<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 28, 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 1-41
SAFEWAY INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3019135
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
5918 Stoneridge Mall Road
Pleasanton, California 94588
----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 467-3000
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $0.01 par value per share New York and Pacific Stock Exchanges
9.30% Senior Secured Debentures due 2007 New York Stock Exchange
10% Senior Notes due 2002 New York Stock Exchange
9.35% Senior Subordinated Notes due 1999 New York Stock Exchange
10% Senior Subordinated Notes due 2001 New York Stock Exchange
9.65 Senior Subordinated Debentures due 2004 New York Stock Exchange
9.875% Senior Subordinated Debentures due 2007 New York Stock Exchange
</TABLE>
(Cover continued on following page)
<PAGE> 2
(Cover continued from previous page)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K ____.
Aggregate market value of the voting stock held by non-affiliates of Registrant
as of March 14, 1997, was $5.5 billion. As of March 14, 1997, there were
issued and outstanding 222.1 million shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the extent specified
herein:
<TABLE>
<CAPTION>
Document Description 10-K Part
-------------------- ---------
<S> <C>
1996 Annual Report to Stockholders I, II, III, IV
1997 Proxy Statement dated March 24, 1997 III
</TABLE>
<PAGE> 3
SAFEWAY INC. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES
GENERAL:
Information appearing under the caption "Company in Review" beginning on page
12 of the Company's 1996 Annual Report to Stockholders is incorporated herein
by this reference.
RETAIL OPERATIONS:
Information appearing under the captions "Retail Operations" and "Distribution"
on pages 12 and 13 of the Company's 1996 Annual Report to Stockholders is
incorporated herein by this reference.
MANUFACTURING AND WHOLESALE OPERATIONS:
Information appearing under the caption "Manufacturing and Wholesale
Operations" on page 13 of the Company's 1996 Annual Report to Stockholders is
incorporated herein by this reference.
Various agricultural commodities constitute the principal raw materials used by
the Company in the manufacture of its food products. Management believes that
raw materials for its products are not in short supply, and all are readily
available from a wide variety of independent suppliers.
CAPITAL EXPENDITURES:
Information appearing under the caption "Capital Expenditure Program" on page
14 of the Company's 1996 Annual Report to Stockholders is incorporated herein
by this reference.
Safeway's new stores, remodels, and closures during the last five years were as
follows:
<TABLE>
<CAPTION>
Total
Five
Years 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
New stores:
New locations 50 14 10 6 8 12
Replacements 81 16 22 14 6 23
---- ---- ---- ---- ---- ----
131 30 32 20 14 35
---- ---- ---- ---- ---- ----
Remodels: (Note A)
Expansions 99 29 13 7 27 23
"Four-Wall" remodels 329 112 95 64 18 40
---- ---- ---- ---- ---- ----
428 141 108 71 45 63
---- ---- ---- ---- ---- ----
Closures 196 37 35 36 39 49
Stores at year-end 1,052 1,059 1,062 1,078 1,103
</TABLE>
Note A. Defined as store projects (other than maintenance) generally requiring
expenditures in excess of $200,000.
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
This information is omitted because the Company has no significant lines of
business or industry segments except the principal business of operating retail
supermarkets.
TRADEMARKS:
The Company has invested significantly in the development and protection of the
"Safeway" name. The right to use the "Safeway" name is considered to be an
important asset. Safeway also owns approximately 75 other trademarks
registered or pending in the United States Patent and Trademark Office,
including its product line names such as Safeway, Safeway SELECT, Lucerne, and
Mrs. Wright's. Each trademark registration is for an initial period of 10 or
20 years and is renewable for as long as the use of the trademark continues.
Safeway considers certain of its trademarks to be of material importance to its
business and actively defends and enforces such trademarks. Safeway has also
registered certain of its trademarks in Canada.
WORKING CAPITAL:
At year-end 1996, working capital deficit was composed of $1.7 billion of
current assets and $2.0 billion of current liabilities. Normal operating
fluctuations in these substantial balances can result in changes to cash flow
from operations presented in the Consolidated Statements of Cash Flows that are
not necessarily indicative of long-term operating trends. There are no unusual
industry practices or requirements relating to working capital items.
COMPETITION:
Food retailing is intensely competitive. The number of competitors and the
amount of competition experienced by Safeway's stores vary by market area. The
principal competitive factors that affect the Company's business are location,
quality, service, price and consumer loyalty to other brands and stores.
Local, regional, and national food chains as well as independent food stores
and markets comprise the principal competition, although Safeway also faces
substantial competition from convenience stores, liquor retailers, membership
warehouse clubs, specialty retailers, supercenters, and large-scale drug and
pharmaceutical chains. Safeway and its competitors engage in price competition
which, from time to time, has adversely affected operating margins in many of
its markets.
COMPLIANCE WITH ENVIRONMENTAL LAWS:
The Company's compliance with the federal, state, and local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment or otherwise relate to the protection of the environment has not
had and is not expected to have a material adverse effect upon the financial
position or results of operations of the Company.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES (CONTINUED)
EMPLOYEES:
At year-end 1996, Safeway had approximately 119,000 full and part-time
employees. Approximately 90% of Safeway's employees in the United States and
Canada are covered by collective bargaining agreements negotiated with local
unions affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three-year terms, with some
agreements having terms up to five years. Accordingly, Safeway renegotiates a
significant number of the these agreements every year.
In the last three years, despite the large number of negotiations, there have
only been three significant work stoppages. During the second and third
quarters of 1996, Safeway was engaged in a labor dispute in British Columbia
which lasted 40 days and affected 86 stores. Under Provincial law in British
Columbia, replacement workers could not be hired, and therefore all the
affected stores were closed throughout the strike-lockout. Separately, the
Company was engaged in a strike-lockout in the Denver operating area which
lasted 44 days also during the second and third quarters of 1996. All of the
Denver stores operated during the strike-lockout, largely with replacement
workers. A nine-day strike during the second quarter of 1995 affected 208
stores in northern California. These work stoppages were resolved in a manner
that management considered generally satisfactory. Safeway estimates that the
combined impact of the disputes in Denver and British Columbia reduced 1996
earnings by approximately $0.14 per share, and that the dispute in northern
California reduced 1995 earnings by an estimated $0.025 per share.
Of Safeway's approximately 107,000 unionized employees, approximately 7,000 in
four operating areas are covered by labor contracts which are scheduled to
expire in 1997. While Safeway believes that its relationship with its employees
is good, there can be no assurance that contracts covering such 7,000
employees, or that labor contracts which come up for renewal after 1997, will
be renewed. Failure to renew contracts covering a significant number of
employees leading to work stoppages could have an adverse effect on Safeway's
results of operations.
In addition, labor contracts covering approximately 10,000 employees in 74
stores in the Alberta, Canada operating area expired in March 1996.
Representatives of the Company and the unions have held negotiations for a
contract renewal periodically since June 1996, but have not agreed on a new
contract. A government appointed mediator was engaged on Saturday, March 1,
1997. On March 4, 1997, talks broke off. After a government mandated cooling
off period which expired March 18, union members at 73 stores gave a strike
authorization vote to the union leadership. The Company presented a final
offer to the union leadership on March 24. In spite of a request by the Company
to vote the offer prior to a strike, the unions took strike action at 12:01
a.m. on Wednesday March 26, 1997. The union has agreed to vote the offer on
March 31 through April 2. The Company intends to operate the stores with
replacement workers for the duration of the strike. Although Safeway is unable
to determine the financial impact of the strike at this time, sales and
operating results are expected to be adversely affected for as long as the
strike continues.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES:
Note L to the consolidated financial statements, included on page 36 of the
Company's 1996 Annual Report to Stockholders and incorporated herein by this
reference, contains financial information by geographic area. At year-end
1996, the Company's foreign operations were composed of retail grocery and
wholesale operations in Canada and a 49% equity investment in Casa Ley, S.A. de
C.V. ("Casa Ley"), a Mexican company. In 1995, Mexico suffered from high
interest rates and inflation which adversely affected Casa Ley. During 1996,
interest rates and inflation in Mexico have moderated and Casa Ley's financial
results have gradually improved. Other than the competitive nature of the
retail food business and the economic situation in Mexico, the Company is not
aware of any significant risks of operating in these foreign countries.
The Company's policy for translating Casa Ley's financial statements into U.S.
dollars is described under the caption "Translation of Foreign Currencies" on
page 25 of the Company's 1996 Annual Report. Casa Ley had total assets of
$263.1 million and $276.9 million as of September 30, 1996 and 1995, based on
financial information provided by Casa Ley. Sales and net income for Casa Ley
were as follows (in millions):
<TABLE>
<CAPTION>
12 months ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $810.1 $861.4 $1,052.4
====== ====== ========
Net income $33.8 $17.9 $32.0
===== ===== =====
</TABLE>
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
ITEM 3. LEGAL PROCEEDINGS
Information about legal proceedings appearing under the caption "Legal Matters"
as reported in Note K to the consolidated financial statements on page 35 of
the Company's 1996 Annual Report to Stockholders is incorporated herein by this
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The names and ages of the current executive officers of the Company and their
positions as of March 18, 1997, are set forth below. Unless otherwise
indicated, each of the executive officers served in various managerial
capacities with the Company over the past five years. None of the executive
officers named below is related to any other executive officer or director by
blood, marriage or adoption. Officers serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
Name and all Positions with the Company Year First Elected
Held at March 18, 1997 Age Officer Present Office
- ---------------------- --- ------- --------------
<S> <C> <C> <C>
Steven A. Burd (1) 47 1992 1992
President and Chief Executive Officer
David T. Ching (2) 44 1994 1994
Senior Vice President and
Chief Information Officer
F. J. Dale 52 1982 1991
Group Vice President
Finance
Julian C. Day (3) 44 1993 1993
Executive Vice President and
Chief Financial Officer
E. Richard Jones 52 1983 1988
Executive Vice President
Supply Operations
Kenneth W. Oder (4) 49 1993 1993
Executive Vice President
Labor Relations, Human Resources, Law and Public Affairs
Diane Peck 48 1990 1995
Senior Vice President
Human Resources
Melissa C. Plaisance 37 1993 1995
Senior Vice President
Finance and Public Affairs
</TABLE>
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
ITEM 4. EXECUTIVE OFFICERS OF THE COMPANY (CONTINUED)
<TABLE>
<CAPTION>
Name and all Positions with the Company Year First Elected
Held at March 18, 1997 Age Officer Present Office
- ---------------------- --- ------- --------------
<S> <C> <C> <C>
Larree M. Renda 38 1991 1994
Senior Vice President
Corporate Retail Operations
Michael C. Ross (4) 49 1993 1993
Senior Vice President
Secretary and General Counsel
Gary D. Smith 54 1988 1995
Senior Vice President and
Director of Marketing
Richard A. Wilson 63 1988 1988
Vice President
Tax
Donald P. Wright 44 1991 1991
Senior Vice President
Real Estate and Engineering
</TABLE>
- -------------------------------
(1) Previously the owner of Burd & Associates, a management consulting firm.
(2) During 1994, Mr. Ching was the General Manager - North America for the
British American Consulting Group. From 1979 to 1994, he was employed by
Lucky Stores, Inc., where he was the Senior Vice President of Information
Systems beginning in 1989.
(3) Previously self-employed as an independent consultant.
(4) Previously a partner at the law firm of Latham & Watkins.
Section 16(a) Beneficial Ownership. Information appearing under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997
Proxy Statement is incorporated herein by this reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $0.01 par value, is listed on the New York Stock
Exchange and the Pacific Stock Exchange. Information as to quarterly sales
prices for the Company's common stock appears in Note M to the consolidated
financial statements on page 37 of the Company's 1996 Annual Report to
Stockholders and is incorporated herein by this reference. There were 7,674
stockholders of record as of March 14, 1997; however, approximately 49% of the
Company's outstanding stock is held in "street name" by depositories or
nominees on behalf of beneficial holders. The price per share of common stock,
as reported on the New York Stock Exchange Composite Tape, was $49 3/4 at the
close of business on March 14, 1997.
Safeway intends to delist from the Pacific Stock Exchange in early April, 1997.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (CONTINUED)
Holders of common stock are entitled to receive dividends if, as, and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and subject to the dividend restrictions in the Credit Agreement and
the indentures relating to the Notes and Debentures. Information as to
dividend restrictions is included in the first paragraph under the caption
"Restrictive Covenants" in Note C to the consolidated financial statements on
page 28 of the Company's 1996 Annual Report to Stockholders and is incorporated
herein by this reference. The Company has not paid dividends on common stock
through 1996 and has no current plans for dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
The "Five-Year Summary Financial Information" included on page 15 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by this
reference. The Five-Year Summary should be read in conjunction with the
Company's consolidated financial statements and accompanying notes incorporated
by reference in Item 8, Consolidated Financial Statements and Supplementary
Data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information appearing under the caption "Financial Review" on pages 16 through
18 and under the caption "Capital Expenditure Program" on page 14 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by this
reference.
Information regarding the terms of outstanding indebtedness appearing in Note C
to the consolidated financial statements on pages 27 through 29 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by this
reference.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, Safeway adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 121 establishes recognition and measurement criteria for impairment
losses when the Company no longer expects to recover the carrying value of a
long-lived asset. Safeway's existing policy for long-lived assets complies
with SFAS No. 121. Therefore, the adoption of SFAS No. 121 did not have a
material effect on the Company's Consolidated Financial Statements. Upon the
decision to close a store or other facility, the Company accrues estimated
future losses, if any, which may include lease payments or other costs of
holding the facility, net of estimated future income. As of year-end 1996,
Safeway had an accrued liability of $27.6 million for the anticipated future
closure of 35 stores and $19.8 million for the anticipated future closure of
other facilities.
STOCK-BASED COMPENSATION
Safeway accounts for stock-based awards to employees using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Safeway elected to adopt the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1996.
LABOR RELATIONS
Of Safeway's approximately 107,000 unionized employees, approximately 7,000 in
four operating areas are covered by labor contracts which are scheduled to
expire in 1997. While Safeway believes that its relationship with its employees
is good, there can be no assurance that contracts covering such 7,000
employees, or that labor contracts which come up for renewal after 1997, will
be renewed. Failure to renew contracts covering a significant number of
employees leading to work stoppages could have an adverse effect on Safeway's
results of operations.
In addition, labor contracts covering approximately 10,000 employees in 74
stores in the Alberta, Canada operating area expired in March 1996.
Representatives of the Company and the unions have held negotiations for a
contract renewal periodically since June 1996, but have not agreed on a new
contract. A government appointed mediator was engaged on Saturday, March 1,
1997. On March 4, 1997, talks broke off. After a government mandated cooling
off period which expired March 18, union members at 73 stores gave a strike
authorization vote to the union leadership. The Company presented a final offer
to the union leadership on March 24. In spite of a request by the Company to
vote the offer prior to a strike, the unions took strike action at 12:01 a.m.
on Wednesday March 26, 1997. The union has agreed to vote the offer on March 31
through April 2. The Company intends to operate the stores with replacement
workers for the duration of the strike. Although Safeway is unable to determine
the financial impact of the strike at this time, sales and operating results
are expected to be adversely affected for as long as the strike continues.
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 19 through 39 of the Company's 1996 Annual Report to Stockholders, which
include the consolidated financial statements, Computation of Earnings Per
Common Share and Common Share Equivalent listed as Exhibit 11.1 to Item 14(a)3,
and the Independent Auditors' Report as listed in Item 14(a)1, are incorporated
herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors of the Company. Information on the nominees for election as
Directors and the continuing Directors of the Company, which appears under the
caption "Election of Directors" in the Company's 1997 Proxy Statement, is
incorporated herein by this reference.
Executive Officers of the Company. See PART I under the caption "Executive
Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Executive Compensation" and "Pension
Plans" in the Company's 1997 Proxy Statement is incorporated herein by this
reference. Information appearing under the captions "Report of the
Compensation and Stock Option Committee" and "Stock Performance Graph" in the
Company's 1997 Proxy Statement is not incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Beneficial Ownership of Securities" in
the Company's 1997 Proxy Statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note J to the consolidated financial statements, included on pages 34 and 35 of
the Company's 1996 Annual Report to Stockholders, and the captions "Certain
Relationships and Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Company's 1997 Proxy Statement contain
information about certain relationships and related transactions and are
incorporated herein by this reference.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. Consolidated Financial Statements of the Company are incorporated by
reference in PART II, Item 8:
Consolidated Statements of Income for fiscal 1996, 1995, and 1994.
Consolidated Balance Sheets as of the end of fiscal 1996 and 1995.
Consolidated Statements of Cash Flows for fiscal 1996, 1995, and 1994.
Consolidated Statements of Stockholders' Equity for fiscal 1996, 1995, and
1994.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Consolidated Financial Statement Schedules:
None required
3. The following exhibits are filed as part of this report:
Exhibit 2.1 Agreement and Plan of Merger dated as of December 15, 1996, by
and among Safeway Inc., SSCI Merger Sub, Inc. and The Vons
Companies, Inc., as amended on January 8, 1997 (incorporated by
reference to Exhibit 2.1 to Safeway Inc. Form S-4 dated March
5, 1997).
Exhibit 2.2 Amended and Restated Stock Repurchase Agreement, dated as
of January 8, 1997 by and between Safeway Inc. and SSI
Associates, L.P. (incorporated by reference to Exhibit 2.1 to
Safeway Inc.'s Current Report on Form 8-K dated January 8,
1997.
Exhibit 3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Registration
Statement No. 33-33388).
Exhibit 3.2 Form of By-laws of the Company as amended (incorporated by
reference to Exhibit 3.2 to Registration Statement No.
33-33388), and Amendment to the Company's By-laws effective
March 8, 1993 (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended January 2, 1993).
Exhibit 4(i).1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4(i).2 to Registration Statement No. 33-33388).
Exhibit 4(i).2 Registration Rights Agreement dated November 25, 1986
between the Company and certain limited partnerships
(incorporated by reference to Exhibit 4(i).4 to Registration
Statement No. 33-33388).
Exhibit 4(i).3 Indenture dated as of November 20, 1991 among the
Company and The Bank of New York, as Trustee, relating to the
Company's Senior Subordinated Debt Securities (incorporated by
reference to Exhibit 4.1 of Registrant's Form 8-K dated
November 13, 1991).
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i). 4 Form of Officers' Certificate establishing the terms of
the 10% Senior Subordinated Notes due December 1, 2001,
including the form of Note (incorporated by reference to
Exhibit 4.4 of Registrant's Form 8-K dated November 13, 1991).
Exhibit 4(i).5 Form of Officers' Certificate establishing the terms of
the 9.65% Senior Subordinated Debentures due January 15, 2004,
including the form of Debenture (incorporated by reference to
Exhibit 4.1 of Registrant's Form 8-K dated January 15, 1992).
Exhibit 4(i).6 Indenture dated as of February 1, 1992 between the
Company and The First National Bank of Chicago, as Trustee,
relating to the Company's 9.30% Senior Secured Debentures due
2007, including the form of Debenture and the forms of Deed of
Trust and Environmental Indemnity Agreement attached as
exhibits thereto (incorporated by reference to Exhibit 4(i).14
of Registrant's Form 10-K for the year ended December 28,
1991).
Exhibit 4(i).7 Indenture dated as of March 15, 1992 between the
Company and Harris Trust and Savings Bank, as Trustee,
relating to the Company's Senior Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 of Registrant's Form
8-K dated March 17, 1992).
Exhibit 4(i).8 Form of Officers' Certificate establishing the terms of
the 9.35% Senior Subordinated Notes due March 15, 1999 and the
9.875% Senior Subordinated Debentures due March 15, 2007,
including the form of Note and form of Debenture (incorporated
by reference to Exhibit 4.2 of Registrant's Form 8-K dated
March 17, 1992).
Exhibit 4(i).9 Indenture dated as of September 1, 1992 between the
Company and The Chase Manhattan Bank (National Association),
as Trustee, relating to the Company's Debt Securities
(incorporated by reference to Exhibit 4.1 of Registrant's Form
8-K dated September 16, 1992).
Exhibit 4(i).10 Form of Officers' Certificate relating to the
Company's Fixed Rate Medium-Term Notes and the Company's
Floating Rate Medium-Term Notes, form of Fixed Rate Note and
form of Floating Rate Note (incorporated by reference to
Exhibits 4.2, 4.3 and 4.4 of Registrant's Form 8-K dated
September 16, 1992).
Exhibit 4(i).11 Form of Officers' Certificate establishing the terms
of a separate series of Safeway Inc.'s Medium-Term Notes
entitled 10% Senior Notes due November 1, 2002, including the
form of Note (incorporated by reference to Exhibits 4.1 and
4.2 of Registrant's Form 8-K dated November 5, 1992).
Exhibit 4(i).12 Form of Officers' Certificate establishing the terms
of a separate series of Safeway Inc.'s Medium-Term Notes
entitled Medium-Term Notes due June 1, 2003 (Series OPR-1),
including the form of Note (incorporated by reference to
Exhibits 4.1 and 4.2 of Registrant's Form 8-K dated June 1,
1993).
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 4(i).13 Common Stock Purchase Warrants to purchase 23,405,953 shares
of Safeway Inc. common stock
Exhibit 4(i).14 Credit Agreement dated as of May 24, 1995 among
Safeway Inc., Canada Safeway Limited, and Lucerne Foods Ltd.,
as Borrowers, Bankers Trust Company, as Administrative Agent,
The Bank of Nova Scotia, as Documentation Agent, The Chase
Manhattan Bank, N.A., Chemical Bank, and Citicorp USA, Inc.,
as Co-Agents, the Lead Managers listed therein, as Lead
Managers, and the lenders listed therein, as Lenders
(incorporated by reference to Exhibit 4(i).16 of the
Registrant's Form 10-Q for the quarterly period ended June
17, 1995).
Exhibit 4(i).15 Commitment Letter from Bankers Trust Company dated February
10, 1997 (incorporated by reference to Exhibit 4.14 to
Registration Statement No. 333-22837).
Exhibit 4(i).16 Commitment Letter from The Chase Manhattan Bank dated
February 11, 1997 (incorporated by reference to Exhibit 4.15
to Registration Statement No. 333-22837).
Exhibit 4(i).17 Commitment Letter from the Bank of Nova Scotia dated
February 19, 1997 (incorporated by reference to Exhibit 4.16
to Registration Statement No. 333-22837).
Exhibit 4(i).18 Commitment Letter from Bank of America dated February 21,
1997 (incorporated by reference to Exhibit 4.17 to
Registration Statement No. 333-22837).
Exhibit 4(iii) Registrant agrees to provide the Securities and
Exchange Commission, upon request, with copies of instruments
defining the rights of holders of long-term debt of the
Registrant and all of its subsidiaries for which consolidated
financial statements are required to be filed with the
Securities and Exchange Commission.
Exhibit 10(iii).1* Safeway Inc. Outside Director Equity Purchase Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 33-36753), and First Amendment to the Safeway
Inc. Outside Director Equity Purchase Plan dated as of July
5, 1994 (incorporated by reference to Exhibit 10(iii).1 to
Registrant's Form 10-Q for the quarterly period ended
September 10, 1994).
Exhibit 10(iii).2* Share Appreciation Rights Plan of Canada Safeway
Limited (incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).17 to
Registrant's Form 10-K for the year ended December 28, 1991).
Exhibit 10(iii).3* Share Appreciation Rights Plan of Lucerne Foods Ltd.
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 29, 1990)
and Amendment No. 1 thereto dated December 13, 1991
(incorporated by reference to Exhibit 10(iii).18 to
Registrant's Form 10-K for the year ended December 28, 1991).
Exhibit 10(iii).4* Letter Agreement dated March 24, 1993 between the
Company and Peter A. Magowan (incorporated by reference to
Exhibit 10(iii).6 to Registrant's Form 10-Q for the quarterly
period ending June 19, 1993).
Exhibit 10(iii).5* Stock Option Plan for Consultants of Safeway Inc.
(incorporated by reference to Exhibit 10(iii).7 to
Registrant's Form 10-Q for the quarterly period ending June
19, 1993).
Exhibit 10(iii).6* First Amendment to the Stock Option Plan for
Consultants of Safeway Inc. (incorporated by reference to
Exhibit 10(iii).7 to Registrant's Form 10-K for the year
ended January 1, 1994).
* Management contract, or compensatory plan or arrangement.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
Exhibit 10(iii).7* 1994 Amended and Restated Stock Option and Incentive
Plan for Key Employees of Safeway Inc. (incorporated by
reference to Exhibit 10(iii).8 to Registrant's Form 10-K for
the year ended January 1, 1994) and First Amendment thereto
dated March 1, 1995 (incorporated by reference to Exhibit
10(iii).7 of Registrant's Form 10-K/A for the year ended
December 31, 1994).
Exhibit 10(iii).8* Operating Performance Bonus Plan for Executive
Officers of Safeway Inc. (incorporated by reference to
Exhibit 10(iii).9 to Registrant's Form 10-K for the year
ended January 1, 1994) and First Amendment to the Operating
Performance Bonus Plan for Executive Officers of Safeway
Inc. dated January 1, 1997.
Exhibit 10(iii).9* Capital Performance Bonus Plan (incorporated by
reference to Exhibit 10(iii).10 to Registrant's Form 10-K
for the year ended January 1, 1994).
Exhibit 10(iii).10* Retirement Restoration Plan of Safeway Inc. (incorporated by
reference to Exhibit 10(iii).11 to Registrant's Form 10-K
for the year ended January 1, 1994).
Exhibit 10(iii).11* Deferred Compensation Plan for Safeway Directors
(incorporated by reference to Exhibit 10(iii).11 of
Registrant's Form 10-K for the year ended December 31,
1994).
Exhibit 10(iii).12* Form of stock option agreement for former directors of The
Vons Companies, Inc.
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent (incorporated by reference to page 38 of the
Company's 1996 Annual Report to Stockholders).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 13.1 Registrant's 1996 Annual Report to Stockholders (considered
filed to the extent specified in Item 1, Item 2, Item 3,
Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1
above).
Exhibit 22.1 Subsidiaries of Registrant.
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only).
- --------------
* Management contract, or compensatory plan or arrangement.
(B) REPORTS ON FORM 8-K:
On December 17, 1996, the Company filed a Current Report on Form 8-K stating
under "Item 5. Other Events" that on December 15, 1996 it had entered into a
merger agreement with The Vons Companies, Inc.
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Steven A. Burd Date:
-----------------------------
SAFEWAY INC. March 26, 1997
Steven A. Burd
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Julian C. Day /s/ F. J. Dale
- ---------------------------- ----------------------
Julian C. Day F. J. Dale
Executive Vice President and Group Vice President
Chief Financial Officer Finance
Date: March 26, 1997 Date: March 26, 1997
<TABLE>
<CAPTION>
Director Date
-------- ----
<S> <C>
/s/Steven A. Burd
- ------------------------
Steven A. Burd March 26, 1997
/s/ Sam Ginn March 26, 1997
- ------------------------
Sam Ginn
/s/ James H. Greene, Jr. March 26, 1997
- ------------------------
James H. Greene, Jr.
/s/ Paul Hazen March 26, 1997
- ------------------------
Paul Hazen
/s/ Henry R. Kravis March 26, 1997
- ------------------------
Henry R. Kravis
/s/ Robert I. MacDonnell March 26, 1997
- ------------------------
Robert I. MacDonnell
/s/ Peter A. Magowan March 26, 1997
- ------------------------
Peter A. Magowan
/s/ George R. Roberts March 26, 1997
- ------------------------
George R. Roberts
/s/ Michael T. Tokarz March 26, 1997
- ------------------------
Michael T. Tokarz
</TABLE>
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
Exhibit Index
LIST OF EXHIBITS FILED WITH FORM 10-K FOR THE PERIOD
ENDED DECEMBER 28, 1996
Exhibit 4(i).13 Company Stock Purchase Warrants to purchase 23,405,953
shares of Safeway Inc. common stock.
Exhibit 10(iii).8 First Amendment to the Operating Performance Bonus Plan for
Executive Officers of Safeway Inc. dated January 1, 1997.
Exhibit 10(iii).12 Form of stock option agreement for former directors of The
Vons Companies, Inc.
Exhibit 11.1 Computation of Earnings Per Common Share and Common Share
Equivalent (incorporated by reference to page 38 of the
Company's 1996 Annual Report to Stockholders).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 13.1 Registrant's 1996 Annual Report to Stockholders (considered
filed to the extent specified in Item 1, Item 2, Item 3,
Item 5, Item 6, Item 7, Item 8, Item 13 and Exhibit 11.1
above).
Exhibit 22.1 Subsidiaries of Registrant.
Exhibit 23.1 Independent Auditors' Consent.
Exhibit 27 Financial Data Schedule (electronic filing only)
<PAGE> 1
EXHIBIT 4(i).13
VOID AFTER 5:00 P.M., NEW YORK CITY TIME, NOVEMBER 15, 2001
Certificate No. 4
SAFEWAY INC.
COMMON STOCK PURCHASE WARRANTS
CERTIFICATE FOR 23,405,953 WARRANTS TO PURCHASE
23,405,953 SHARES OF COMMON STOCK
OF SAFEWAY INC.
This certifies that, for value received, SSI Equity
Associates, L.P., or registered assigns (the "Holder") is entitled to purchase
from Safeway Inc., a Delaware corporation (the "Company"), at any time after
the date hereof and until 5:00 p.m., New York City time, on November 15, 2001,
at the purchase price of $1.00 per share, up to an aggregate of 23,405,953
shares of common stock, par value $.01 per share, of the Company (the "Common
Stock"), subject to adjustment as herein provided. In this warrant certificate
(the "Warrant Certificate"), the right to purchase each share of Common Stock
is referred to as a "Warrant"; the shares of Common Stock or, pursuant to the
terms hereof, other securities, issuable upon exercise of the Warrants are
referred to as the "Warrant Shares", and the purchase price of $1.00 per
Warrant Share, subject to adjustment as herein provided, is referred to as the
"Warrant Price".
The Warrants are subject to the following terms, conditions
and provisions:
SECTION 1. Registration; Transferability; Exchange of Warrant
Certificate.
1.1 Registration. The Company shall number and register
the Warrants in a register (the "Warrant Register") as they are issued by the
Company. The Company shall be entitled to treat the Holder of any Warrant as
the owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim to or interest in such Warrant on the part of any
other person, and shall not be liable for complying with a request by a
fiduciary or nominee of a fiduciary to register a transfer of any Warrant which
is registered in the name of such fiduciary or nominee.
<PAGE> 2
1.2 Transfer. Subject to compliance with Section 3
hereof, the Warrants shall be transferable only in the Warrant Register
maintained at the office of the Company in New York, New York (the "Office"),
upon presentation of this Warrant Certificate and proper evidence of
succession, assignment or authority to transfer. In all cases of transfer by
an attorney, the original power of attorney, duly approved, or a copy thereof,
duly certified, shall be deposited and remain with the Company. In case of
transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Company in
its discretion.
1.3 Exchange of Warrant Certificate. This Warrant
Certificate may be exchanged for another certificate or certificates entitling
the Holder to purchase a like aggregate number of Warrant Shares as this
Warrant Certificate then entitles the Holder to purchase. If the Holder
desires to exchange this Warrant Certificate, it shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, this
Warrant Certificate for exchange. Thereupon, the Company shall countersign and
deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.
SECTION 2. Term of Warrants; Exercise of Warrants.
2.1 Term of Warrants. Subject to the terms of this
Warrant Certificate, the Holder shall have the right, which may be exercised at
any time from the date hereof until 5:00 p.m., New York City time, on November
15, 2001 (the "Expiration Date"), to purchase from the Company up to an
aggregate of 23,405,953 fully paid and nonassessable Warrant Shares, or such
other number of Warrant Shares which the Holder may at the time be entitled to
purchase in accordance with the provisions of this Warrant Certificate. Each
Warrant not exercised prior to 5:00 p.m., New York City time, on the Expiration
Date shall become void and all rights in respect thereof under this Warrant
Certificate shall cease as of such time.
2.2 Exercise of Warrants.
(a) The Warrants evidenced by this Warrant Certificate
may be exercised in whole or in part upon surrender to the Company at
its Office of this Warrant Certificate, together with the Form of
Election to Purchase attached hereto duly filed in and signed, and
upon payment to the Company of the Warrant Price (as determined in
accordance with the provisions of Section 7 hereof), for the number of
Warrant Shares in respect of which such Warrants are then exercised.
2
<PAGE> 3
(b) Payment of the Warrant Price for Warrant Shares upon
exercise of any Warrants may be made (i) in cash, (ii) by certified or
official bank check in immediately available funds, or (iii) by any
combination of (i) and (ii).
(c) Subject to Section 3 hereof, upon the surrender of
this Warrant Certificate and payment of the Warrant Price as
aforesaid, the Company shall cause to be issued and delivered with all
reasonable dispatch to or upon the written order of the Holder and in
such name or names as the Holder may designate a certificate or
certificates for the number of Warrant Shares so purchased. If
permitted by applicable law, such certificate or certificates shall be
deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of this Warrant
Certificate and payment of the Warrant Price, as aforesaid. The
rights of purchase represented by the Warrants shall be exercisable,
at the election of the Holder, either in full or from time to time in
part and, in the event that this Warrant Certificate is exercised in
respect of less than all the Warrant Shares purchasable on such
exercise at any time prior to the Expiration Date, a new certificate
evidencing the remaining Warrant or Warrants will be issued by the
Company.
2.3 Compliance with Government Regulations. The Company covenants
that if any Warrant Shares required to be reserved for purposes of exercise of
Warrants require, under any Federal or state law or applicable governing rule
or regulation of any national securities exchange, registration with or
approval of any governmental authority, or listing on any such national
securities exchange, before such Warrant Shares may be issued upon exercise,
the Company will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered or approved by such governmental
authority or listed on the relevant national securities exchange, as the case
may be; provided, however, that in no event shall such Warrant Shares be
issued, and the Company is hereby authorized to suspend the exercise of all
Warrants, for the period during which such registration, approval or listing is
required but not in effect.
SECTION 3. Payment of Taxes. The Company will pay all
documentary stamp and other taxes, if any, attributable to the initial issuance
of Warrant Shares upon the exercise of Warrants; provided, however, that the
Company shall not be required to pay any tax or other governmental charge which
may be payable in respect of any transfer involved in the issue or delivery of
any Warrants, or certificates for Warrant Shares, in a name other than that of
the registered Holder of such Warrants, and the
3
<PAGE> 4
Company shall not register any such transfer or issue any such certificate
until such tax or governmental charge, if required, shall have been paid.
SECTION 4. Mutilated or Missing Warrants. In case this
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
may, in its discretion, issue and deliver in exchange and substitution for and
upon cancellation of this Warrant Certificate, if mutilated, or in lieu of and
in substitution for this Warrant Certificate, if lost, stolen or destroyed, a
new Warrant Certificate of like tenor and representing an equivalent right or
interest, but only upon, in the event this Warrant Certificate has been lost,
stolen or destroyed, receipt of evidence satisfactory to the Company of such
loss, theft or destruction. An applicant for such a substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe.
SECTION 5. Reservation of Warrant Shares; Purchase, Call and
Cancellation of Warrants.
5.1 Reservation of Warrant Shares. There have been
reserved, and the Company shall at all times keep reserved, out of its
authorized Common Stock, a number of shares of Common Stock (which will at all
times remain free of preemptive rights) sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants evidenced by
this Warrant Certificate. The Company or, if appointed, the transfer agent for
the Common Stock and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid (each, a "Transfer Agent") will be irrevocably authorized
and directed at all times to reserve such number of authorized shares as shall
be required for such purpose. The Company will keep a copy of this Warrant
Certificate on file with each Transfer Agent. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto, transmitted to each Holder pursuant to Section 7.3 hereof. All
Warrant Certificates surrendered in the exercise of the rights thereby
evidenced shall be cancelled by the Company and retired.
5.2 Purchase of Warrants by the Company. The Company
shall have the right, except as limited by law, other agreements or herein, to
purchase or otherwise acquire Warrants evidenced hereby at such times, in such
manner and for such consideration as it may deem appropriate.
4
<PAGE> 5
5.3 Call of Warrants.
(a) The Company shall have the right to call all (but not
less than all) of the Warrants evidenced hereby for redemption at a
cash price for each Warrant Share covered by such Warrants equal to
$1.00 upon no less than 90 days' written notice if, at the date of
such notice, the Securities and Exchange Commission has, under the
Securities Act of 1933, as amended, declared effective a registration
statement covering shares of the Common Stock and any shares of such
Common Stock have been sold and the Warrant Shares are to be sold
pursuant to such registration statement, or any subsequent
registration statement of a type contemplated by the Registration
Rights Agreement dated November 25, 1986, by and between the Company
and SSI Equity Associates, L.P., filed with the Securities and
Exchange Commission and declared effective; provided, however, that
(i) at the time such registration statement covering the Warrant
Shares becomes effective there shall exist an Active Public Trading
Market (as such term is defined below) in the shares of Common Stock,
and (ii) if at the date of such notice this Warrant shall be owned by
SSI Equity Associates, L.P. or any successor partnership it may be
called for redemption under the circumstances referred to in this
Section 5.3(a) only if the exercise of this Warrant shall then be
permissible under the terms of the Limited Partnership Agreement of
SSI Equity Associates, L.P. or such successor partnership.
(b) If a "Change of Ownership Transaction" (as said term is
defined below) occurs or is pending, the Company shall have the right
to call all (but not less than all) of the Warrants evidenced hereby,
upon written notice to the Holder at a cash price for each Warrant
equal to the greater of (x) $.075 or (y) the excess of (A) the fair
market value of one Warrant Share (or the fair market value of the
securities issuable upon exercise of the Warrants, if other than
Warrant Shares) over (B) the Warrant Price therefor; provided, that
upon notice from the Holder to the Company, the Company shall deliver,
or cause to be delivered, in lieu of cash, securities of the same
class for which Warrants would be, or would become, exercisable
pursuant to Section 7 hereof, having a fair market value (which shall
be the same value as was used to determine the fair market value of
one Warrant Share) equal to such excess, except that if as a result of
such Change of Ownership Transaction the Warrants (if not redeemed)
would not be immediately exercisable for cash or securities that have
an Active Public Trading Market (a "Non-Marketable Acquisition
Transaction") the Holder shall not have the option to request such
securities in lieu of cash if the distribution of such securities to
the Holder would require registration under the Securities Act. For
5
<PAGE> 6
purposes of determining the fair market value of one Warrant Share
pursuant to the preceding sentence, each Warrant Share shall be deemed
to have a fair market value equal to the value stated for the
consideration for which said Warrant Share is exchangeable in the
Change of Ownership Transaction or, in the event there is no such
stated value, the value, in the case of securities that have an Active
Public Trading Market, equal to the average closing sale price for the
30 trading days ending on the date immediately preceding the date of
consummation of the Change of Ownership Transaction (if such
securities are then publicly traded on a national securities exchange)
or the average closing bid price for the 30 trading days ending on the
date immediately preceding the date of consummation of the Change of
Ownership Transaction (if such securities are not then publicly traded
on a national securities exchange but are included in a national
quotation system). If the consideration for which said Warrant Share
is exchangeable is other than securities that have an Active Public
Trading Market and there is no stated value for the transaction, each
Warrant Share shall be deemed to have a fair market value as
determined by the Board of Directors of the Company, provided that any
such determination of fair market value shall be sent to the Holder at
least 30 days prior to the date of redemption, together with written
information as to the basis upon which the Board of Directors of the
Company made such determination. Such determination by the Board of
Directors shall be conclusive and undisputed unless objected to in
writing at least 10 days prior to the date of redemption by the
holders of a majority of the Warrants.
(c) For purposes hereof, (i) a "Change of Ownership
Transaction" means (A) a consolidation of the Company with, or a
merger of the Company into, another entity, (B) an exchange of all or
substantially all of the Common Stock for securities, cash or property
of another entity, or (C) a sale, transfer or lease to another entity
of all or substantially all of the assets of the Company, if, as a
result of any transaction described in the foregoing clauses (A), (B)
or (C), and after giving effect thereto, the holders of the Common
Stock will own less than 50% of the voting power of all classes of
stock having general voting rights of the resulting or acquiring
entity and such resulting or acquiring entity is not an "affiliate" of
the Company (as such term is defined in Rule 405 under the Securities
Act of 1933, as amended, at the date hereof), and (ii) an "Active
Public Trading Market" in the shares of Common Stock shall be deemed
to exist only if at least 25% of the issued and outstanding shares of
Common Stock has been publicly sold and continues to be freely
tradeable and the Common Stock is traded on a national securities
6
<PAGE> 7
exchange, or included in a national quotation system, or there are at
least three active market-makers with respect to the Common Stock who
are recognized investment bankers or securities dealers.
(d) The Company shall mail the notice of any call for
redemption pursuant to Section 5.3(a) or (b) hereof to the Holder
hereof not more than 120 days nor less than 90 days prior to the date
scheduled for redemption (the "Call Date"); provided, however, that if
the Company desires to call the Warrants for redemption pursuant to
Section 5.3(a) hereof, such notice shall be mailed not later than the
date the registration statement referred to therein shall have been
initially filed with the Securities and Exchange Commission. Such
notice shall state the Call Date and the place and price of such call.
The Holder shall continue to have the right to exercise the warrants
until 5:00 p.m., New York time, on the last business day preceding the
Call Date. The term "business day" as used herein shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York are not required to be open.
5.4 Cancellation of Warrants. In the event the Company
shall purchase or otherwise acquire Warrants, the same shall thereupon be
cancelled by it and retired. The Company shall cancel any warrant surrendered
for exchange, substitution, transfer or exercise in whole or in part.
SECTION 6. Warrant Price. Subject to adjustment as provided
in Section 7 hereof, the Warrant Price shall be $1.00 per Warrant Share.
SECTION 7. Adjustment of Warrant Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of
each Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the happening of certain events as hereinafter described.
7.1 Mandatory Adjustments. The number and kind of securities
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend on its
outstanding Common Stock in shares of Common Stock or make a
distribution to all holders of its outstanding Common Stock in shares
of Common Stock, (ii) subdivide its outstanding shares of Common Stock
into a greater number of shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of
Common Stock or (iv) issue by reclassification of its shares of
7
<PAGE> 8
Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which
the Company is the surviving corporation), the number of Warrant
Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder of each Warrant upon
exercise thereof shall be entitled to receive the kind and number of
Warrant Shares or other securities of the Company which he would have
owned or have been entitled to receive after the happening of any of
the events described above had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. An adjustment made pursuant to this paragraph (a) shall
become effective on the date of dividend payment, subdivision,
combination or issuance retroactive to the record date with respect
thereto, if any, for such event. Such adjustment shall be made
successively, whenever such an issuance is made.
(b) (i) In case the Company shall distribute to all holders
of its outstanding Common Stock evidences of its indebtedness or
assets or securities other than its Common Stock (excluding cash
distributions payable out of consolidated earnings or earned surplus
and dividends or distributions referred to in Section 7.1(a) above or
in Section 7.1(b)(ii) hereof) or rights, options or warrants to
subscribe for or purchase shares of Common Stock, or convertible or
exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, then in each case the number of
Warrant Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon the exercise of each Warrant by a
fraction, of which the numerator shall be the then current Warrant
Price on the date of such distribution, and of which the denominator
shall be the then current Warrant Price, less the then fair value (as
determined by the Board of Directors of the Company, whose
determination shall be conclusive), up to the then current Warrant
Price less $.01, of the portion of the evidences of indebtedness,
assets, securities, rights, options, warrants or convertible or
exchangeable securities so distributed attributable to one share of
Common Stock.
(ii) In the event of a distribution by the Company
to all holders of its outstanding Common Stock of stock of a
subsidiary or securities convertible into or exercisable for such
stock, then in lieu of an adjustment in the number of Warrant Shares
purchasable upon the exercise of each Warrant, the Holder of each
Warrant, upon the exercise thereof at any time after such
distribution, shall be entitled to receive from the Company, such
subsidiary or
8
<PAGE> 9
both, as the Company shall determine, the stock or other securities to
which such Holder would have been entitled if such Holder had
exercised such Warrant immediately prior thereto.
(iii) The adjustment required by this Section 7.1(b)
shall be made whenever any such distribution is made, and shall become
effective on the date of distribution retroactive to the record date
for the determination of stockholders entitled to receive such
distribution.
(c) In case the Company shall after the date hereof sell and
issue shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock (all of the foregoing
being referred to in this Section 7.1(c) as "Shares") (excluding (i)
Shares issued in any of the transactions described in Section 7.1(a)
or (b) above, (ii) Shares issuable upon exercise of stock options
granted or to be granted to employees or directors of the Company or
its subsidiaries, other than pursuant to Shares included in clause
(iii) below, (iii) Shares issued to employees of the Company or its
subsidiaries pursuant to stock bonus or incentive compensation plans
or agreements approved by the stockholders of the Company, provided
that the number of Shares so excluded pursuant to this clause (iii)
and the immediately preceding clause (ii) shall not exceed in the
aggregate 28,000,000 Shares, subject to adjustment under the terms of
any such stock options, (iv) Shares issued pursuant to a dividend or
interest reinvestment plan, or (v) Shares issued to stockholders of
any corporation which is acquired by, merged into or becomes part of
the Company or a subsidiary of the Company in an arm's length
transaction), at a price per Share (determined, in the case of rights,
options, warrants or convertible or exchangeable securities, by
dividing (x) the total amount received or receivable by the Company in
consideration of the sale and issuance of such rights, options,
warrants or convertible or exchangeable securities, plus the total
consideration payable to the Company upon exercise or conversion or
exchange thereof, by (y) the total number of shares of Common Stock
covered by such rights, options, warrants or convertible or
exchangeable securities) lower than the then current Warrant Price in
effect immediately prior to such sale and issuance, then in each case
the number of Warrant Shares thereafter purchasable upon the exercise
of each Warrant shall be determined by multiplying the number of
Warrant Shares theretofore purchasable upon the exercise of each
Warrant by a fraction, the numerator of which shall be the total
number of shares of Common Stock outstanding immediately after such
sale and issuance and the
9
<PAGE> 10
denominator of which shall be an amount equal to the sum of (A) the
total number of shares of Common Stock outstanding immediately prior
to such sale and issuance plus (B) the number of shares of Common
Stock which the aggregate consideration received (determined as
provided below) for such sale or issuance would purchase at the
Warrant Price in effect immediately prior to such sale and issuance.
Such adjustment shall be made successively whenever such an issuance
is made. For the purposes of such adjustments, the shares of Common
Stock which the holder of any such rights, options, warrants, or
convertible or exchangeable securities shall be entitled to subscribe
for or purchase shall be deemed to be issued and outstanding as of the
date of such sale and issuance and the consideration received by the
Company therefor shall be deemed to be the consideration received by
the Company (plus any underwriting discounts or commissions in
connection therewith) for such rights, options, warrants or
convertible or exchangeable securities, plus the consideration or
premiums stated in such rights, options, warrants or convertible or
exchangeable securities to be paid for the shares of Common Stock
owned thereby. In case the Company shall sell and issue Shares for a
consideration consisting, in whole or in part, of property other than
cash or its equivalent, then in determining the "price per share of
Common Stock" and the "consideration received by the Company" for
purposes of the first sentence and the immediately preceding sentence
of this Section 7.1(c), the Board of Directors of the Company shall
determine, in its discretion, the fair value of said property, and
such determinations, if made in good faith, shall be binding on all
Holders. The determination of whether any adjustment is required
under this Section 7.1(c), by reason of the sale and issuance of any
rights, options, warrants or convertible or exchangeable securities
and the amount of such adjustment, if any, shall be made only at such
time and not at the subsequent time of issuance of Shares upon the
exercise of such rights to subscribe or purchase.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Warrant Shares purchasable upon the exercise of each Warrant;
provided, however, that any adjustments which by reason of this
Section 7.1(d) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon
the exercise of each Warrant is adjusted, as herein
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<PAGE> 11
provided, the Warrant Price payable upon exercise of each Warrant
shall be adjusted by multiplying such Warrant Price immediately prior
to such adjustment by a fraction, of which the numerator shall be the
number of Warrant Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares purchasable immediately
thereafter.
(f) No adjustment in the number of Warrant Shares
purchasable upon the exercise of each Warrant need be made under
Section 7.1(b) hereof if the Company issues or distributes to each
Holder of Warrants the rights, options, warrants, convertible or
exchangeable securities, evidences of indebtedness, assets or
securities referred to in such paragraph which each Holder of Warrants
would have been entitled to receive had the Warrants been exercised
prior to the happening of such event or the record date with respect
thereto. No adjustment need be made for a change in the par value of
the Warrant Shares that does not affect the number of shares of Common
Stock outstanding after giving effect to such change.
(g) For the purposes of this Section 7.1, the term "shares
of Common Stock" shall mean (i) the class of stock designated as the
Common Stock of the Company at the date of this Warrant Certificate or
(ii) any other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from no par value to par value. In the event that at any
time, as a result of an adjustment made pursuant to Section 7.1(a)
above, the Holders shall become entitled to purchase any securities
other than shares of Common Stock, thereafter the number of such other
securities so purchasable upon exercise of each Warrant and the
Warrant Price of such securities shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares
contained in Section 7.1(a) through (e), inclusive, above, and the
provisions of Section 2 and Sections 7.2 through 7.4, inclusive, with
respect to the Warrant Shares, shall apply on like terms to any such
other securities.
(h) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges which resulted in adjustments
pursuant to subsections (a), (b) or (c) of this Section 7.1, if any
thereof shall not have been exercised, the Warrant Price and the
number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be readjusted and shall thereafter be such as it would
have been had it been originally adjusted (or had the
11
<PAGE> 12
original adjustment not been required, as the case may be) as if (A)
the only shares of Common Stock purchasable upon exercise of such
rights, options, warrants or conversion or exchange privileges were
the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion or exchange
privileges and (B) such shares of Common Stock so issued or sold, if
any, were issuable for the consideration actually received by the
Company for the issuance, sale or grant of all such rights, options,
warrants or conversion or exchange privileges whether or not
exercised; provided, that no such readjustment shall have the effect
of increasing the Warrant Price or decreasing the number of Warrant
Shares purchasable upon the exercise of each Warrant by an amount in
excess of the amount of the adjustment initially made in respect to
the issuance, sale or grant of such rights, options, warrants or
conversion or exchange privileges.
7.2 Voluntary Adjustment by the Company. The Company may at
its option, at any time during the term of the Warrants, reduce the then
current Warrant Price to any amount deemed appropriate by the Board of
Directors of the Company; provided that if the Company elects so to reduce the
then current Warrant Price, such reduction shall remain in effect for at least
a 15-day period, after which time the Company may, at its option, reinstate the
Warrant Price in effect prior to such reduction.
7.3 Notice of Adjustment. Whenever the number of Warrant
Shares purchasable upon the exercise of each Warrant or the Warrant Price of
such Warrant Shares is adjusted, as herein provided, the Company shall promptly
mail by first class mail, postage prepaid, to each Holder a notice of such
adjustment or adjustments and a certificate of an officer of the Company
accompanied by the report thereon by a firm of independent public accountants
selected by the Board of Directors of the Company (who may be the regular
accountants for the Company) setting forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made. Such certificate shall be conclusive evidence of the
correctness of such adjustment.
7.4 No Adjustment for Dividends. Except as provided in
Section 7.1 hereof, no adjustment in respect of any dividends or other payments
or distributions made to holders of securities issuable upon exercise of
Warrants shall be made during the term of a Warrant or upon the exercise of a
Warrant.
7.5 Preservation of Purchase Rights Upon Merger,
Consolidation, etc. Subject to Section 5.3 hereof, in case of
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<PAGE> 13
any consolidation of the Company with or merger of the Company into another
entity (whether or not the Company is the surviving corporation), or in the
case of any sale, transfer or lease to another of all or substantially all the
property of the Company, the Company or such successor or purchasing entity, as
the case shall be, shall deliver to the Holder an undertaking that the Holder
shall have the right thereafter upon payment of the Warrant Price in effect
immediately prior to such action to purchase upon exercise of each Warrant the
kind and amount of securities, cash and property which the Holder would have
owned or have been entitled to receive after the happening of such
consolidation, merger, sale, transfer or lease had such Warrant been exercised
immediately prior to such action. Upon the execution of such agreement, such
Warrant shall be exercisable only for such securities, cash and property. Such
agreement shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 7. The
provisions of this Section 7.5 shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
7.6 Statement on Warrants. Irrespective of any adjustments
in the Warrant Price or the number or kind of securities purchasable upon the
exercise of the Warrants, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in the Warrants initially issuable pursuant to this Warrant Certificate.
SECTION 8. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be presented for exercise in full at the same time
by the Holder, the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would, except for the provisions
of this Section 8, be issuable on the exercise of any Warrant (or specified
portion thereof) there will be paid in cash to the Holder of the Warrants an
amount per Warrant Share equal to the same fraction of the current market value
of a share of Common Stock. For purposes of this Section 8, the "current
market value" per share of Common Stock shall be (a) if the Common Stock is
then publicly traded on a national securities exchange, the closing sale price
of the Common Stock on such exchange on the last trading day prior to the date
of determination, (b) if the Common Stock is not then publicly traded on a
national securities exchange but is included in a national quotation system,
the closing bid price for the Common Stock on the last trading day prior to the
date of determination, and (c) if neither (a) nor (b) is applicable, as
determined in good faith by the Board of Directors of the Company.
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<PAGE> 14
SECTION 9. No Rights as Stockholders; Notices to Holders.
Nothing contained in this Warrant Certificate shall be construed as conferring
upon the Holder or its transferees the right to vote or to receive dividends or
to consent or to receive notice as stockholders in respect of any meeting of
stockholders of the Company for the election of the directors of the Company or
any other matter, or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable
in cash or in any securities upon its shares of Common Stock or make
any distribution to the holders of its shares of Common Stock;
(b) the Company shall offer to all holders of its
shares of Common Stock any additional shares of Common Stock or
securities convertible into or exchangeable for shares of Common Stock
or any right to subscribe for or purchase any thereof;
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger, sale,
transfer or lease of all or substantially all of its property, assets
and business as an entirety) shall be proposed: or
(d) a proposed transaction, which, if consummated,
would permit the Company to call the Warrants pursuant to Section 5.3
hereof,
then in any one or more of said events, the Company shall give notice in
writing of such event to the Holder as provided in Section 11 hereof, such
giving of notice to be completed at least 20 days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, or subscription
rights, or for the determination of the stockholders entitled to vote on such
proposed dissolution, liquidation or winding up. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to mail or receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such dividend, distribution or subscription rights, or such proposed
dissolution, liquidation or winding up.
SECTION 10. Identity of Transfer Agent. Forthwith upon the
appointment of any Transfer Agent for the Warrant Shares, or any other
securities issuable upon the exercise of the
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<PAGE> 15
Warrants, the Company will notify the Holder of the name and address of such
Transfer Agent.
SECTION 11. Notices. Any notice pursuant to this Warrant
Certificate by the Holder to the Company shall be in writing and shall be
delivered in person or by facsimile transmission, or mailed by first class
mail, postage prepaid to the Company, at Safeway Inc., Fourth and Jackson
Streets, Oakland, California 94660. Any notice pursuant to this agreement by
the Company to the Holder shall be in writing and shall be mailed first class,
postage prepaid, or otherwise delivered, to the Holder at its address on the
books of the Company.
Each party hereto may from time to time change the address to
which notices to it are to be delivered or mailed hereunder by notice to the
other party.
SECTION 12. Supplements and Amendments. The Company may from
time to time supplement or amend this Warrant Certificate without the approval
of the Holder in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provision herein or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not be inconsistent with the provisions of the Warrants and
which shall not adversely affect the interests of the Holder in any material
respect.
SECTION 13. Successors. All the covenants and provisions of
this Warrant Certificate by or for the benefit of the Company shall bind and
inure to the benefit of its successors and assigns hereunder.
SECTION 14. Merger or Consolidation of the Company. The
Company will not merge or consolidate with or into, or sell, transfer or lease
all or substantially all of its property to, any other corporation unless the
successor, transferee or lessee corporation, as the case may be (if not the
Company), shall expressly assume the due and punctual performance and
observance of each and every covenant and condition of this Warrant Certificate
to be performed and observed by the Company, subject to Sections 5.3 and 7.5
hereof.
SECTION 15. Applicable Law. This Warrant Certificate and
each Warrant issued hereunder shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to principles of
conflict of laws. The parties hereto agree to submit to the jurisdiction of
the courts of the State of New York in any action or proceeding arising out of
or relating to this Warrant Certificate and/or the Warrants evidenced hereby.
15
<PAGE> 16
SECTION 16. Benefits of this Warrant Certificate. Nothing in
this Warrant Certificate shall be construed to give to any person or entity
other than the Company and the Holder any legal or equitable right, remedy or
claim under this Warrant Certificate; but this Warrant Certificate shall be for
the sole and exclusive benefit of the Company and the Holder.
SECTION 17. Captions. The captions of the sections and
paragraphs of this Warrant Certificate have been inserted for convenience only
and shall have no substantive effect.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed this 8th day of February, 1996.
SAFEWAY INC.
By: /s/ Michael C. Ross
--------------------------------
Name: Michael C. Ross
Title: Senior Vice President
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<PAGE> 17
[FORM OF ELECTION TO PURCHASE]
(To be executed upon exercise of Warrants)
To Safeway Inc.:
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder, ______ shares of Common Stock, as provided for therein,
and requests that a certificate or certificates for such shares of Common Stock
be issued in the name of, and any cash for any fractional shares be paid to:
Name ____________________________
(Please print name,
address and Social
Security or other
taxation identification No.)
If said number of shares shall not be all the shares
purchasable under the within Warrant Certificate, the undersigned requests that
a new Warrant Certificate for the balance remaining of the shares purchasable
thereunder (less any fraction of a share paid in cash pursuant to the terms of
the Warrant Certificate) be issued to:
Name ____________________________
(Please print name,
address and Social
Security or other
taxation identification No.)
In full payment of the Warrant Price with respect to the
Warrants exercised hereby and transfer taxes, if any, the undersigned hereby
tenders payment of $______, payable as follows: (a) in cash, as to $______
and/or (b) by certified or official bank check, as to $___________.
Dated: __________________
______________________________
(Name, signature, address and
social security or other
taxation identification number
of Holder - signature must
conform in all respects to
name of Holder on the face of
Warrant Certificate or with
the name of assignee appearing
in the Warrant Register.)
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<PAGE> 1
EXHIBIT 10(iii).8
FIRST AMENDMENT TO THE OPERATING PERFORMANCE BONUS PLAN
FOR EXECUTIVE OFFICERS OF SAFEWAY INC.
Safeway Inc. (the "Company"), a corporation organized under the laws
of the State of Delaware, by resolution of its Board of Directors has adopted
this First Amendment to The Operating Performance Bonus Plan for Executive
Officers of Safeway Inc. (the "Plan") pursuant to Section 9.2 of the Plan,
effective as of January 1, 1997.
Section 3.1 of the Plan is hereby amended to read in its entirety as follows:
"Section 3.1 - Form of Payment. Each participant's bonus award may be
paid, at the option of the Participant, in cash or in stock,
or in any combination of cash and stock. Stock bonuses shall
be paid in accordance with the provisions of the 1994 Amended
and Restated Stock Option and Incentive Plan for Key Employees
of Safeway."
************
I hereby certify that the foregoing First Amendment to the Plan was
duly adopted by the Board of Directors of Safeway Inc. as of January 1, 1997.
Executed on this _____ day of __________________, 1997.
______________________________
Assistant Secretary
<PAGE> 1
SAFEWAY INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (the "Agreement") is dated as of
April 8, 1997, by and between SAFEWAY INC., a Delaware corporation (the
"Company") and ____________ ("Optionee"), a current or former member of the
Board of Directors of The Vons Companies, Inc. ("Vons").
WHEREAS, pursuant to The Vons Companies, Inc. Directors' Stock
Option Plan (the "Vons Plan") and various stock option agreements between Vons
and Optionee, Vons has granted to Optionee those non-qualified stock options
(the "Vons Options") to purchase shares of the $0.10 par value common stock of
Vons (the "Vons Common Stock") listed on Exhibit A hereto;
WHEREAS, the Company, SSCI Merger Sub, Inc., a Michigan
corporation and an indirect wholly owned subsidiary of the Company ("Merger
Sub"), and Vons entered into an Agreement and Plan of Merger dated as of
December 15, 1996, as amended by the First Amendment to Agreement and Plan of
Merger dated as of January 8, 1997, under which Merger Sub will be merged with
and into Vons, with Vons continuing as the surviving corporation (the
"Merger"), and each share of Vons Common Stock outstanding immediately prior to
the effective time of the Merger (other than shares of Vons Common Stock owned
directly or indirectly by the Company) will be converted into the right to
receive 1.425 shares of common stock of the Company, $.01 par value per share
("Company Common Stock");
WHEREAS, in connection with the Merger, the Company wishes to
offer holders of Vons Options the opportunity to exchange such Vons Options for
new non-qualified options to purchase shares of Company Common Stock
("Replacement Options"), of comparable value to the Vons Options as
contemplated by Sections 4.5 and 4.6 of the Vons Plan;
WHEREAS, each Replacement Option will represent the right to
purchase the number (rounded to the nearest whole number) of shares of Company
Common Stock as such holder of the Vons Option being replaced would have been
entitled to receive pursuant to the Merger had such holder exercised such Vons
Option in full immediately prior to the Merger (not taking into account whether
such Vons Option was in fact exercisable), at a price per share equal to (a)
the aggregate exercise price for Vons Common Stock otherwise purchasable
pursuant to such Vons Option divided by (b) the number of shares of Company
Common Stock purchasable pursuant to such Replacement Option;
WHEREAS, the Board of Directors of the Company has authorized
granting to Optionee the Replacement Options immediately prior to the
consummation of the Merger in accordance with and on the terms and conditions
hereinafter stated; and
WHEREAS, Optionee agrees that the Vons Options shall terminate upon grant
<PAGE> 2
of the Replacement Options in accordance with this Agreement.
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option
Pursuant to the action of the Company and in accordance with
any and all authorizations granted by appropriate regulatory and governmental
agencies, the Company hereby grants to the Optionee the right to purchase the
number of shares of Company Common Stock listed under the heading "Replacement
Options" on Exhibit A hereto.
2. Purchase Price
The purchase price of the shares of Company Common Stock
covered by the Replacement Options shall be as set forth on Exhibit A hereto
under the heading "Exercise Price of Replacement Options," without commission
or other charge.
3. Exercisability
The Replacement Options shall be exercisable as of the date of
this Agreement. The Replacement Options shall remain exercisable until the day
after the tenth (10th) anniversary of the date of the grant of the Vons Option
to which the Replacement Option corresponds (the "Expiration Date"), unless the
Replacement Options have expired or terminated earlier in accordance with the
provisions hereof. Subject to the terms and conditions hereof, the shares of
Company Common Stock as to which these Replacement Options are exercisable may
be purchased at any time prior to the expiration of the Replacement Options.
4. Expiration
a. No Replacement Option may be exercised to any extent
by Optionee or any other person after the first to occur of the following
events:
i. The Expiration Date;
ii. Except in the case of Optionee's death,
disability (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code")) or Retirement (as
defined below), the expiration of three months from the date of
Optionee's resignation from or replacement on the Board of Directors
of the Company unless Optionee dies within said three-month period;
iii. The expiration of one year from the date of
Optionee's resignation from or replacement on the Board of Directors
of the Company by reason of Optionee's
2
<PAGE> 3
disability, unless Optionee dies within said one-year period;
iv. The expiration of one year from the date of
Optionee's Retirement (as defined below) from the Board of Directors
of the Company, unless Optionee dies within said one-year period; or
v. The expiration of one year from the date of
Optionee's death; or
"Retirement" shall mean resignation from the Board of
Directors of the Company after Optionee has attained the age of 60 years.
[The following version of Section 4.a. will apply to Optionees
who will not continue as members of the Board of Directors of Vons or the
Company after the Merger:
a. No Replacement Option may be exercised to any extent
by Optionee or any other person after _____________, 199_ or, in the event that
Optionee dies prior to such date, one year from the date of Optionee's death.
The blank in the preceding sentence will be a date that is either (a) three
months after the Merger or (b) one year after the Merger if Optionee is at
least 60 years of age and has served a minimum of three years on the Board of
Directors of Vons or if Optionee is disabled at the time of the Merger.]
b. Notwithstanding the preceding provisions of this
Section 4, the Replacement Options or any portion thereof outstanding at the
time of a Change of Control shall terminate at such time, unless there is a
surviving corporation or Parent Corporation or Subsidiary corporation thereof
that shall assume (with appropriate changes) the outstanding Replacement
Options or replace them with new options of comparable value. "Change of
Control" shall mean (a) the merger or consolidation of the Company with or into
another corporation; (b) the acquisition by another corporation or person of
all or substantially all of the Company's assets or 80% or more of the
Company's then outstanding voting stock; or (c) the liquidation or dissolution
of the Company. "Parent Corporation" shall mean any corporation in an unbroken
chain of corporations ending with the Company if each of the corporations other
than the Company then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain. "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
5. Manner of Exercise
An exercisable Replacement Option, or any exercisable portion
thereof, may be
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<PAGE> 4
exercised solely by delivery to the Secretary of the Company or his office of
all of the following prior to the time when such Replacement Option or such
portion becomes unexercisable under Section 4:
a. Notice in writing signed by the Optionee or other
person then entitled to exercise such Replacement Option or portion, stating
that such Replacement Option or portion is exercised, such notice complying
with all applicable rules established by the Board of Directors of the Company
(or a duly authorized committee of such Board); and
b. i. Full payment (in cash or by check) for the
shares with respect to which such Replacement Option or portion is
thereby exercised; or
ii. Subject to the Company's consent, full
payment by delivery to the Company of shares of Company Common Stock
owned by the Optionee duly endorsed for transfer to the Company by the
Optionee or other person then entitled to exercise such Replacement
Option or portion, with a Fair Market Value (as defined below) equal
to the Replacement Option price of shares with respect to which such
Replacement Option or portion is thereby exercised; or
iii. Any combination of the considerations provided
for in the foregoing subsections (i) and (ii); and
c. On or prior to the date the same is required to be
withheld:
i. Full payment (in cash or by check) of any
amount that must be withheld by the Company for federal, state and/or
local tax purposes; or
ii. Subject to the Company's consent, full
payment by delivery to the Company of shares of Company Common Stock
owned by the Optionee duly endorsed for transfer to the Company by the
Optionee or other person then entitled to exercise such Replacement
Option or portion with an aggregate Fair Market Value (as defined
below) equal to the amount that must be withheld by the Company for
federal, state and/or local tax purposes;
iii. Subject to the Company's consent, full
payment by retention by the Company of shares of Company Common Stock
to be issued pursuant to such Replacement Option exercise with an
aggregate Fair Market Value (as defined below) equal to the amount
that must be withheld by the Company for federal, state and/or local
tax purposes; or
iv. Any combination of payments provided for in
the foregoing subsections (i), (ii) or (iii); and
4
<PAGE> 5
d. Such representations and documents as the Board of
Directors of the Company (or a duly authorized committee of such Board), in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provision of the Securities Act and any other federal or state
securities laws or regulations. The Board of Directors of the Company (or a
duly authorized committee of such Board) may, in its absolute discretion, also
take whatever additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and
issuing stop-transfer orders to transfer agents and registrars; and
e. In the event that the Replacement Option or portion
thereof shall be exercised by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Replacement Option or portion thereof.
"Fair Market Value" of a share of Company Common Stock as of a
given date shall mean (i) the closing price of the Company Common Stock on the
New York Stock Exchange on such date or, if shares were not traded on such
date, then on the next preceding trading day during which a sale occurred; (ii)
if such stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, (1) the last sales price (if the stock is then
listed as a National Market Issue under the NASD National Market System) or (2)
the mean between the closing representative bid and asked prices (in all other
cases) for the stock on such date as reported by NASDAQ or such successor
quotation system; (iii) if such stock is not publicly traded on an exchange and
not quoted on NASDAQ or a successor quotation system, the mean between the
closing bid and asked prices for the stock, on such date, as determined in good
faith by the Board of Directors of the Company (or a duly authorized committee
of such Board); or (iv) if the Company Common Stock is not publicly traded, the
fair market value established by the Board of Directors of the Company (or a
duly authorized committee of such Board) acting in good faith. In determining
the Fair Market Value of the Company Common Stock under (i) of this paragraph,
the Board of Directors of the Company (or a duly authorized committee of such
Board) may rely on the closing price as reported in the New York Stock Exchange
composite transactions published in the Western Edition of the Wall Street
Journal.
6. Conditions to Issuance of Stock Certificates
The shares of stock issuable and deliverable upon the exercise
of Replacement Options shall be previously issued shares which have then been
reacquired by the Company. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of Replacement Options prior to fulfillment of all of the following
conditions:
a. The admission of such shares to listing on all stock
exchanges, if any, on which such class of stock is then listed;
5
<PAGE> 6
b. The completion of any registration or other
qualification of such shares under any state or federal law or under the
rulings or regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Company shall deem necessary or
advisable;
c. The obtaining of any approval or other clearance from
any state or federal governmental agency which the Company shall determine to
be necessary or advisable;
d. The payment to the Company of any amounts which it is
required to withhold under federal, state or local law in connection with the
exercise of the Replacement Options; and
e. The lapse of such reasonable period of time following
the exercise of the Replacement Options as the Company may establish from time
to time for reasons of administrative convenience.
7. Transfer Restrictions
No Replacement Option or interest or right therein or part
thereof shall be subject to or liable for the debts, contracts or engagements
of Optionee, as the case may be, or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that after Optionee's death, but before expiration of the
Replacement Options, such Replacement Options shall be exercisable by the
person or persons to whom Optionee's rights under the Replacement Options shall
have passed by will or by the laws of descent and distribution or by a person
lawfully entitled to act for such person or persons or by a person named by
Optionee in a Beneficiary Designation Form. Shares purchased by such persons
shall be subject to all of the terms and provisions of this Agreement.
8. Privileges and Restrictions of Stock Ownership
Optionee shall have no rights as a stockholder with respect to
Company Common Stock subject to Replacement Options until the date of issuance
of stock certificates to Optionee. Except as provided in Sections 4(b) and 9
hereof, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificates are issued.
9. Adjustments in Outstanding Options
In the event that the outstanding shares of Company Common
Stock subject to
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<PAGE> 7
Replacement Options are changed into or exchanged for a different number or
kind of shares of other securities of the Company, or of another corporation,
by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares, the
Company shall make an appropriate and equitable adjustment in the number and
kind of shares as to which all outstanding Options, or portions thereof then
unexercised, shall be exercisable, to the end that after such event Optionee's
proportionate interest shall be maintained as before the occurrence of such
event. Such adjustment in an outstanding Replacement Options shall be made
without change in the total price applicable to the Replacement Options or
unexercised portions of the Replacement Options (except for any change in the
aggregate price resulting from rounding-off of share quantities or prices) and
with any necessary corresponding adjustment in Replacement Option price per
share. Any such adjustment made by the Company shall be final and binding upon
Optionee, the Company and all other interested persons.
10. Notices
Notices delivered under this Agreement shall be delivered to
the Secretary of the Company at the Company's principal office and to the
Optionee at such address as Optionee shall designate to the Company.
11. Titles
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Agreement.
12. Construction
This Agreement shall be administered, interpreted and enforced
under the internal laws of the State of California without regard to conflicts
of laws thereof.
13. Conformity to Securities Laws
Optionee acknowledges that this Agreement is intended to
conform to the extent necessary with all provisions of the Securities Act and
the Exchange Act and any and all regulations and rules promulgated by the
Securities and Exchange Commission thereunder, including without limitation
Rule 16b-3. Notwithstanding anything herein to the contrary, Replacement
Options are granted and may be exercised, only in such a manner as to conform
to such laws, rules and regulations. To the extent permitted by applicable
law, this Agreement shall be deemed amended to the extent necessary to conform
to such laws, rules and regulations.
7
<PAGE> 8
14. Exhibits
The Exhibits to this Agreement are a material part hereof and
shall be treated as if fully incorporated into the body of the Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
SAFEWAY INC.
By: ________________________________________
Steven A. Burd
President and Chief Executive Officer
By: ________________________________________
Michael C. Ross
Senior Vice President, Secretary
and General Counsel
____________________________
Optionee
____________________________
____________________________
____________________________
Address
Optionee's Taxpayer
Identification Number:
____________________________
8
<PAGE> 9
BENEFICIARY DESIGNATION
STOCK OPTION AGREEMENT
SAFEWAY INC.
I designate the following beneficiary or beneficiaries to exercise any options
in the event of my death, heretofore or hereafter granted to me pursuant to the
Stock Option Agreement dated April 8, 1997 by and between Safeway Inc. and
myself:
Beneficiary Relationship Address
I may change the beneficiary or beneficiaries from time to time by filing with
the Company a new Beneficiary Designation Form.
I agree that the last designation received by the Company prior to my death
shall control over any testamentary or other disposition I may make; however,
if my spouse is one of the beneficiaries named above but is not my spouse at
the time of my death, such designation shall be deemed revoked. I further
agree that the Company may make a lump sum payment to the legal representative
of my estate if there is any question as to the right of any beneficiary to
take hereunder, and the Company, its Board of Directors (and any duly
authorized committee thereof), and any employee of the Company shall have no
further liability with respect thereto.
DATED:____________________________ SIGNATURE:______________________________
PRINT NAME:_____________________________
CONSENTED TO:
__________________________________ DATED:__________________________________
(Signature of Spouse)
__________________________________
(Print Name)
<PAGE> 1
EXHIBIT 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT (UNAUDITED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
Fully Fully Fully
Diluted Primary Diluted Primary Diluted Primary
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary loss $ 460.6 $ 460.6 $ 328.3 $ 328.3 $ 250.2 $ 250.2
Extraordinary loss -- -- (2.0) (2.0) (10.5) (10.5)
--------- --------- --------- --------- --------- ---------
Net income $ 460.6 $ 460.6 $ 326.3 $ 326.3 $ 239.7 $ 239.7
========= ========= ========= ========= ========= =========
Weighted average common shares outstanding 218.0 218.0 213.7 211.9 209.6 205.9
Common share equivalents 20.4 19.8 29.8 28.7 37.5 38.2
--------- --------- --------- --------- --------- ---------
Weighted average common shares and common
share equivalents 238.4 237.8 243.5 240.6 247.1 244.1
========= ========= ========= ========= ========= =========
Earnings per common share and common
share equivalent:
Income before extraordinary loss $ 1.93 $ 1.94 $ 1.35 $ 1.36 $ 1.01 $ 1.02
Extraordinary loss -- -- (0.01) (0.01) (0.04) (0.04)
--------- --------- --------- --------- --------- ---------
Net income $ 1.93 $ 1.94 $ 1.34 $ 1.35 $ 0.97 $ 0.98
========= ========= ========= ========= ========= =========
Calculation of common share equivalents:
Options and warrants to purchase common shares 31.6 31.2 43.8 44.1 54.0 56.5
Common shares assumed purchased with potential
proceeds (11.2) (11.4) (14.0) (15.4) (16.5) (18.3)
--------- --------- --------- --------- --------- ---------
Common share equivalents 20.4 19.8 29.8 28.7 37.5 38.2
========= ========= ========= ========= ========= =========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options and
warrants to purchase common shares $ 462.3 $ 394.3 $ 359.2 $ 298.9 $ 262.9 $ 237.5
Common stock price used under the treasury
stock method $ 41.15 $ 34.43 $ 25.62 $ 19.40 $ 15.94 $ 12.98
Common shares assumed purchased with
potential proceeds 11.2 11.4 14.0 15.4 16.5 18.3
</TABLE>
<PAGE> 1
EXHIBIT 12.1
SAFEWAY INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary loss and cumulative
effect of accounting changes $ 767.6 $ 556.5 $ 424.1 $ 216.3 $ 197.4
Add interest expense 178.5 199.8 221.7 265.5 290.4
Add interest on rental expense (a) 90.0 87.5 86.6 88.0 88.0
Less equity in earnings of unconsolidated
affiliates (50.0) (26.9) (27.3) (33.5) (39.1)
Add minority interest in subsidiary 3.4 3.9 3.0 3.5 1.7
------- ------- ------- ------- -------
Earnings $ 989.5 $ 820.8 $ 708.1 $ 539.8 $ 538.4
======= ======= ======= ======= =======
Interest expense $ 178.5 $ 199.8 $ 221.7 $ 265.5 $ 290.4
Add capitalized interest 4.4 4.6 2.9 4.2 8.0
Add interest on rental expense (a) 90.0 87.5 86.6 88.0 88.0
------- ------- ------- ------- -------
Fixed charges $ 272.9 $ 291.9 $ 311.2 $ 357.7 $ 386.4
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.63 2.81 2.28 1.51 1.39
======= ======= ======= ======= =======
(b)
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of
future operating lease payments.
(b) Safeway's ratio of earnings to fixed charges during 1993 was adversely
affected by a $54.9 million charge to operating and administrative
expense for severance payments made to retail employees in the
Alberta, Canada division as part of a voluntary employee buyout.
Excluding this charge, the ratio of earnings to fixed charges for 1993
would have been 1.66.
<PAGE> 1
EXHIBIT 13.1
COMPANY IN REVIEW
At December 28, 1996, Safeway Inc. ("Safeway" or the "Company") operated 1,052
stores in the United States and Canada. U.S. retail operations are located
principally in northern California, Oregon, Washington, Colorado, Arizona and
the Mid-Atlantic region. Canadian retail operations are located principally in
British Columbia, Alberta and Manitoba/Saskatchewan. In support of its retail
operations, Safeway has an extensive network of distribution, manufacturing and
food processing facilities.
In addition to stores operated under the Safeway name, the Company has
ownership interests in two other retailers. At year-end 1996, Safeway held a 49%
interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operated 71 food and
general merchandise stores in western Mexico, and a 34.4% interest in The Vons
Companies, Inc. ("Vons").
MERGER WITH VONS
In December 1996, Safeway and Vons entered into an agreement pursuant to which
Safeway will issue 1.425 shares of Safeway common stock for each share of Vons
common stock it does not currently own in a transaction (the "Merger") that will
be accounted for as a purchase. As a result of the Merger, Vons will become a
wholly-owned subsidiary of Safeway. The transaction is subject to approval by
Vons' shareholders. The companies expect to complete the transaction in early
April of 1997.
At December 28, 1996, Vons operated 320 supermarkets and food and drug
combination retail stores located primarily in southern California under the
names Vons and Pavilions. Vons also operates a fluid milk processing facility,
an ice cream plant, a bakery, and two distribution facilities for meat, grocery,
produce and general merchandise to support the store network.
In connection with the Merger, Safeway will repurchase (the "Repurchase") 32
million shares of Safeway common stock held by one or more partnerships
controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR") at $43 per
share, or $1.376 billion in the aggregate. To finance the Repurchase, Safeway
currently expects to enter into a new credit agreement to provide for, among
other things, increased borrowing capacity to $3 billion and an extended
maturity on the new commitments.
<PAGE> 2
RETAIL OPERATIONS
STORES Safeway operates stores ranging in size from approximately 8,600 square
feet to over 60,000 square feet. Safeway determines the size of a new store
based on a number of considerations, including the needs of the community the
store serves, the location and site plan, and the estimated return on capital
invested. Most stores offer a wide selection of both food and general
merchandise and feature a variety of specialty departments such as bakery, deli
and floral. In most of Safeway's larger stores, specialty departments are
showcased in each corner and along the perimeter walls of the store to create a
pleasant shopping atmosphere. Safeway's primary new store prototype is 55,000
square feet and is designed to accommodate changing consumer needs and to
achieve certain operating efficiencies.
Safeway continues to operate a number of smaller stores which offer an
extensive selection of food and general merchandise, and generally include one
or more specialty departments. These stores remain an important part of the
Company's store network in smaller communities and certain other locations where
larger stores may not be feasible because of space limitations and/or community
needs or restrictions.
The following table summarizes Safeway's stores by size at year-end 1996:
<TABLE>
<CAPTION>
Number Percent
of Stores of Total
- --------------------------------------------------------
<S> <C> <C>
Less than 30,000 square feet 285 27%
30,000 to 50,000 569 54
More than 50,000 198 19
- --------------------------------------------------------
Total stores 1,052 100%
========================================================
</TABLE>
STORE OWNERSHIP At year-end 1996, Safeway owned more than one-third of its
stores. Safeway leases its remaining stores. In recent years, the Company has
preferred ownership because it provides control and flexibility with respect to
financing terms, remodeling, expansions and closures.
12
<PAGE> 3
MERCHANDISING Safeway's operating strategy is to provide superior value to its
customers by maintaining high store standards and a wide selection of high
quality products at competitive prices. Pharmacies, specialty departments, and
special services are designed to provide one-stop shopping for today's busy
shoppers.
Safeway's merchandising strategy emphasizes high quality perishables,
including in-store bakery, produce, floral, delicatessen and meat departments.
Safeway has introduced a line of over 650 premium corporate brand products
since 1993 under the "Safeway SELECT" banner. These products include soft
drinks, pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream,
yogurt, pet food and laundry detergent. The line also includes Safeway SELECT
"Enlighten" items such as no-fat salad dressings and low-sodium quick lunches,
and Safeway SELECT "Gourmet Club" frozen entrees and hors d'oeuvres.
The Safeway SELECT line is designed to offer premium quality products that
are equal or superior to comparable best-selling nationally advertised brands,
are offered at more competitive prices, or are not available from national brand
manufacturers. Safeway also offers a wide selection of private label products
under well-known and respected brand names such as Safeway, Lucerne and Mrs.
Wright's, which Safeway believes are equivalent in quality to comparable
nationally advertised brands.
The Company continually refines its merchandising strategies which are
designed to identify and accommodate changing demographics, lifestyles and
product preferences of its customers. Safeway has intensified its efforts to
improve in-stock conditions and enhance merchandise presentation and selection.
MANUFACTURING AND WHOLESALE OPERATIONS
The principal function of manufacturing operations is to purchase, manufacture
and process private label merchandise sold in Safeway stores under brand names
such as Safeway, Lucerne, Mrs. Wright's and Safeway SELECT. As measured by sales
dollars, approximately one-half of Safeway's private label merchandise is
manufactured in company-owned plants, and the remainder is purchased from third
parties.
<PAGE> 4
During 1993, Safeway began a review to identify manufacturing operations
that were not providing acceptable returns. This review resulted in the sale or
closure of three plants during 1993, six plants during 1994, five plants during
1995, three plants during 1996 and a reorganization of the manufacturing
division administrative office during 1994. In 1997, Safeway expects to open a
new manufacturing facility in California to replace a facility closed in early
1997. The ongoing review of all remaining manufacturing operations may result in
additional plant closures.
Safeway's Canadian subsidiary has a wholesale operation that distributes both
national brands and private label products to independent grocery stores and
institutional customers.
Safeway operated the following manufacturing and processing facilities at
year-end 1996:
<TABLE>
<CAPTION>
U.S. CANADA
- --------------------------------------------------------
<S> <C> <C>
Milk plants 6 3
Bread baking plants 5 2
Ice cream plants 4 3
Cheese packaging plants 1 1
Soft drink bottling plants 4 -
Fruit and vegetable processing plants 2 3
Other food processing plants 3 2
Pet food plant 1 -
- --------------------------------------------------------
Total 26 14
========================================================
</TABLE>
In addition, the Company operates laboratory facilities for quality assurance
and research and development in certain of its plants and at its U.S.
manufacturing headquarters in Walnut Creek, California.
DISTRIBUTION
Each of Safeway's retail operating areas is served by a regional distribution
center consisting of one or more facilities. Safeway has 11
distribution/warehousing centers (seven in the United States and four in
Canada), which collectively provide the majority of all products to Safeway
stores. Safeway's distribution centers in northern California and British
Columbia are operated by a third party. Management regularly reviews
distribution operations focusing on whether these operations support their
operating areas in a cost-effective manner. As a result of such reviews, Safeway
has begun construction of a new replacement distribution center in Maryland.
13
<PAGE> 5
CAPITAL EXPENDITURE PROGRAM
A component of the Company's long-term strategy is its capital expenditure
program. The Company's capital expenditure program funds new stores, remodels,
advances in information technology, and other facilities, including plant and
distribution facilities and corporate headquarters. In the last several years,
Safeway management has significantly strengthened its program to select and
approve new capital investments.
The table below reconciles cash paid for property additions reflected in the
Consolidated Statements of Cash Flows to Safeway's broader definition of capital
expenditures (dollars in millions):
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Cash paid for property
additions $541.8 $450.9 $339.9
Less: Purchases of
previously leased
properties (13.2) (9.9) (54.5)
Plus: Present value of all
lease obligations
incurred 91.7 62.2 55.5
Mortgage notes
assumed in
property acquisitions -- -- 11.3
- -----------------------------------------------------------
Total capital expenditures $620.3 $503.2 $352.2
- -----------------------------------------------------------
Capital expenditures as a
percent of sales 3.6% 3.1% 2.3%
New stores opened 30 32 20
Stores closed or sold 37 35 36
Remodels 141 108 71
Total retail square footage
at year-end (in millions) 40.7 40.1 39.5
</TABLE>
Improved operations and lower project costs have raised the return on capital
projects, allowing Safeway to increase capital expenditures to $620 million in
1996 from $503 million in 1995 and $352 million in 1994. In 1997, excluding any
expenditures on Vons' operations, Safeway plans to invest approximately $700
million in capital expenditures to open 35 new stores and complete 150 remodels,
as well as begin construction on a new distribution center in Maryland and open
a new manufacturing plant in California.
Management regularly reviews the performance of individual stores and other
facilities on the basis of a variety of economic factors. Upon the decision to
close a store or other facility, the Company accrues estimated future losses, if
any, which may include lease payments or other costs of holding the facility,
net of estimated future income. As of year-end 1996, Safeway had an accrued
liability of $27.6 million for the anticipated future closure of 35 stores and
$19.8 million for the anticipated future closure of other facilities.
PERFORMANCE-BASED COMPENSATION
The Company has performance-based compensation plans that cover approximately
7,000 management employees. Performance-based compensation plans set overall
bonus levels based upon both operating results and working capital management.
Individual bonuses are based on job performance. Certain employees are covered
by capital investment bonus plans which measure the performance of capital
projects based on operating performance over several years.
14
<PAGE> 6
FIVE-YEAR SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
52 WEEKS 52 Weeks 52 Weeks 52 Weeks 53 Weeks
SAFEWAY INC. AND SUBSIDIARIES 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per-share amounts)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Sales $17,269.0 $16,397.5 $15,626.6 $15,214.5 $15,151.9
====================================================================================================================
Gross profit 4,774.2 4,492.4 4,287.3 4,123.3 4,149.9
Operating and administrative expense (3,882.5) (3,765.0) (3,675.2) (3,681.8) (3,708.3)
- --------------------------------------------------------------------------------------------------------------------
Operating profit 891.7 727.4 612.1 441.5 441.6
Interest expense (178.5) (199.8) (221.7) (265.5) (290.4)
Equity in earnings of unconsolidated affiliates 50.0 26.9 27.3 33.5 39.1
Other income, net 4.4 2.0 6.4 6.8 7.1
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting changes 767.6 556.5 424.1 216.3 197.4
Income taxes (307.0) (228.2) (173.9) (93.0) (99.0)
- --------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of accounting changes 460.6 328.3 250.2 123.3 98.4
Extraordinary loss, net of tax benefit
of $1.3, $6.7, and $17.1 - (2.0) (10.5) - (27.8)
Cumulative effect of accounting changes,
net of tax benefit of $12.0 - - - - (27.1)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 460.6 $ 326.3 $ 239.7 $ 123.3 $ 43.5
====================================================================================================================
Earnings per common share and common share
equivalent (fully diluted):
Income before extraordinary loss and
cumulative effect of accounting changes $ 1.93 $ 1.35 $ 1.01 $ 0.50 $ 0.41
Extraordinary loss - (0.01) (0.04) - (0.12)
Cumulative effect of accounting changes - - - - (0.11)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1.93 $ 1.34 $ 0.97 $ 0.50 $ 0.18
====================================================================================================================
FINANCIAL STATISTICS
Same-store sales (Note 1) 5.1% 4.6% 4.4% 2.1% (1.6%)
Gross profit margin 27.65% 27.40% 27.44% 27.10% 27.39%
Operating and administrative expense margin 22.48% 22.96% 23.52% 24.20% 24.47%
Operating profit margin 5.2% 4.4% 3.9% 2.9% 2.9%
Capital expenditures (Note 2) $ 620.3 $ 503.2 $ 352.2 $ 290.2 $ 553.4
Depreciation and amortization 338.5 329.7 326.4 330.2 320.3
Total assets 5,545.2 5,194.3 5,022.1 5,074.7 5,225.8
Total debt 1,984.2 2,190.2 2,196.1 2,689.2 3,048.6
Stockholders' equity 1,186.8 795.5 643.8 382.9 243.1
Weighted average common shares and common
share equivalents (fully diluted) (in millions) 238.4 243.5 247.1 246.9 238.0
OTHER STATISTICS
Stores opened during the year 30 32 20 14 35
Stores closed or sold during the year 37 35 36 39 49
Total stores at year-end 1,052 1,059 1,062 1,078 1,103
Remodels completed during the year (Note 3) 141 108 71 45 63
Total retail square footage at year-end (in millions) 40.7 40.1 39.5 39.4 39.7
</TABLE>
Note 1. Reflects sales increases (decreases) for stores operating the entire
measurement period in both the current and prior periods. 1996
same-store sales exclude British Columbia stores, which were closed
during a labor dispute.
Note 2. Defined on page 14 under "Capital Expenditure Program."
Note 3. Defined as store projects (other than maintenance) generally
requiring expenditures in excess of $200,000.
15
<PAGE> 7
FINANCIAL REVIEW
RESULTS OF OPERATIONS
Safeway's net income was $460.6 million ($1.93 per share) in 1996, $326.3
million ($1.34 per share) in 1995, and $239.7 million ($0.97 per share) in 1994.
In 1995 and 1994, income before extraordinary items was $328.3 million ($1.35
per share) and $250.2 million ($1.01 per share).
During the second and third quarters of 1996, Safeway was engaged in a
labor dispute in British Columbia which lasted 40 days and affected 86 stores.
Under Provincial law in British Columbia, replacement workers could not be
hired, and therefore all the affected stores were closed throughout the
strike-lockout. Separately, the Company was engaged in a strike-lockout in the
Denver operating area which lasted 44 days also during the second and third
quarters of 1996. All of the Denver stores operated during the strike-lockout,
largely with replacement workers. Safeway estimates that the combined impact of
both disputes reduced 1996 earnings by approximately $0.14 per share.
A nine-day strike during the second quarter of 1995 affected 208 stores
in northern California. The Company estimates that the dispute reduced 1995
earnings by an estimated $0.025 per share.
SALES Sales were $17.3 billion in 1996, $16.4 billion in 1995 and $15.6 billion
in 1994. Annual same-store sales (sales of stores operating the entire
measurement period in both 1996 and 1995, including stores that remained open
during strikes or lockouts) increased 5.1% in 1996 and 4.6% in 1995. British
Columbia stores were closed during the strike-lockout, and therefore are
excluded from 1996 annual same-store sales. This marks the third consecutive
year that same-store sales have exceeded 4%. Through year-end 1996, Safeway has
achieved 14 consecutive quarters of same-store sales increases in excess of 3%.
Safeway has reinvested cost savings into more competitive pricing, improved
store standards and enhanced customer service, which Safeway believes has
resulted in increased sales. Safeway's efforts to upgrade store standards and
customer service have focused on improving store appearance, in-stock condition,
employee friendliness and speed of checkout. In addition, management believes
that the success of the Safeway SELECT line of premium quality private label
products also contributed to sales growth since its introduction in 1993.
<PAGE> 8
GROSS PROFIT Gross profit represents the portion of sales revenue remaining
after deducting the costs of inventory sold during the period, including
purchase and distribution costs. Beginning with the first quarter of 1996,
Safeway classified all in-store bakery production labor costs as operating and
administrative expense. Previously, a portion of this labor cost was classified
as a component of cost of goods sold. All prior periods have been reclassified
to conform to the new presentation. Gross profit of 27.65% of sales in 1996 was
up from 27.40% in 1995 and 27.44% in 1994. During 1996, Safeway continued to
make progress in lowering its cost of sales through better buying practices,
improved product mix, lower advertising expenses, distribution efficiencies, and
manufacturing plant closures and consolidations. These improvements were offset
during the second and third quarters of 1996 by the impact of the labor disputes
in Denver and British Columbia, and by efforts to rebuild sales in those areas
during the fourth quarter of the year. In addition, Safeway continued to
reinvest cost savings throughout 1996 to maintain its competitive position.
OPERATING AND ADMINISTRATIVE EXPENSE Operating and administrative expense as a
percentage of sales has declined each year since 1992 due to both sales
increases and efforts to control costs. Efforts to control costs have included
overhead reduction in the Company's administrative support functions,
negotiation of competitive labor agreements, store level work simplification,
consolidation of the Company's information technology operations, elimination of
corporate perquisites and the general encouragement of a "culture of thrift"
among employees. As a result, operating and administrative expense fell to
22.48% of sales in 1996 from 22.96% in 1995 and 23.52% in 1994.
INTEREST EXPENSE Interest expense fell to $178.5 million in 1996, from $199.8
million in 1995, and $221.7 million in 1994. Interest expense declined in 1996
due to a combination of lower interest rates and reduced debt levels. In 1995,
interest expense declined primarily due to lower average debt outstanding
resulting from Safeway's strong cash flow from operations.
16
<PAGE> 9
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES Equity in earnings of
unconsolidated affiliates, recorded on a one-quarter delay basis, rose to $50.0
million in 1996 compared to $26.9 million in 1995 and $27.3 million in 1994. At
year-end 1996, Safeway held a 34.4% interest in Vons, which operated 320 grocery
stores located primarily in southern California, and a 49% interest in Casa Ley,
which operated 71 food and general merchandise stores in western Mexico.
Safeway's share of Vons' earnings was $31.2 million in 1996, compared to
$18.3 million in 1995 and $11.6 million in 1994. According to Vons' financial
reports filed with the Securities and Exchange Commission, same-store sales
increased 5.2% for the 16 weeks and 5.5% for the 40 weeks ended October 6, 1996.
In 1994, Vons reported a restructuring charge which decreased Safeway's share of
Vons' earnings by $3.9 million. According to Vons, this restructuring charge
included anticipated expenses associated with a program to close underperforming
stores and reduce workforce.
Income from Safeway's equity investment in Casa Ley increased to $18.8
million in 1996 from $8.6 million in 1995 and $15.7 million in 1994. For much of
1995, Mexico suffered from high interest rates and inflation which adversely
affected Casa Ley. During 1996, interest rates and inflation in Mexico have
moderated and Casa Ley's financial results have gradually improved.
EXTRAORDINARY LOSS In 1995 and 1994, Safeway's net income was reduced by
extraordinary losses of $2.0 million ($0.01 per share) and $10.5 million ($0.04
per share) for the early retirement of debt. The extraordinary losses represent
the payment of premiums on retired debt and the write-off of deferred finance
costs, net of the related tax benefits. Depending on market conditions, Safeway
may continue to purchase and retire long-term debt.
MERGER, REPURCHASE AND ACQUISITION OF COMMON STOCK EQUIVALENTS Following the
Merger, it is expected that Safeway's operating and administrative expense will
increase as a percentage of sales due to Vons' historically higher operating and
administrative expense to sales ratio when restated to conform to Safeway's
presentation. In addition, annual goodwill amortization will increase by
approximately $29 million. However, Safeway plans to apply its cost reduction,
sales growth and capital management strategies to Vons' operations in an effort
to offset these negative effects.
As a result of the Repurchase of Safeway common stock, the Company will
significantly increase its debt and interest expense, but will also reduce the
number of common shares outstanding used to calculate earnings per share after
the Merger.
<PAGE> 10
SSI Equity Associates, L.P. ("SSI"), a related party, is a limited
partnership whose sole assets consist of warrants to purchase 23.4 million
shares of Safeway common stock at $1.00 per share. In 1995, the Company acquired
50.7% of the partnership interests in SSI for $196.2 million with proceeds from
bank borrowings. During 1996, Safeway acquired an additional 13.8% of the
partnership interests in SSI for $126.5 million, again with proceeds from bank
borrowings. In calculating earnings per share, Safeway considers the warrants to
be common stock equivalents. Safeway estimated that, as of year-end 1996, the
effect of the 1996 repurchases would reduce common stock equivalents by about
3.1 million shares. The favorable effect on earnings per share from reducing
common stock equivalents will be partially offset by interest expense on the
bank borrowings.
The combined impact of the Merger (including options to purchase Safeway
shares as a result of the assumption of Vons options), the Repurchase and the
1996 SSI Warrant repurchases will be a net increase in the number of common
stock and common stock equivalents of approximately 8.4 million shares as
follows (in millions):
<TABLE>
<CAPTION>
Shares
- ----------------------------------------------------------------------------
<S> <C>
Merger 43.5
Repurchase (32.0)
SSI Warrant repurchases (3.1)
- ----------------------------------------------------------------------------
Net increase in common stock and common stock equivalents 8.4
- ----------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND FINANCIAL RESOURCES
Net cash flow from operations was $825.2 million in 1996, $657.7 million in 1995
and $753.3 million in 1994. Net cash flow from operations increased in 1996
largely due to increased net income. Cash flow from operations was down in 1995
compared to 1994 primarily as a result of strong improvement in 1994 working
capital items, particularly accounts payable.
Cash flow used by investing activities was $482.3 million in 1996,
$425.7 million in 1995 and $331.6 million in 1994. The increase in cash flow
used by investing activities is primarily the result of increased capital
expenditures for 30 new stores and 141 remodels in 1996, 32 new stores and 108
remodels in 1995, and 20 new stores and 71 remodels in 1994.
Cash flow used by financing activities was $337.5 million in 1996,
$218.4 million in 1995 and $478.5 million in 1994, reflecting Safeway's steady
reduction in total debt in the last three years.
Net cash flow from operations as presented on the Consolidated
Statements of Cash Flows is an important
17
<PAGE> 11
measure of cash generated by the Company's operating activities. Operating cash
flow, as defined below, is similar to net cash flow from operations because it
excludes certain noncash items. However, operating cash flow also excludes
interest expense and income taxes. Management believes that operating cash flow
is relevant to investors because operating cash flow assists investors in
evaluating Safeway's ability to service its debt by providing a commonly used
measure of cash available to pay interest and facilitates comparisons of
Safeway's results of operations with those companies having different capital
structures. Safeway's computation of operating cash flow is as follows (dollars
in millions):
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C>
Income before income taxes
and extraordinary loss $ 767.6 $556.5 $424.1
LIFO expense 4.9 9.5 2.7
Interest expense 178.5 199.8 221.7
Depreciation and amortization 338.5 329.7 326.4
Equity in earnings of
unconsolidated affiliates (50.0) (26.9) (27.3)
- ------------------------------------------------------------------------------
Operating cash flow $1,239.5 $1,068.6 $947.6
- ------------------------------------------------------------------------------
As a percent of sales 7.18% 6.52% 6.06%
- ------------------------------------------------------------------------------
As a multiple of interest expense 6.94x 5.35x 4.27x
- ------------------------------------------------------------------------------
</TABLE>
Annual debt maturities over the next five years are set forth in Note C of
the Company's 1996 consolidated financial statements.
As of year-end 1996, the Company had effectively converted $83.0 million of
its $494.3 million of floating rate debt to fixed interest rate debt through the
use of interest rate swap agreements. Interest rate swap agreements increased
interest expense by $3.0 million in 1996, $0.3 million in 1995 and $4.4 million
in 1994. The significant terms of such agreements outstanding at year-end 1996
are described in Note E to the Company's 1996 consolidated financial statements.
Total debt at year-end 1996 fell slightly to $1.98 billion from $2.19 billion
at year-end 1995, despite increased capital expenditures and the acquisition of
limited partnership interests in SSI for $126.5 million. Safeway anticipates
that borrowings will increase significantly due to the Repurchase and assumption
of Vons debt. To finance the Repurchase, Safeway currently expects to enter into
a new credit agreement to provide for, among other things, increased borrowing
capacity to $3 billion and an extended maturity on the new commitments.
Based upon the current level of operations of Safeway and Vons, Safeway
expects cash flow from operations of the combined company, supplemented by
borrowings available under the new credit agreement, to be Safeway's primary
sources of liquidity. Management believes that these sources of liquidity will
be adequate to meet anticipated requirements for working capital, capital
expenditures, interest payments and scheduled principal payments.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements relating to,
among other things, capital expenditures, cost reduction and operating
improvements. Such statements are subject to inherent uncertainties and risks,
including among others: business and economic conditions generally in the
Company's operating regions; pricing pressures and other competitive factors;
results of the Company's programs to reduce costs; the ability to integrate Vons
and achieve operating improvements; relations with union bargaining units; and
the availability and terms of financing. Consequently, actual events and results
may vary significantly from those included in or contemplated or implied by such
statements.
18
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SAFEWAY INC. AND SUBSIDIARIES 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per-share amounts)
<S> <C> <C> <C>
Sales $ 17,269.0 $ 16,397.5 $ 15,626.6
Cost of goods sold (12,494.8) (11,905.1) (11,339.3)
------------------------------------------------------------------------------------------------------
Gross profit 4,774.2 4,492.4 4,287.3
Operating and administrative expense (3,882.5) (3,765.0) (3,675.2)
------------------------------------------------------------------------------------------------------
Operating profit 891.7 727.4 612.1
Interest expense (178.5) (199.8) (221.7)
Equity in earnings of unconsolidated affiliates 50.0 26.9 27.3
Other income, net 4.4 2.0 6.4
------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary loss 767.6 556.5 424.1
Income taxes (307.0) (228.2) (173.9)
------------------------------------------------------------------------------------------------------
Income before extraordinary loss 460.6 328.3 250.2
Extraordinary loss related to early retirement of
debt, net of income tax benefit of $1.3 and $6.7 - (2.0) (10.5)
------------------------------------------------------------------------------------------------------
Net income $ 460.6 $ 326.3 $ 239.7
======================================================================================================
Earnings per common share and common
share equivalent:
Primary
Income before extraordinary loss $ 1.94 $ 1.36 $ 1.02
Extraordinary loss - (0.01) (0.04)
------------------------------------------------------------------------------------------------------
Net income $ 1.94 $ 1.35 $ 0.98
======================================================================================================
Fully diluted
Income before extraordinary loss $ 1.93 $ 1.35 $ 1.01
Extraordinary loss - (0.01) (0.04)
------------------------------------------------------------------------------------------------------
Net income $ 1.93 $ 1.34 $ 0.97
======================================================================================================
Weighted average common shares
and common share equivalents:
Primary 237.8 240.6 244.1
Fully diluted 238.4 243.5 247.1
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR-END YEAR-END
SAFEWAY INC. AND SUBSIDIARIES 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
ASSETS Current assets:
Cash and equivalents $ 79.7 $ 74.8
Receivables 160.9 152.7
Merchandise inventories, net of LIFO
reserve of $79.2 and $74.3 1,283.3 1,191.8
Prepaid expenses and other current assets 130.5 95.5
------------------------------------------------------------------------------------------------------
Total current assets 1,654.4 1,514.8
------------------------------------------------------------------------------------------------------
Property:
Land 438.3 419.4
Buildings 1,286.9 1,213.2
Leasehold improvements 957.2 858.5
Fixtures and equipment 2,108.5 1,912.7
Property under capital leases 278.7 283.4
------------------------------------------------------------------------------------------------------
5,069.6 4,687.2
Less accumulated depreciation and amortization 2,313.2 2,094.3
------------------------------------------------------------------------------------------------------
Total property, net 2,756.4 2,592.9
Goodwill, net of accumulated amortization of $116.4 and $106.3 312.5 323.8
Prepaid pension costs 328.7 322.4
Investments in unconsolidated affiliates 362.4 336.0
Other assets 130.8 104.4
------------------------------------------------------------------------------------------------------
Total assets $5,545.2 $5,194.3
======================================================================================================
</TABLE>
20
<PAGE> 14
<TABLE>
<CAPTION>
YEAR-END YEAR-END
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per-share amounts)
<S> <C> <C> <C>
LIABILITIES AND Current liabilities:
STOCKHOLDERS' Current maturities of notes and debentures $ 237.3 $ 221.4
EQUITY Current obligations under capital leases 18.4 19.0
Accounts payable 1,153.1 1,040.0
Accrued salaries and wages 231.2 234.6
Other accrued liabilities 390.0 424.0
------------------------------------------------------------------------------------------------------
Total current liabilities 2,030.0 1,939.0
------------------------------------------------------------------------------------------------------
Long-term debt:
Notes and debentures 1,568.1 1,783.6
Obligations under capital leases 160.4 166.2
------------------------------------------------------------------------------------------------------
Total long-term debt 1,728.5 1,949.8
Deferred income taxes 223.8 108.5
Accrued claims and other liabilities 376.1 401.5
------------------------------------------------------------------------------------------------------
Total liabilities 4,358.4 4,398.8
------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share;
750 shares authorized; 221.4 and 213.7 shares
outstanding 2.2 2.1
Additional paid-in capital 750.3 684.9
Unexercised warrants purchased (322.7) (196.2)
Cumulative translation adjustments 12.0 20.3
Retained earnings 745.0 284.4
------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,186.8 795.5
------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,545.2 $5,194.3
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SAFEWAY INC. AND SUBSIDIARIES 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
CASH Net income $ 460.6 $ 326.3 $ 239.7
FLOW FROM Reconciliation to net cash flow from operations:
OPERATIONS
Extraordinary loss related to early retirement
of debt, before income tax benefit - 3.3 17.2
Depreciation and amortization 338.5 329.7 326.4
Amortization of deferred finance costs 1.8 4.0 3.0
Deferred income taxes 113.9 (15.8) (12.9)
LIFO expense 4.9 9.5 2.7
Equity in earnings of unconsolidated affiliates (50.0) (26.9) (27.3)
Net pension expense (income) 4.2 7.6 (1.4)
Contributions to Canadian pension plan (10.6) (10.3) (11.5)
Increase (decrease) in accrued claims
and other liabilities (17.6) 19.0 (5.7)
Loss (gain) on property retirements (12.6) 20.4 56.3
Changes in working capital items:
Receivables (8.5) (3.8) (24.5)
Inventories at FIFO cost (99.3) (55.4) (31.8)
Prepaid expenses and other current assets (35.1) (2.9) 3.6
Payables and accruals 135.0 53.0 219.5
------------------------------------------------------------------------------------------------------
Net cash flow from operations 825.2 657.7 753.3
------------------------------------------------------------------------------------------------------
CASH FLOW Cash paid for property additions (541.8) (450.9) (339.9)
FROM INVESTING
ACTIVITIES Proceeds from sale of property and operations 60.8 54.8 36.3
Other (1.3) (29.6) (28.0)
------------------------------------------------------------------------------------------------------
Net cash flow used by investing activities (482.3) (425.7) (331.6)
------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 16
<TABLE>
<CAPTION>
SAFEWAY INC. AND SUBSIDIARIES 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
CASH Additions to short-term borrowings $ 227.2 $ 183.7 $ 157.9
FLOW FROM
FINANCING Payments on short-term borrowings (280.4) (131.5) (108.0)
ACTIVITIES
Additions to long-term borrowings 387.1 708.1 455.7
Payments on long-term borrowings (552.0) (787.6) (986.2)
Proceeds from exercise of warrants
and stock options 12.6 12.8 14.6
Premiums paid on early retirement of debt - (3.3) (13.2)
Purchase of unexercised warrants (126.5) (196.2) -
Other (5.5) (4.4) 0.7
------------------------------------------------------------------------------------------------------
Net cash flow used by financing activities (337.5) (218.4) (478.5)
------------------------------------------------------------------------------------------------------
Effect of changes in exchange rates on cash (0.5) 0.5 (0.9)
------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents 4.9 14.1 (57.7)
CASH AND Beginning of year 74.8 60.7 118.4
EQUIVALENTS ------------------------------------------------------------------------------------------------------
End of year $ 79.7 $ 74.8 $ 60.7
======================================================================================================
OTHER Cash payments during the year for:
CASH FLOW
INFORMATION Interest $ 181.8 $ 203.0 $ 230.1
Income taxes, net of refunds 156.7 213.0 126.0
NONCASH Tax benefit from stock options exercised 51.9 16.6 15.6
INVESTING
AND FINANCING Mortgage notes assumed in property acquisitions - - 11.3
ACTIVITIES
Capital lease obligations entered into 15.5 13.7 4.5
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL UNEXERCISED CUMULATIVE EARNINGS TOTAL
---------------- PAID-IN WARRANTS TRANSLATION (ACCUMULATED STOCKHOLDERS'
SAFEWAY INC. AND SUBSIDIARIES SHARES AMOUNT CAPITAL PURCHASED ADJUSTMENTS DEFICIT) EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, YEAR-END 1993 203.0 $2.0 $623.5 $39.0 $(281.6) $ 382.9
OPTIONS AND WARRANTS EXERCISED,
INCLUDING TAX BENEFIT 6.6 0.1 30.1 - - 30.2
STOCK BONUSES - - 0.9 - - 0.9
NET INCOME - - - - 239.7 239.7
TRANSITION ADJUSTMENTS - - - (9.9) - (9.9)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, YEAR-END 1994 209.6 2.1 654.5 29.1 (41.9) 643.8
OPTIONS AND WARRANTS EXERCISED,
INCLUDING TAX BENEFIT 4.0 - 29.4 - - 29.4
STOCK BONUSES 0.1 - 1.0 - - 1.0
UNEXERCISED WARRANTS PURCHASED - - - $(196.2) - - (196.2)
NET INCOME - - - - - 326.3 326.3
TRANSLATION ADJUSTMENTS - - - - (8.8) - (8.8)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, YEAR-END 1995 213.7 2.1 684.9 (196.2) 20.3 284.4 795.5
OPTIONS AND WARRANTS EXERCISED,
INCLUDING TAX BENEFIT 7.7 0.1 64.4 - - - 64.5
STOCK BONUSES - - 1.0 - - - 1.0
UNEXERCISED WARRANTS PURCHASED - - - (126.5) - - (126.5)
NET INCOME - - - - - 460.6 460.6
TRANSLATION ADJUSTMENTS - - - - (8.3) - (8.3)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, YEAR-END 1996 221.4 $2.2 $750.3 $(322.7) $12.0 $ 745.0 $1,186.8
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY At December 28, 1996, Safeway Inc. ("Safeway" or the "Company")
operated 1,052 stores in the United States and Canada. U.S. retail operations
are located principally in northern California, Oregon, Washington, Colorado,
Arizona and the Mid-Atlantic region. Canadian retail operations are located
principally in British Columbia, Alberta and Manitoba/Saskatchewan. In support
of its retail operations, Safeway has an extensive network of distribution,
manufacturing and food processing facilities.
In addition to stores operated under the Safeway name, the Company has
ownership interests in two other retailers. At year-end 1996, Safeway held a 49%
interest in Casa Ley, S.A. de C.V. ("Casa Ley"), which operated 71 food and
general merchandise stores in western Mexico, and a 34.4% interest in The Vons
Companies, Inc. ("Vons"), which operated 320 grocery stores located primarily in
southern California.
In December 1996, Safeway and Vons entered into an agreement for a
business combination of the two companies pursuant to which Safeway will issue
1.425 shares of Safeway common stock for each share of Vons common stock it does
not currently own in a transaction that will be accounted for as a purchase (the
"Merger"). As a result of the Merger, Vons will become a wholly-owned subsidiary
of Safeway. The transaction is subject to approval by Vons' shareholders. The
companies expect to complete the transaction in early April of 1997.
BASIS OF CONSOLIDATION The consolidated financial statements include Safeway
Inc., a Delaware corporation, and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Investments in affiliates which are not majority-owned are
reported using the equity method.
FISCAL YEAR The Company's fiscal year ends on the Saturday nearest December 31.
The last three fiscal years consist of the 52-week periods ended December 28,
1996, December 30, 1995 and December 31, 1994.
RECLASSIFICATIONS Certain amounts for prior years have been reclassified to
conform to the 1996 presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of the Company's
Canadian subsidiaries and Mexican unconsolidated affiliate are translated into
U.S. dollars at year-end rates of exchange, and income and expenses are
translated at average rates during the year. Adjustments resulting from
translating financial statements into U.S. dollars are reported as cumulative
translation adjustments and are shown net of applicable income taxes as a
separate component of stockholders' equity.
MERCHANDISE INVENTORIES Merchandise inventory of $756 million at year-end 1996
and $693 million at year-end 1995 is valued at the lower of cost on a last-in,
first-out ("LIFO") basis or market value. Such LIFO inventory had a replacement
or current cost of $835 million at year-end 1996 and $767 million at year-end
1995. The remaining inventory is valued at the lower of cost on a first-in,
first-out ("FIFO") basis or market value. FIFO cost of inventory approximates
replacement or current cost. Inventory on a FIFO basis includes meat and produce
in the United States, inventory of U.S. manufacturing operations and all
inventories of the Canadian subsidiaries.
Application of the LIFO method resulted in increases in cost of goods
sold of $4.9 million in 1996, $9.5 million in 1995 and $2.7 million in 1994.
Liquidations of LIFO layers during the three years reported did not have a
significant effect on the results of operations.
PROPERTY AND DEPRECIATION Property is stated at cost. Depreciation expense on
buildings and equipment is computed on the straight-line method using the
following lives:
Stores and other buildings 10 - 30 years
Fixtures and equipment 3 - 15 years
Property under capital leases is amortized on a straight-line basis over
the remaining terms of the leases. Leasehold improvements include buildings
constructed on leased land and improvements to leased buildings. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
remaining terms of the lease or the estimated useful lives of the assets.
GOODWILL Goodwill is amortized on a straight-line basis over 40 years. Goodwill
amortization was $10.4 million in 1996, 1995 and 1994.
25
<PAGE> 20
SELF-INSURANCE The Company is primarily self-insured for workers' compensation,
automobile and general liability costs. The self-insurance liability is
determined actuarially, based on claims filed and an estimate of claims incurred
but not yet reported. The present value of such claims was accrued using a
discount rate of 5.5% in both 1996 and 1995. The current portion of the
self-insurance liability ($65.1 million at year-end 1996 and $70.6 million at
year-end 1995) is included in other accrued liabilities in the consolidated
balance sheets. The long-term portion of $168.7 million at year-end 1996 and
$188.7 million at year-end 1995 is included in accrued claims and other
liabilities. Claims payments were $66.7 million in 1996, $71.4 million in 1995
and $75.3 million in 1994. The total undiscounted liability was $266 million at
year-end 1996 and $297 million at year-end 1995.
INCOME TAXES The Company provides a deferred tax expense or benefit equal to
the change in the deferred tax liability during the year in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred income taxes represent tax credit carryforwards and
future net tax effects resulting from temporary differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT Earnings per common share
and common share equivalent is calculated by dividing net income by the weighted
average number of common shares outstanding during the period plus the dilutive
effect of stock options and warrants, as determined by the treasury stock
method.
STATEMENTS OF CASH FLOWS Short-term investments with original maturities of
less than three months are considered to be cash equivalents. Borrowings with
original maturities of less than three months are presented net of related
repayments.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS As discussed in Note E, the Company has
entered into interest rate swap agreements to limit the exposure of its floating
interest rate debt to changes in market interest rates. These agreements involve
the exchange with a counterparty of fixed and floating rate interest payments
periodically over the life of the agreements without exchange of the underlying
notional principal amounts. The differential to be paid or received is
recognized over the life of the agreements as an adjustment to interest expense.
The Company's counterparties are major financial institutions.
REVENUE RECOGNITION Sales are recorded when payment is tendered at check-out.
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS Generally accepted accounting principles
require the disclosure of the fair value of certain financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Safeway estimated the fair values presented below using
appropriate valuation methodologies and market information available as of
year-end. Considerable judgment is required to develop estimates of fair value,
and the estimates presented are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions or estimation methodologies could have a material effect on
the estimated fair values. Additionally, these fair values were estimated at
year-end, and current estimates of fair value may differ significantly from the
amounts presented.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and equivalents, accounts receivable, accounts payable and short-term debt.
The carrying amount of these items approximates fair value.
Long-term debt. Market values quoted on the New York Stock Exchange are used to
estimate the fair value of publicly traded debt. To estimate the fair value of
debt issues that are not quoted on an exchange, the Company uses those interest
rates that are currently available to it for issuance of debt with similar terms
and remaining maturities. At year-end 1996, the estimated fair value of debt was
$1.9 billion compared to a carrying value of $1.8 billion. At year-end 1995, the
estimated fair value of debt was $2.1 billion compared to a carrying value of
$2.0 billion.
Interest rate swap agreements. The fair value of interest rate swap agreements
is the amount at which they could be settled based on estimates obtained from
dealers. At year-end 1996 and 1995, net unrealized losses on interest rate swap
agreements were $2.0 million and $2.4 million. Since the Company intends to hold
these agreements as hedges for the terms of the agreements, the market risk
associated with changes in interest rates should not be significant.
IMPAIRMENT OF LONG-LIVED ASSETS In 1996, Safeway adopted the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 establishes recognition and measurement
criteria for impairment losses when the Company no longer expects to recover the
carrying value of a long-lived asset. Safeway's existing accounting policy for
long-lived assets complied with SFAS No. 121. Therefore, the adoption of
SFAS No. 121 did not have a material effect on the Company's Consolidated
Financial Statements. Upon the decision to close a store or other facility, the
Company accrues estimated future losses, if any, which may include lease
payments or other costs of holding the facility, net of estimated future income.
As of year-end 1996, Safeway had an accrued liability of $27.6 million for the
anticipated future closure of 35 stores and $19.8 million for the anticipated
future closure of other facilities.
26
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCK-BASED COMPENSATION Safeway accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Safeway elected to
adopt the disclosure requirements of SFAS No. 123,"Accounting for Stock-Based
Compensation," in 1996.
NOTE B: MERGER WITH THE VONS COMPANIES, INC.
Safeway currently owns approximately 34% of the outstanding common stock of
Vons. In December 1996, Safeway and Vons entered into an agreement for the
Merger pursuant to which Safeway will issue 1.425 shares of Safeway common stock
for each share of Vons common stock it does not currently own in a transaction
that will be accounted for as a purchase. As a result of the Merger, Vons will
become a wholly-owned subsidiary of Safeway. The transaction is subject to
approval by Vons' shareholders. The companies expect to complete the transaction
in early April of 1997.
Safeway currently recognizes its proportionate share of Vons' net income
(based on Safeway's ownership interest in Vons) as equity in the earnings of an
unconsolidated affiliate on a one-quarter delay basis. As of the acquisition
date, Safeway will consolidate 100% of Vons' activity in its financial
statements. Based on preliminary estimates, the cost to acquire the Vons stock
not currently owned by Safeway will be approximately $1.7 billion, of which an
estimated $1.5 billion will be allocated to goodwill with an estimated useful
life of 40 years. Annual goodwill amortization of the combined company is
expected to increase by approximately $29 million.
In connection with the Merger, Safeway will repurchase (the
"Repurchase") 32 million shares of Safeway common stock held by one or more
partnerships controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR")
at $43 per share, or $1.376 billion in the aggregate. To finance the Repurchase,
Safeway currently expects to enter into a new credit agreement to provide for,
among other things, increased borrowing capacity to $3 billion and an extended
maturity on the new commitments.
NOTE C: FINANCING
Notes and debentures were composed of the following at year-end (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Credit Agreement, unsecured $360.6 $395.0
9.30% Senior Secured
Debentures due 2007 70.7 70.7
Mortgage notes payable, secured 306.4 389.3
10% Senior Notes due 2002,
unsecured 59.1 59.1
Medium-term notes, unsecured 65.5 80.0
Other notes payable, unsecured 119.0 122.7
Short-term bank borrowings,
unsecured 83.0 136.1
9.35% Senior Subordinated
Notes due 1999, unsecured 161.5 172.5
10% Senior Subordinated
Notes due 2001, unsecured 241.4 241.4
9.65% Senior Subordinated
Debentures due 2004, unsecured 228.2 228.2
9.875% Senior Subordinated
Debentures due 2007, unsecured 110.0 110.0
- -----------------------------------------------------------
1,805.4 2,005.0
Less current maturities 237.3 221.4
- -----------------------------------------------------------
Long-term portion $1,568.1 $1,783.6
===========================================================
</TABLE>
CREDIT AGREEMENT Safeway's existing unsecured bank credit agreement (the "Credit
Agreement") matures in 2000 and has two one-year extension options. Safeway may
borrow up to $1.15 billion under the Credit Agreement, including up to $400
million in Canada. At year-end 1996, the Company had total unused borrowing
capacity under the Credit Agreement of $722.7 million.
U.S. borrowings under the Credit Agreement carry interest at one of the
following rates selected by the Company: (i) the prime rate; (ii) a rate based
on rates at which Eurodollar deposits are offered to first-class banks by the
lenders in the Credit Agreement plus a pricing margin based on the Company's
debt rating or interest coverage ratio (the "Pricing Margin"); or (iii) rates
quoted at the discretion of the lenders. Canadian borrowings denominated in U.S.
dollars carry interest at one of the following rates selected by the Company:
(a) the Canadian base rate; or (b) the Canadian Eurodollar rate plus the Pricing
Margin. Canadian borrowings denominated in Canadian dollars carry interest at
one of the following rates selected by the Company: (i) the Canadian prime rate;
or (ii) the rate for Canadian bankers acceptances plus the Pricing Margin.
The weighted average interest rate on borrowings under the Credit Agreement
was 5.3% during 1996. At year-end 1996, the weighted average interest rate on
borrowings under the Credit Agreement was 5.0%.
27
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SENIOR SECURED INDEBTEDNESS The 9.30% Senior Secured Debentures due 2007 are
secured by a Deed of Trust which created a lien on the land, buildings and
equipment owned by Safeway at its distribution center in Tracy, California.
MORTGAGE NOTES PAYABLE Mortgage notes payable at year-end 1996 have remaining
terms ranging from one to 13 years, have a weighted average interest rate of
9.3% and are secured by properties with a net book value of approximately $425
million.
SENIOR UNSECURED INDEBTEDNESS In 1992, the Company filed with the Securities
and Exchange Commission a shelf registration statement relating to public
offerings of up to $240 million of debt securities. Pursuant to the shelf
registration, the Company issued $80 million of notes in 1992, including $74
million of 10% Senior Notes due 2002, and $80 million of medium-term notes in
1993. The Company used the proceeds from these notes to finance capital
expenditures.
OTHER NOTES PAYABLE Other notes payable at year-end 1996 have remaining terms
ranging from one to 15 years and a weighted average interest rate of 7.6%.
SENIOR SUBORDINATED INDEBTEDNESS The 9.35% Senior Subordinated Notes due 1999,
10% Senior Subordinated Notes due 2001, 9.65% Senior Subordinated Debentures due
2004, and 9.875% Senior Subordinated Debentures due 2007 (collectively the
"Subordinated Securities") are subordinated in right of payment to, among other
things, the Company's borrowings under the Credit Agreement, the 9.30% Senior
Secured Debentures, the senior unsecured indebtedness and mortgage notes
payable.
REDEMPTIONS During 1995, Safeway retired $53.5 million of mortgage debt with
proceeds from floating rate bank borrowings. During 1994, Safeway retired $44.2
million of senior debt and $247.9 million of Subordinated Securities primarily
with proceeds from floating rate bank borrowings. These redemptions resulted in
extraordinary losses of $2.0 million ($0.01 per share) in 1995 and $10.5 million
($0.04 per share) in 1994. The extraordinary losses represent the payment of
redemption premiums and the write-off of deferred finance costs, net of the
related tax benefits. Depending on market conditions, Safeway may continue to
purchase and retire long-term debt.
RESTRICTIVE COVENANTS The Credit Agreement and the indentures related to
Safeway's 9.30% Senior Secured Debentures due 2007 and the Subordinated
Securities (the "Indentures") contain certain restrictions on payments by the
Company for, among other things: (i) paying cash dividends on its capital stock;
(ii) repurchasing shares of its capital stock or certain indebtedness; and (iii)
acquiring any outstanding warrants, options or other rights to acquire shares of
any class of stock of Safeway. At year-end 1996, the limitation on such
restricted payments was $540 million. Other provisions of the Credit Agreement,
Indentures and the indentures related to the senior unsecured indebtedness limit
Safeway with respect to, among other things, (a) incurring additional
indebtedness; (b) creating liens upon its assets; and (c) disposing of material
amounts of assets other than in the ordinary course of business.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other provisions of the Credit Agreement limit certain acts of the
Company and require the Company to meet certain financial tests.
The restrictions under the Indentures will not affect the Company's
ability to consummate the Merger and the Repurchase described in Note B above.
ANNUAL DEBT MATURITIES As of year-end 1996, annual debt maturities were as
follows (in millions):
- -----------------------------------------------------------
1997 $237.3
1998 70.8
1999 195.6
2000 386.0
2001 306.3
Thereafter 609.4
- -----------------------------------------------------------
$1,805.4
- -----------------------------------------------------------
LETTERS OF CREDIT The Company had letters of credit of $153.5 million
outstanding at year-end 1996 of which $66.7 million were issued under the Credit
Agreement. The letters of credit are maintained primarily to support
performance, payment, deposit or surety obligations of the Company. The Company
pays annual commitment fees ranging from 0.25% to 0.75% on the outstanding
portion of the letters of credit.
NOTE D: LEASE OBLIGATIONS
Approximately two-thirds of the premises that the Company occupies are leased.
The Company had approximately 1,020 leases at year-end 1996, including
approximately 170 which are capitalized for financial reporting purposes. Most
leases have renewal options, some with terms and conditions similar to the
original lease, others with reduced rental rates during the option periods.
Certain of these leases contain options to purchase the property at amounts that
approximate fair market value.
As of year-end 1996, future minimum rental payments applicable to
non-cancelable capital and operating leases with remaining terms in excess of
one year were as follows (in millions):
CAPITAL OPERATING
LEASES LEASES
- ----------------------------------------------------------
1997 $ 39.4 $ 144.4
1998 36.5 142.6
1999 32.9 138.4
2000 28.1 131.8
2001 25.8 118.7
Thereafter 196.1 968.3
- ----------------------------------------------------------
Total minimum lease payments 358.8 $1,644.2
--------
Less amounts representing interest (180.0)
- -----------------------------------------------
Present value of net minimum lease
payments 178.8
Less current obligations (18.4)
- -----------------------------------------------
Long-term obligations $160.4
- -----------------------------------------------
28
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments under non-cancelable capital and operating
lease agreements have not been reduced by minimum sublease rental income of
$146.1 million.
Amortization expense for property under capital leases was $17.9 million in
1996, $18.9 million in 1995 and $20.6 million in 1994. Accumulated amortization
of property under capital leases was $156.1 million at year-end 1996 and $151.6
million at year-end 1995.
The following schedule shows the composition of total rental expense for all
operating leases (in millions). In general, contingent rentals are based on
individual store sales.
1996 1995 1994
- -----------------------------------------------------------
Property leases:
Minimum rentals $138.2 $132.7 $126.4
Contingent rentals 9.9 9.1 9.8
Less rentals from subleases (11.1) (11.1) (13.7)
- -----------------------------------------------------------
137.0 130.7 122.5
Equipment leases 21.0 20.8 20.9
- -----------------------------------------------------------
$158.0 $151.5 $143.4
- -----------------------------------------------------------
NOTE E: INTEREST EXPENSE
Interest expense consisted of the following (in millions):
1996 1995 1994
- -----------------------------------------------------------
Credit Agreement $ 16.4 $ 13.5
Bank Credit Agreement and
Working Capital Credit
Agreement - 11.7 $ 20.5
9.30% Senior Secured
Debentures 6.6 6.6 8.0
Mortgage notes payable 33.0 43.3 50.2
10% Senior Notes 5.9 5.9 6.5
Medium-term notes 6.0 7.1 7.5
Other notes payable 11.9 11.3 16.5
Short-term bank borrowings 5.1 6.6 3.0
9.35% Senior Subordinated
Notes 15.3 16.1 19.6
10% Senior Subordinated
Notes 24.1 24.1 26.6
9.65% Senior Subordinated
Debentures 22.0 22.0 24.5
9.875% Senior Subordinated
Debentures 10.9 10.9 12.1
Obligations under capital
leases 20.8 21.0 22.2
Amortization of deferred
finance costs 1.8 4.0 3.0
Interest rate swap
agreements 3.0 0.3 4.4
Capitalized interest (4.3) (4.6) (2.9)
- -----------------------------------------------------------
$178.5 $199.8 $221.7
- -----------------------------------------------------------
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of year-end 1996, the Company had effectively converted $83.0 million
of its $494.3 million of floating rate debt to fixed interest rate debt through
the use of interest rate swap agreements. The significant terms of such
agreements outstanding at year-end 1996 were as follows (dollars in millions):
Variable
Canada Interest
U.S. Fixed Fixed Rates
Notional Interest Interest to be Origination Expiration
Principal Rates Paid Rates Paid Received Date Date
- ---------------------------------------------------------------------
$10.0 5.8% 5.5% 1992 1997
18.3 8.7% 2.9 1992 1997
18.2 8.7 4.4 1992 1997
36.5 6.0 4.0 1993 1998
- ------
$83.0
- ------
The variable interest rate received on the U.S. swap is based on LIBOR rates.
Variable interest rates received on Canadian swaps are based on the average of
bankers acceptance rates quoted by Canadian banks.
The notional principal amounts do not represent cash flows and therefore are
not subject to credit risk. The Company is subject to risk from nonperformance
of the counterparties to the agreements in the amount of any interest
differential to be received. Because the Company monitors the credit ratings of
its counterparties, which are limited to major financial institutions, Safeway
does not anticipate nonperformance by the counterparties.
At year-end 1996 and 1995, net unrealized losses on the interest rate swap
agreements were $2.0 million and $2.4 million. Since the Company intends to hold
these agreements as hedges for the term of the agreements, the market risk
associated with changes in interest rates should not be significant.
NOTE F - CAPITAL STOCK
SHARES AUTHORIZED AND ISSUED Authorized preferred stock consists of 25 million
shares of which none was outstanding during 1996, 1995 or 1994. Authorized
common stock consists of 750 million shares at $0.01 par value. Common stock
outstanding at year-end 1996 and 1995 was 221.4 million and 213.7 million
shares.
Common stock issued to certain Company officers is restricted as to
transferability. Generally, this restriction gives the Company the option to
purchase, at market price, any such stock offered for sale.
Under Safeway's stock option plans, the Company may grant incentive and
non-qualified options to purchase up to 49.0 million shares of common stock at
an exercise price equal to or greater than the fair market value at the date of
grant, as determined by the Compensation and Stock Option Committee of the
Board of Directors. Options generally vest over seven years. Vested options are
exercisable in part or in full at any time prior to the expiration date of 10 to
15 years from the date of the grant. The stock option plans prohibit the
transfer of options.
29
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Activity in the Company's stock option plans for the three-year period
ended December 28, 1996 was as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
- -------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, year-end 1993 27,087,240 $4.73
1994 Activity:
Granted 3,709,250 13.13
Canceled (1,154,168) 7.25
Exercised (4,329,298) 2.83
----------
Outstanding, year-end 1994 25,313,024 6.18
1995 Activity:
Granted 1,018,180 18.13
Canceled (779,324) 7.44
Exercised (3,386,558) 3.86
----------
Outstanding, year-end 1995 22,165,322 7.04
1996 Activity:
Granted 1,995,992 33.30
Canceled (362,227) 10.14
Exercised (4,412,509) 4.09
----------
Outstanding, year-end 1996 19,386,578 10.14
----------
Exercisable, year-end 1995 12,022,760 4.69
----------
Exercisable, year-end 1996 11,517,320 8.50
----------
Weighted average fair value of options granted during the year:
1995 $ 8.69
1996 $15.28
</TABLE>
The following table summarizes stock option information at year-end 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- -----------------------------
Range of Number Weighted-Average Weighted Average Number Weighted Average
Exercise Prices of Options Remaining Contractual Life Exercise Price of Options Exercise Price
- ----------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to $ 1.00 2,087,000 1.70 years $ 1.00 2,087,000 $ 1.00
4.80 to 6.00 3,445,520 10.69 5.47 2,031,285 5.48
6.19 to 6.44 3,210,026 8.67 6.43 2,686,820 6.43
6.50 to 9.50 4,313,040 10.40 7.78 2,648,072 7.82
9.56 to 13.13 2,625,205 7.96 12.58 823,961 12.49
13.19 to 43.00 3,705,787 9.98 24.85 1,240,182 29.38
-------------------------------------------------------------------------------------------
$ 1.00 to $43.00 19,386,578 8.81 $10.33 11,517,320 $ 8.50
-------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 7.4 million shares were available for grant at
year-end 1996.
ADDITIONAL STOCK PLAN INFORMATION As discussed in Note A, the Company continues
to account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" requires the disclosure of proforma net income and
earnings per share as if the Company had adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: seven to nine years expected life to
vesting; stock volatility of 30% in 1996 and 29% in 1995; risk-free interest
rates of 6.29% in 1996 and 6.50% in 1995; and no dividends during the expected
term.
30
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's calculations are based on a single-option valuation
approach and forfeitures are recognized as they occur. However, the impact of
outstanding unvested stock options granted prior to 1995 has been excluded from
the proforma calculation; accordingly, the 1995 and 1996 proforma adjustments
are not indicative of future period proforma adjustments. Had compensation cost
for the Safeway's stock option plans been determined based on the fair value at
the grant date for awards in 1995 and 1996 consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
adjusted to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net income (in millions):
As reported $460.6 $326.3
Proforma 459.0 325.8
Primary earnings per share:
As reported $ 1.94 $ 1.35
Proforma 1.93 1.35
Fully diluted earnings per share:
As reported $ 1.93 $ 1.34
Proforma 1.92 1.34
</TABLE>
PUBLIC STOCK OFFERING In February 1996, the Company completed the public
offering of 23.0 million shares of common stock owned by affiliates of KKR,
including 2.2 million shares issued upon the exercise of SSI Warrants (as
defined below) and 0.2 million shares issued upon the exercise of employee stock
options. Also in 1996, SSI Warrants to purchase 2.3 million shares attributable
to the limited partnership interests owned by Safeway were canceled. The Company
received proceeds of $2.4 million for the exercise price of the options and
warrants. Affiliates of KKR and the option holder received the balance of
proceeds from the stock offering. After the offering, two limited partnerships
affiliated with KKR own 109.2 million shares of Safeway common stock, and SSI
Equity Associates, L.P. holds SSI Warrants to purchase 23.4 million shares of
Safeway common stock.
REPURCHASES OF COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK At year-end
1996, warrants (the "SSI Warrants") to purchase 23.4 million shares of the
Company's common stock at $1.00 per share were held by SSI Equity Associates,
L.P. ("SSI"), a limited partnership whose sole assets consist of the SSI
Warrants. The SSI Warrants are exercisable through November 15, 2001. SSI
Partners, L.P., an affiliate of KKR, is the general partner of SSI. During 1996
and 1995, the Company acquired 64.5% of the partnership interests in SSI for
$322.7 million with proceeds from bank borrowings, which was accounted for as a
reduction to stockholders' equity.
Outstanding common stock and the effect of options and warrants at year-end
1996 are summarized as follows (in millions):
<TABLE>
<CAPTION>
Potential Proceeds
Shares from Exercise
------ ------------------
<S> <C> <C>
Common stock outstanding 221.4
Options to purchase common stock 18.5 $169.9
SSI Warrants 8.3 8.3
----- ------
Total 248.2 $178.2
===== ======
</TABLE>
Immediately following the Merger described in Note B above, the Company will
consummate the Repurchase of 32.0 million shares of Safeway common stock held by
one or more partnerships controlled by affiliates of KKR at $43 per share, or
$1.376 billion in the aggregate. Immediately after the Repurchase, it is
expected that the two limited partnerships affiliated with KKR will own
approximately 33% of Safeway's outstanding common stock.
NOTE G: TAXES ON INCOME
The components of income tax expense are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $162.9 $157.9 $112.6
State 30.7 29.9 23.1
Foreign (0.5) 56.2 51.4
------ ------ ------
193.1 244.0 187.1
====== ====== ======
Deferred:
Federal 49.3 8.2 (0.6)
State 12.6 (0.8) 1.9
Foreign 52.0 (23.2) (14.5)
------ ------ ------
113.9 (15.8) (13.2)
------ ------ ------
$307.0 $228.2 $173.9
====== ====== ======
</TABLE>
Extraordinary losses are presented net of related tax benefits.
Therefore, 1995 and 1994 income tax expense excludes tax benefits of $1.3
million and $6.7 million on extraordinary losses. Tax benefits from the
exercise of employee stock options of $51.9 million in 1996, $16.6 million in
1995 and $15.6 million in 1994 were credited directly to paid-in capital and,
therefore, are excluded from income tax expense.
The reconciliation of the provision for income taxes at the U.S.
federal statutory income tax rate to the Company's income taxes is as follows
(dollars in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Income tax expense using
federal statutory rate $268.7 $194.8 $148.4
State rates on income less
federal benefit 28.1 18.9 16.3
Taxes provided on equity in
earnings of unconsolidated
affiliates at rates below
the statutory rate (10.5) (5.3) (6.9)
Taxes on foreign earnings
not permanently reinvested 7.3 6.2 6.6
Withholding tax on Canadian
earnings not permanently
reinvested - (5.8) 4.4
Nondeductible expenses and
amortization 3.2 4.2 2.9
Difference between statutory
rate and foreign effective
rate 11.1 1.0 2.2
Other accruals (0.9) 14.2 -
------ ------ ------
$307.0 $228.2 $173.9
====== ====== ======
</TABLE>
31
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's net deferred tax liability at
year-end were as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Workers' compensation
and other claims $ 91.7 $ 102.9
Accruals not currently deductible 48.7 59.5
Accrued claims and other liabilities 47.4 48.3
Employee benefits 9.7 34.0
Canadian operating loss
carryforward 2.7 54.7
Other assets 6.0 14.5
- ------------------------------------------------------------
206.2 313.9
- ------------------------------------------------------------
Deferred tax liabilities:
Property (110.5) (124.3)
Prepaid pension costs (149.9) (142.7)
LIFO inventory reserves (66.8) (53.7)
Investments in unconsolidated affiliates (48.1) (40.0)
Cumulative translation adjustments (23.0) (24.6)
Other liabilities (31.7) (37.1)
- ------------------------------------------------------------
(430.0) (422.4)
- ------------------------------------------------------------
Net deferred tax liability $(223.8) $(108.5)
============================================================
</TABLE>
Income tax returns for years subsequent to 1985 and 1991 are subject to
examination by U.S. and Canadian taxing authorities, respectively.
NOTE H: EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS
U.S. AND CANADIAN RETIREMENT PLANS The Company maintains defined benefit,
non-contributory pension plans (the "Plans") for substantially all of its U.S.
and Canadian employees not participating in multi-employer pension plans.
Benefits are generally based upon years of service, age at retirement date and
compensation during the last years of employment. The Company's funding policy
is to contribute annually the amount necessary to satisfy the statutory funding
standards. Through year-end 1996, the assets of the U.S. Plan have exceeded its
actuarially determined liabilities by such amounts that the U.S. Plan was
considered fully funded for purposes of contribution requirements. Accordingly,
no Company contributions were made to the U.S. Plan during the last three years.
In 1996, 1995 and 1994, the Company contributed $10.6 million, $10.3 million and
$11.5 million to the Canadian Plan. Assets of the Plans are primarily composed
of equity and interest-bearing securities.
Actuarial assumptions used to determine year-end Plan status were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Discount rate used to
determine the projected
benefit obligations:
U.S. Plan 7.5% 7.0% 8.0%
Canadian Plan 7.0 8.0 8.0
Combined weighted
average rate 7.4 7.2 8.0
Long-term rate of return on
Plan assets:
U.S. Plan 9.0 9.0 9.0
Canadian Plan 8.0 8.0 8.0
Rate of compensation
increase 5.5 5.5 5.5
</TABLE>
Net pension plan income (expense) consisted of the following (in
millions):
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Return on Plan assets:
Actual return, gain (loss) $162.4 $ 241.2 $(26.9)
Deferred loss (gain) (14.2) (152.9) 123.6
- -------------------------------------------------------------
Actuarial assumed return 148.2 88.3 96.7
Service cost (41.3) (36.7) (41.2)
Interest cost on projected
benefit obligations (51.7) (48.3) (44.9)
Net amortization (56.0) (10.9) (9.2)
- -------------------------------------------------------------
Net pension plan income
(expense) recognized
in consolidated statements
of income $ (0.8) $ (7.6) $ 1.4
=============================================================
</TABLE>
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
("SFAS No. 88"), Safeway recognized a $3.4 million special termination expense
in 1996 in connection with a workforce reduction, which is excluded from 1996
pension expense in the table above.
32
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The funded status of the Plans at year-end was as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Fair value of assets at year-end $1,392.0 $1,245.9
- -----------------------------------------------------------------
Actuarially determined present value of:
Vested benefit obligations 758.9 657.4
Nonvested benefit obligations 9.3 9.3
- -----------------------------------------------------------------
Accumulated benefit obligations 768.2 666.7
Additional amounts related to
projected compensation
increases 98.9 102.7
- -----------------------------------------------------------------
Projected benefit obligations 867.1 769.4
- -----------------------------------------------------------------
Fair value of assets in excess of
projected benefit obligations 524.9 476.5
Adjustment for difference in book
and tax basis of assets (165.1) (165.1)
Unamortized prior service costs
resulting from improved Plan
benefits 83.3 68.7
Net gain from actuarial experience
which has not been recognized in
the consolidated financial
statements (114.4) (57.7)
- -----------------------------------------------------------------
Prepaid pension costs $ 328.7 $ 322.4
=================================================================
</TABLE>
RETIREMENT RESTORATION PLAN The Retirement Restoration Plan provides death
benefits and supplemental income payments for senior executives after
retirement. The Company recognized expense of $4.4 million in 1996, $3.4 million
in 1995 and $1.7 million in 1994. The aggregate projected benefit obligation of
the Retirement Restoration Plan was approximately $44.9 million at year-end 1996
and $45.5 million at year-end 1995.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to pension and the
Retirement Restoration Plan benefits, the Company sponsors plans that provide
postretirement medical and life insurance benefits to certain salaried
employees. Retirees share a portion of the cost of the postretirement medical
plans. Safeway pays all of the cost of the life insurance plans. The plans are
not funded.
In 1996, the postretirement medical plan was amended to restrict the
types of coverage available, to change the participant contributions and to
exclude future retirees from participating in the plan. The exclusion of future
retirees in the plan is considered a curtailment under the provisions of SFAS
No. 88 which resulted in recognition of a curtailment gain of $14.5 million in
1996.
At year-end 1996 and 1995, the Company's accumulated postretirement
benefit obligation ("APBO") was $15.9 million and $23.3 million. The APBO
represents the actuarial present value of benefits expected to be paid after
retirement. Postretirement benefit expense was $1.7 million in 1996, $2.5
million in 1995 and $2.9 million in 1994.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The significant assumptions used to determine the periodic
postretirement benefit expense and the APBO were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 7.0% 8.0%
Rate of compensation
increase 5.5 5.5 5.5
</TABLE>
For 1997, an 8.0% annual rate of increase in the per capita cost of
postretirement medical benefits provided under the Company's group health plan
was assumed. The rate was assumed to decrease gradually to 5.5% for 2002 and
remain at that level thereafter. A 5.5% annual rate of increase was assumed for
1997 and thereafter in the per capita cost of postretirement benefits provided
under HMO plans. If the health care cost trend rate assumptions were increased
by 1% in each year, the APBO as of year-end 1996 would increase $0.1 million,
and the net periodic postretirement benefit expense for 1996 would remain
unchanged. Retiree contributions have historically been adjusted when plan costs
increase. The APBO for the medical plans anticipates future cost-sharing changes
to the written plan that are consistent with the Company's past practice.
MULTI-EMPLOYER PENSION PLANS Safeway participates in various multi-employer
pension plans, covering virtually all Company employees not covered under the
Company's non-contributory pension plans, pursuant to agreements between the
Company and employee bargaining units which are members of such plans. These
plans are generally defined benefit plans; however, in many cases, specific
benefit levels are not negotiated with or known by the employer-contributors.
Contributions of $112 million in 1996, $105 million in 1995 and $70 million in
1994 were made and charged to income.
Under U.S. legislation regarding such pension plans, a company is
required to continue funding its proportionate share of a plan's unfunded vested
benefits in the event of withdrawal (as defined by the legislation) from a plan
or plan termination. Safeway participates in a number of these pension plans,
and the potential obligation as a participant in these plans may be significant.
The information required to determine the total amount of this contingent
obligation, as well as the total amount of accumulated benefits and net assets
of such plans, is not readily available. During 1988 and 1987, the Company sold
certain operations. In most cases the party acquiring the operation agreed to
continue making contributions to the plans. Safeway is relieved of the
obligations related to these sold operations to the extent the acquiring parties
continue to make contributions. Whether such sales could result in withdrawal
under ERISA and, if so, whether such withdrawals could result in liability to
the Company, is not determinable at this time.
33
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COLLECTIVE BARGAINING AGREEMENTS At year-end 1996, Safeway had approximately
119,000 full and part-time employees. Approximately 90% of Safeway's employees
in the United States and Canada are covered by collective bargaining agreements
negotiated with local unions affiliated with one of 12 different international
unions. There are approximately 400 such agreements, typically having three-year
terms, with some agreements having terms up to five years. Accordingly, Safeway
negotiates a significant number of these agreements every year.
Of Safeway's approximately 107,000 unionized employees, approximately
7,000 in four operating areas are covered by labor contracts which are scheduled
to expire in 1997. In addition, there are contracts in one operating area
covering 10,000 employees that expired in 1996 and that have not yet been
renewed. While Safeway believes that its relationship with its employees is
good, there can be no assurance that contracts covering such 17,000 employees,
or that labor contracts which come up for renewal after 1997, will be renewed.
Failure to renew significant contracts can lead to work stoppages that could
have an adverse effect on Safeway's results of operations.
NOTE I: INVESTMENTS IN AFFILIATES
At year-end 1996, investments in affiliates consisted of a 49% interest in Casa
Ley, which operated 71 food and general merchandise stores in western Mexico,
and a 34.4% interest in Vons, which operated 320 grocery stores located mostly
in southern California.
In December 1996, Safeway and Vons entered into an agreement for the
Merger pursuant to which Safeway will issue 1.425 shares of Safeway common stock
for each share of Vons common stock it does not currently own in a transaction
that will be accounted for as a purchase. The transaction is subject to approval
by Vons' shareholders. The companies expect to complete the transaction in early
April of 1997. See Note B to the Consolidated Financial Statements.
At year-end 1996, the Company owned 15.1 million shares of Vons
outstanding common stock. The Company's recorded investment in Vons was $286.4
million (including goodwill of $44.3 million) at year-end 1996 and $255.2
million (including goodwill of $45.6 million) at year-end 1995. Goodwill is
being amortized over 40 years. At year-end 1996, the aggregate market value of
Safeway's shares of Vons stock as quoted on the New York Stock Exchange was
$871.6 million.
Safeway's share of Vons' earnings, recorded on a one-quarter delay
basis, was $31.2 million in 1996, compared to $18.3 million in 1995 and $11.6
million in 1994. According to Vons' financial reports filed with the Securities
and Exchange Commission, same-store sales increased 5.2% and 5.5% for the 16 and
40 weeks ended October 6, 1996. In 1994, Vons reported a restructuring charge
which decreased Safeway's share of Vons' earnings by $3.9 million. According to
Vons, these restructuring charges included anticipated expenses associated with
a program to close underperforming stores and reduce workforce.
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized financial information derived from Vons' financial reports
filed with the Securities and Exchange Commission was as follows (in millions):
<TABLE>
<CAPTION>
OCTOBER 6, October 8,
1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Financial Position:
Current assets $ 440.7 $ 436.3
Property and equipment, net 1,182.9 1,189.3
Other assets 529.3 545.3
- -----------------------------------------------------------
Total assets $2,152.9 $2,170.9
- -----------------------------------------------------------
Current liabilities $ 706.0 $ 573.6
Long-term obligations 744.9 995.8
Shareholders' equity 702.0 601.5
- -----------------------------------------------------------
Total liabilities and shareholders'
equity $2,152.9 $2,170.9
===========================================================
</TABLE>
<TABLE>
<CAPTION>
52 WEEKS 52 Weeks 52 Weeks
ENDED Ended Ended
OCTOBER 6, October 8, October 9,
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Results of Operations:
Sales $ 5,366.6 $ 5,023.5 $ 4,990.9
Cost of sales and
other expenses (5,275.9) (4,967.4) (4,954.5)
- ----------------------------------------------------------------
Net income $ 90.7 $ 56.1 $ 36.4
================================================================
</TABLE>
Income from Safeway's equity investment in Casa Ley, recorded on a
one-quarter delay basis, increased to $18.8 million in 1996 from $8.6 million in
1995 and $15.7 million in 1994. For much of 1995, Mexico suffered from high
interest rates and inflation which adversely affected Casa Ley. During 1996,
interest rates and inflation in Mexico have moderated and Casa Ley's financial
results have gradually improved.
Casa Ley had total assets of $263.1 million and $276.9 million as of
September 30, 1996 and 1995 based on financial information provided by Casa Ley.
Sales and net income for Casa Ley were as follows (in millions):
<TABLE>
<CAPTION>
12 months ended
September 30,
----------------------------------------
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Sales $810.1 $861.4 $1,052.4
================================================================
Net income $ 33.8 $ 17.9 $ 32.0
================================================================
</TABLE>
NOTE J: RELATED-PARTY TRANSACTIONS
KKR provides management, consulting and financial services to the Company for an
annual fee. Such services include, but are not necessarily limited to, advice
and assistance concerning any and all aspects of the operation, planning and
financing of the Company. Payments for management fees, special services and
reimbursement of expenses were $1,364,000 in 1996, $1,355,000 in 1995 and
$980,000 in 1994.
The Company holds an 80% interest in Property Development Associates
("PDA"), a partnership formed in 1987 with a company controlled by an affiliate
of KKR, to purchase, manage and dispose of certain Safeway facilities which are
no longer used in the retail grocery business. The financial statements of PDA
are consolidated with those of the Company and minority interest of $25.1
million and $23.2 million at year-end 1996 and 1995 is included in accrued
claims and other liabilities in the accompanying consolidated balance sheets.
During 1996, the Company contributed to PDA 16 properties no longer used in its
retail grocery business which had an aggregate net book value of $8.4 million.
The minority partner contributed cash in an amount sufficient to maintain its
20% ownership. No gains or losses were recognized on these transactions. In
1995, no properties were contributed. Safeway paid PDA $1.6 million in 1996,
$1.5 million in 1995 and $1.1 million in 1994 for reimbursement of expenses
related to management and real estate services provided by PDA.
34
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Safeway sells products to Vons for resale under Vons' private label.
Sales and cost of sales to Vons were as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Sales $51.4 $28.4 $19.5
================================================================
Cost of Sales $49.3 $27.9 $18.5
================================================================
</TABLE>
NOTE K: COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS In July 1988, there was a major fire at the Company's dry grocery
warehouse in Richmond, California. Through January 9, 1997 in excess of 125,000
claims for personal injury and property damage arising from the fire have been
settled for an aggregate amount of approximately $121 million. The Company's
loss as a result of the fire damage to its property and settlement of the above
claims was substantially covered by insurance.
As of January 9, 1997, there were still pending approximately 3,000 claims
against the Company for personal injury (including punitive damages) and
approximately 460 separate claims for property damage arising from the smoke,
ash and embers generated by the fire. A substantial percentage of these claims
have been asserted in lawsuits against the Company filed in the Superior Court
for Alameda County, California. There can be no assurance that the pending
claims will be settled or otherwise disposed of for amounts and on terms
comparable to those settled to date.
On March 8, 1996, a purported class action was filed on behalf of persons
allegedly injured as a result of the smoke, ash and embers generated by the
fire. The complaint, which was amended after the Court sustained the Company's
demurrer with leave to amend, generally alleges that the Company fraudulently
(i) obtained settlements of certain claims arising out of the fire and (ii) made
statements that induced claimants not to file actions within the time period
under the statute of limitations. The amended complaint seeks compensatory and
punitive damages. Safeway has demurred to the amended complaint, and the court
has taken the demurrer under submission. The Company has received notice from
its insurance carrier denying coverage for claims asserted in this case. Safeway
strongly disagrees with the insurance carrier's denial of coverage.
Safeway believes that coverage under its insurance policy will be sufficient
and available for resolution of all remaining third-party claims arising out of
the fire.
In February 1988, the Company sold its Kansas City Division to a company
formed by Morgan, Lewis, Githen & Ahn Fund I ("Morgan Lewis") and financed
principally by the Prudential Insurance Company of America ("Prudential") and
its affiliate, PruCo Insurance Company ("PruCo"). In January 1993, the buyer
(Food Barn Stores, Inc.) filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code, and the plan of reorganization was confirmed in July 1994. In
January 1995, Food Barn filed suit against the Company and others in the U.S.
Bankruptcy Court for the Western District of Missouri. In its complaint, Food
Barn alleges that (i) the 1988 transaction was a fraudulent conveyance under New
York law, and (ii) the Company defrauded Food Barn and fraudulently induced it
to enter into the February 1988 transaction. Food Barn seeks damages of $78
million (the alleged difference between the value of the division and the
purchase price), and consequential damages of approximately $696 million, plus
interest, and $100 million in punitive damages. In April 1995, the Company filed
motions to dismiss, and for summary judgment on, Food Barn's claims, and in
August 1995 the Bankruptcy Court denied the motions. In September 1995, the
Company filed its answer and counterclaims, denying the operative allegations of
the complaint, asserting numerous defenses, and alleging that any losses
sustained by Food Barn were the result of actions and omissions of Morgan Lewis
and its principals, Prudential and PruCo. A trial was held in December 1996 and
January 1997, and the case is under submission in the Bankruptcy Court. Safeway
believes that its defenses are meritorious.
There are also pending against the Company various claims and lawsuits
arising in the normal course of business, some of which seek damages and other
relief which, if granted, would require very large expenditures.
It is management's opinion that although the amount of liability with respect
to all of the above matters cannot be ascertained at this time, any resulting
liability, including any punitive damages but without regard to potential
recovery under the Company's insurance policies where coverage is contested,
will not have a material adverse effect on the Company's financial statements
taken as a whole.
COMMITMENTS The Company has commitments under contracts for the purchase of
property and equipment and for the construction of buildings. Portions of such
contracts not completed at year-end are not reflected in the consolidated
financial statements. These unrecorded commitments were $39.6 million at
year-end 1996.
35
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
(In millions) United States Canada Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
SALES $ 13,797.5 $ 3,471.5 $ 17,269.0
GROSS PROFIT 3,901.3 872.9 4,774.2
OPERATING PROFIT 752.8 138.9 891.7
INCOME BEFORE INCOME TAXES 652.2 115.4 767.6
NET WORKING CAPITAL (DEFICIT) (442.7) 67.1 (375.6)
TOTAL ASSETS 4,625.4 919.8 5,545.2
NET ASSETS 792.4 394.4 1,186.8
1995
Sales $ 12,902.4 $ 3,495.1 $ 16,397.5
Gross profit 3,584.5 907.9 4,492.4
Operating profit 590.1 137.3 727.4
Income before income taxes and extraordinary loss 448.9 107.6 556.5
Net working capital (deficit) (490.1) 65.9 (424.2)
Total assets 4,261.5 932.8 5,194.3
Net assets 462.6 332.9 795.5
1994
Sales $ 12,240.1 $ 3,386.5 $ 15,626.6
Gross profit 3,409.7 877.6 4,287.3
Operating profit 490.9 121.2 612.1
Income before income taxes and extraordinary loss 337.7 86.4 424.1
Net working capital (deficit) (372.5) (13.5) (386.0)
Total assets 4,171.3 850.8 5,022.1
Net assets 386.6 257.2 643.8
</TABLE>
36
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE M: QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflect all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>
LAST THIRD SECOND FIRST
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) YEAR 16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Sales $17,269.0 $5,486.9 $3,954.0 $3,945.4 $3,882.7
Gross profit 4,774.2 1,493.0 1,086.6 1,102.1 1,092.5
Operating profit 891.7 283.7 203.8 210.1 194.1
Income before income taxes 767.6 248.2 178.1 179.2 162.1
Net income 460.6 151.6 105.9 106.7 96.4
Income per common share and common share
equivalent:
Primary $ 1.94 $ 0.63 $ 0.44 $ 0.44 $ 0.40
Fully diluted 1.93 0.63 0.44 0.44 0.40
Price range, New York Stock Exchange $ 45-3/8 $ 45-3/8 $ 38-1/4 $ 35-5/8 $ 30-1/8
to 22-7/16 to 37-1/4 to 31-3/4 to 27-5/8 to 22-7/16
LAST THIRD SECOND FIRST
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) YEAR 16 WEEKS 12 WEEKS 12 WEEKS 12 WEEKS
- -------------------------------------------------------------------------------------------------------------------------------
1995
Sales $16,397.5 $5,166.3 $3,845.5 $3,753.4 $3,632.3
Gross profit 4,492.4 1,413.8 1,058.4 1,016.8 1,003.4
Operating profit 727.4 231.9 176.4 165.1 154.0
Income before income taxes and extraordinary loss 556.5 183.6 141.6 121.5 109.8
Extraordinary loss related to early retirement of debt (2.0) (2.0) - - -
Net income 326.3 111.9 83.7 68.7 62.0
Income per common share and common share
equivalent:
Primary
Income before extraordinary loss $ 1.36 $ 0.48 $ 0.35 $ 0.29 $ 0.26
Extraordinary loss (0.01) (0.01) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.35 $ 0.47 $ 0.35 $ 0.29 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------------
Fully diluted
Income before extraordinary loss $ 1.35 $ 0.47 0.35 $ 0.29 $ 0.26
Extraordinary loss (0.01) (0.01) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.34 $ 0.46 $ 0.35 $ 0.29 $ 0.26
- ------------------------------------------------------------------------------------------------------------------------------
Price range, New York Stock Exchange $ 25-3/4 $ 25-3/4 $20-5/16 $ 19-1/4 $ 18
to 15-5/16 to 19-15/16 to 17-15/16 to 15-9/16 to 15-5/16
</TABLE>
37
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Safeway Inc.:
We have audited the accompanying consolidated balance sheets of Safeway Inc. and
subsidiaries as of December 28, 1996 and December 30, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three fiscal years in the period ended December 28, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Safeway Inc. and subsidiaries as of
December 28, 1996 and December 30, 1995, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended December
28, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 18, 1997
39
<PAGE> 38
APPENDIX TO EXHIBIT 13.1
GRAPHIC PRESENTATION OF MATERIAL
The following three graphs in the Company's 1996 Annual Report to
Stockholders are incorporated by reference in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations:
1. On page 16 under the section "Financial Review" is a bar graph
entitled "Net Income (In Millions)" which shows net income for 1994,
1995 and 1996 as follows:
<TABLE>
<S> <C>
1994 $239.7
1995 $326.3
1996 $460.6
</TABLE>
This graph has an initial value of zero.
2. On page 16 under the section "Financial Review" is a pie graph
entitled "1996 Portions of the Sales Dollar" depicting the following:
<TABLE>
<S> <C>
Cost of Goods Sold 72.3%
Operating and Administrative Expense 22.5%
Operating Profit 5.2%
</TABLE>
This graph accompanies the subsection entitled "Sales".
3. On page 17 under the section "Financial Review" is a bar graph
entitled "Interest Expense (In Millions)" which shows interest expense
for 1994, 1995 and 1996 as follows:
<TABLE>
<S> <C>
1994 $221.7
1995 $199.8
1996 $178.5
</TABLE>
This graph accompanies the subsection entitled "Interest Expense" and
has an initial value of zero.
<PAGE> 1
EXHIBIT 22.1
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 28, 1996
Registrant: Safeway Inc.
Subsidiaries of Registrant (Tier I subsidiaries):
Safeway Canada Holdings, Inc.
Safeway Australia Holdings, Inc.
Safeway Leasing, Inc.
Oakland Property Brokerage, Inc.
Glencourt, Inc.
Safeway Foreign Sales, Inc.
Milford Insurance Ltd.
Pak `N Save, Inc.
Safeway Trucking, Inc.
Photo Acquisition I, Inc.
Photo Acquisition II, Inc.
Safeway Southern California, Inc.
Safeway Denver, Inc.
Safeway Richmond, Inc.
Safeway Dallas, Inc.
Safeway Supply, Inc.
Safeway Corporate, Inc.
Safeway Stores 42, Inc.
Safeway Stores 43, Inc.
Safeway Stores 64, Inc.
Safeway Claim Services, Inc.
Safeway Stores, Incorporated
Safeway Warehouse, Inc.
Subsidiaries of Safeway Canada Holdings, Inc.:
Safeway New Canada, Inc.
(Continued)
<PAGE> 2
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 28, 1996
SUBSIDIARIES OF TIER I SUBSIDIARIES (Tier II subsidiaries):
Subsidiaries of Safeway Southern California, Inc.
Safeway Stores 18, Inc.
Safeway Stores 26, Inc.
Safeway Stores 28, Inc.
Safeway Stores 31, Inc.
Subsidiaries of Safeway Denver, Inc.
Safeway Stores 44, Inc.
Safeway Stores 45, Inc.
Safeway Stores 46, Inc.
Safeway Stores 47, Inc.
Safeway Stores 48, Inc.
Safeway Stores 49, Inc.
Safeway Stores 50, Inc.
Subsidiaries of Safeway Richmond, Inc.
Safeway Stores 58, Inc.
Safeway Stores 59, Inc.
Subsidiaries of Safeway Corporate, Inc.
Safeway Stores 67, Inc.
Safeway Stores 68, Inc.
Safeway Stores 69, Inc.
Safeway Stores 70, Inc.
Subsidiaries of Safeway Supply, Inc.
Safeway Stores 71, Inc.
Safeway Stores 72, Inc.
Safeway Stores 73, Inc.
Safeway Stores 74, Inc.
Safeway Stores 75, Inc.
Safeway Stores 76, Inc.
Safeway Stores 77, Inc.
Consolidated Procurement Services, Inc.
(Continued)
<PAGE> 3
SAFEWAY INC.
SCHEDULE OF SUBSIDIARIES
As of December 28, 1996
Subsidiaries of Safeway Dallas, Inc.
Safeway Stores 78, Inc.
Safeway Stores 79, Inc.
Safeway Stores 80, Inc.
Safeway Stores 81, Inc.
Safeway Stores 82, Inc.
Safeway Stores 85, Inc.
Safeway Stores 86, Inc.
Safeway Stores 87, Inc.
Safeway Stores 88, Inc.
Safeway Stores 89, Inc.
Safeway Stores 90, Inc.
Safeway Stores 91, Inc.
Safeway Stores 92, Inc.
Safeway Stores 96, Inc.
Safeway Stores 97, Inc.
Safeway Stores 98, Inc.
Subsidiaries of Photo Acquisition I, Inc.
Everett Realty Advisors, Inc.
SUBSIDIARIES OF TIER I SUBSIDIARIES (Non-tier Subsidiaries):
Subsidiary of Safeway New Canada, Inc.:
Canada Safeway Limited and its subsidiaries:
Safeway International Finance Corp. of Canada Ltd.
SUBSIDIARIES OF TIER II SUBSIDIARIES (Tier III Subsidiaries):
Subsidiary of Safeway Stores 58, Inc.:
Safelease, Inc.
Ten companies are not listed as they are maintained solely for the purpose of
holding licenses.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated
February 18, 1997, incorporated by reference in this Annual Report on
Form 10-K of Safeway Inc. for the fiscal year ended December 28, 1996,
in the following Registration Statements of Safeway Inc.:
- - No. 33-36753 on Form S-8 regarding the Safeway Inc. Outside Director
Equity Purchase Plan,
- - No. 33-37207 on Form S-8 regarding the Profit Sharing Plan of Safeway Inc.
and its United States Subsidiaries,
- - No. 33-42232 on Forms S-3 and S-8 regarding the Amended and Restated Stock
Option and Incentive Plan for Key Employees of Safeway Inc.,
- - No. 33-48884 on Form S-8 regarding the Amended and Restated Stock Option
and Incentive Plan for Key Employees of Safeway Inc.,
- - No. 33-51552 on Form S-3 regarding Debt Securities,
- - No. 33-51119 on Form S-8 regarding the Stock Option Plan for Consultants of
Safeway Inc.,
- - No. 33-54581 on Form S-8 regarding the Employee Stock Purchase Plan of
Safeway Inc.,
- - No. 33-63803 on Form S-8 regarding the 1994 Amended and Restated Stock
Option and Incentive Plan for Key Employees of Safeway Inc.,
- - No. 333-13677 on Form S-8 regarding Stock Option Plan for Consultants of
Safeway Stores, Incorporated, and
- - No. 333-22837 on Form S-4 regarding shares of common stock issuable in
connection with the acquisition of The Vons Companies, Inc.
Deloitte & Touche LLP
San Francisco, California
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME ON PAGES
19 THROUGH 21 OF THE COMPANY'S 1996 ANNUAL REPORT TO STOCKHOLDERS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 79,700
<SECURITIES> 0
<RECEIVABLES> 160,900
<ALLOWANCES> 0
<INVENTORY> 1,283,300
<CURRENT-ASSETS> 1,654,400
<PP&E> 5,069,600
<DEPRECIATION> 2,313,200
<TOTAL-ASSETS> 5,545,200
<CURRENT-LIABILITIES> 2,030,000
<BONDS> 1,728,500
0
0
<COMMON> 2,200
<OTHER-SE> 1,184,600
<TOTAL-LIABILITY-AND-EQUITY> 5,545,200
<SALES> 17,269,000
<TOTAL-REVENUES> 17,269,000
<CGS> 12,494,800
<TOTAL-COSTS> 12,494,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,500
<INCOME-PRETAX> 767,600
<INCOME-TAX> 307,000
<INCOME-CONTINUING> 460,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 460,600
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.93
</TABLE>
