Marwick LLP letterhead] ACCOUNTANTS' 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 January 17, 1997, except for the penultimate sentence of paragraph five of note 7 which is as of March 27, 1997, relating to the consolidated balance sheets of The Vons Companies and subsidiaries as of December 29, 1996 and December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the fifty-two week periods ended December 29, 1996, December 31, 1995 and January 1, 1995 which report appears in the December 29, 1996 annual report on Form 10-K of The Vons Companies, Inc. /s/ KPMG Peat Marwick LLP March 27, 1997 EX-27 3
5 This schedule contains summary financial information extracted from the Company's Consolidated Statement of Operations for the fifty-two weeks ended December 29, 1996, the Consolidated Balance Sheet as of December 29, 1996 and the accompanying notes thereto and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-29-1996 DEC-29-1996 9,300 0 45,000 0 335,300 464,900 1,786,700 592,500 2,185,400 759,800 349,800 0 0 4,400 734,000 2,185,400 5,407,400 5,407,400 4,032,700 4,032,700 0 0 55,600 185,500 80,800 104,700 0 0 0 104,700 2.34 2.34
EX-10.7.2 4 Exhibit 10.7.2 The Vons Companies, Inc. Amendment to 1990 Stock Option and Restricted Stock Plan The Vons Companies, Inc. 1990 Stock Option and Restricted Stock Plan (the "Plan") is hereby amended, effective as of December 13, 1996, as set forth below. 1. There is hereby inserted in Article I of the Plan, after Section 1.8 and before Section 1.9 thereof, a Section 1.8A, reading in its entirety as follows: Section 1.8A Involuntary Termination: "Involuntary Termination" of an Optionee's employment shall mean (a) in the case of an Optionee who is, at the time of such termination of employment, a "Designated Employee" covered by the Company's Amended and Restated Severance Plan for Senior Management and Key Employees, any termination of employment that gives rise to an entitlement to severance compensation pursuant to Section 4 of such plan; and (b) in the case of all other Optionees, a termination of the Optionee's employment by the Company or one of its Subsidiaries (as applicable) other than (x) for Cause where "Cause" is defined as the Optionee (i) commission of acts constituting a crime of moral turpitude (other then driving under the influence of alcohol), (ii) conduct which is malicious or known or intended to be contrary to the best interest of the Company or any of its subsidiaries and which causes material harm to the Company or such Subsidiary (as applicable), (iii) habitual neglect of duty if the Optionee shall have been given five (5) business days' written notice by the Company or such Subsidiary (as applicable) of such habitual neglect and such habitual neglect shall not have been cured prior to the expiration of such five (5) business day period; provided however, that a termination of employment shall not be considered to be for Cause unless the Optionee shall have been advised in writing at the time of his or her termination that the termination is for Cause, with a reasonable specification in such writing of the facts constituting Cause, or (iv) nonperformance which results in a termination of employment in accordance with the Company's written policies and practices and in effect in the period preceding a Change of Control, or (y) as a result of a Scheduled Store Closing where "Scheduled Store Closing" is defined as the closing by the Company of a store during the two-year period following a Change of Control when such store was scheduled to be closed in the Company's Key Budget as in existence at least three months prior to the Change of Control and is reflected in the Company's schedules to a definitive merger agreement relating to the Change of Control. 2. Section 4.3(d) is amended by replacing the phase "Notwithstanding any other provision of this Plan" at the beginning thereof with the phrase "Except as otherwise provided in Section 4.3(e) and Section 4.7 hereof". 3. Section 4.3 is hereby amended by inserting at the end thereof a new subsection (e), reading in its entirety as follows: (e) Notwithstanding any other provision of this Plan, upon the Involuntary Termination of an Optionee's employment during the two-year period after the occurrence of a Change of Control by reason of the acquisition of the Company by Safeway, Inc., all Options held by such Optionee shall become immediately vested and exercisable to the extent not therefore exercised, whether or not they are then exercisable in the ordinary course of business (notwithstanding any contrary restrictions the may be contained elsewhere in this Plan, in the written Stock Option Agreement or otherwise), and shall remain exercisable until the close of business on the 30th day following such Involuntary Termination, but in any case no later than the original expiration date of such Option. 4. The foregoing amendments shall apply to, and shall be deemed to amend, as of the date hereof, all Options that are outstanding as of the date hereof. 5. Except as otherwise specified herein, the Plan is hereby ratified without amendment. 6. Nothing in this Amendment is intended to or shall compromise the right of the Company and its subsidiaries to terminate the Optionee's employment at any time with or without notice or with or without cause. lelra\056 -----END PRIVACY-ENHANCED MESSAGE-----