<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
AMENDMENT TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 8, 1997
SAFEWAY INC.
(Exact name of registrant as specified in its charter)
Delaware 1-00041 94-3019135
(State of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
5918 Stoneridge Mall Road, Pleasanton, California 94588
(Address of principal executive offices) (Zip Code)
(510) 467-3000
(Registrant's telephone number, including area code)
n/a
(former name or former address, if changed since last report)
<PAGE> 2
Safeway Inc. ("Safeway") hereby amends Item 7 of its Current
Report on Form 8-K filed with the Securities and Exchange Commission on April
23, 1997 (the "Form 8-K") to file financial statements of The Vons Companies,
Inc. ("Vons") for the fiscal year ended December 29, 1996 and unaudited pro
forma financial information pertaining to Safeway's acquisition of Vons pursuant
to the Merger (as defined in the Form 8-K).
Item 7. Acquisition or Disposition of Assets.
(a) Financial Statements of Business Acquired.
The financial statements of Vons required by this Item 7(a)
are incorporated herein by reference to the financial statements of Vons set
forth in the Annual Report on Form 10-K of Vons for the fiscal year ended
December 29, 1996, which financial statements are included herewith as Exhibit
99.1.
(b) Pro Forma Financial Information.
The pro forma financial information required by this Item 7(b)
is filed herewith as Exhibit 99.2 and is incorporated herein by reference to the
Unaudited Pro Forma Combined Financial Information included in such Exhibit
99.2.
(c) Exhibits.
The following exhibits are filed with this report:
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Financial Statements of Vons set forth in
the Annual Report on Form 10-K of Vons for
the fiscal year ended December 29, 1996.
99.2 Unaudited Pro Forma Combined Financial
Information.
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 30, 1997
SAFEWAY INC.
By: /s/ Michael C. Ross
----------------------------
Name: Michael C. Ross
Title: Senior Vice President - General Counsel
<PAGE> 1
Exhibit 23.1
The Board of Directors
The Vons Companies, Inc.
We consent to the incorporation by reference in the registration statements (No.
33-36753, No. 33-37207, No. 33-42232, No. 33-48884, No. 33-51119, No. 33-54581,
No. 33-63803 and No. 333-13677 on Form S-8; and No. 33-42232 and No. 33-51552 on
Form S-3; and No. 333-22837 on Form S-4) of Safeway, Inc. of our report dated
January 17, 1997, except for the penultimate sentence in paragraph five of note
7 which is as of March 27, 1997, with respect to the consolidated balance sheets
of The Vons Companies, Inc. as of December 31, 1996 and December 31, 1995, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for the fifty-two week periods ended December 29, 1996, December 31, 1995
and January 1, 1995, which report appears in the Form 8-K/A of Safeway, Inc.
filed on May 1, 1997.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
April 30, 1997
<PAGE> 1
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Vons Companies, Inc.
We have audited the accompanying consolidated balance sheets of The
Vons Companies, Inc. and subsidiaries as of December 29, 1996 and December 31,
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for the fifty-two week periods ended December 29, 1996,
December 31, 1995 and January 1, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Vons
Companies, Inc. and subsidiaries at December 29, 1996 and December 31, 1995 and
the results of their operations and cash flows for the fifty-two week periods
ended December 29, 1996, December 31, 1995 and January 1, 1995, in conformity
with generally accepted accounting principles.
As described in note 13 to the consolidated financial statements, the
Company adopted the provisions of Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
/S/ KPMG Peat Marwick LLP
January 17, 1997, except for the
penultimate sentence in paragraph
five of note 7 which is
as of March 27, 1997
<PAGE> 2
THE VONS COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended
All amounts except per share data December 29, December 31, December 29,
in millions of dollars 1996 1996 1996
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 5,407.4 $ 5,070.7 $ 4,996.6
--------- --------- ---------
Costs and expenses:
Cost of sales, buying and
occupancy 4,032.7 3,790.2 3,767.2
Selling and administrative
expenses 1,118.6 1,071.4 1,055.5
Amortization of excess cost
over net assets acquired 15.0 15.0 15.1
Restructuring charges -- -- 33.0
--------- --------- ---------
5,166.3 4,876.6 4,870.8
--------- --------- ---------
Operating income 241.1 194.1 125.8
Interest expense, net 55.6 67.3 70.8
--------- --------- ---------
Income before income tax provision 185.5 126.8 55.0
Income tax provision 80.8 58.7 28.4
--------- --------- ---------
Net income $ 104.7 $ 68.1 $ 26.6
========= ========= =========
Income per common and common equivalent share:
Net income $ 2.34 $ 1.55 $ .61
========= ========= =========
Weighted average common and
common equivalent shares 44.8 43.9 43.6
========= ========= =========
Dividends paid on common stock None None None
========= ========= =========
</TABLE>
See accompanying notes to these consolidated financial statements.
1
<PAGE> 3
THE VONS COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
All amounts except share data in millions of dollars December 29, December 31,
1996 1995
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash $ 9.3 $ 9.4
Accounts receivable 45.0 31.7
Inventories 335.3 350.7
Deferred taxes 32.5 30.9
Other 42.8 29.6
-------- --------
Total current assets 464.9 452.3
Property and equipment, net 1,194.2 1,192.5
Excess of cost over net assets acquired,
net of accumulated amortization of $133.7
million and $118.7 million, respectively 467.8 482.8
Other 58.5 58.9
-------- --------
Total Assets $2,185.4 $2,186.5
======== ========
Liabilities and Shareholders' Equity Current liabilities:
Current maturities of capital lease
obligations and long-term debt $ 154.9 $ 25.7
Accounts payable 339.2 304.2
Accrued liabilities 265.7 263.5
-------- --------
Total current liabilities 759.8 593.4
Accrued self-insurance 143.4 128.0
Deferred income taxes 131.7 118.9
Other noncurrent liabilities 62.3 65.0
Capital lease obligations 50.3 53.4
Senior debt 15.0 298.8
Subordinated debt, net 284.5 305.7
-------- --------
Total liabilities 1,447.0 1,563.2
-------- --------
Shareholders' equity:
Preferred stock - $.01 par value;
authorized 20,000,000 shares;
issued and outstanding - none -- --
Common stock - $.10 par value; authorized
100,000,000 shares; issued and
outstanding - December 29, 1996:
43,987,000 shares; December 31, 1995:
43,533,000 shares 4.4 4.3
Paid-in capital 353.5 343.2
Retained earnings 380.6 275.9
Notes receivable for stock (.1) (.1)
-------- --------
Total shareholders' equity 738.4 623.3
-------- --------
Total Liabilities and Shareholders' Equity $2,185.4 $2,186.5
======== ========
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE> 4
THE VONS COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
December 29, December 31, January 1,
All amounts in millions of dollars 1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 104.7 $ 68.1 $ 26.6
Adjustments to reconcile net
income to net cash provided by
operating activities:
Restructuring charges -- -- 33.0
Depreciation and
amortization of property
and capital leases 99.6 100.0 102.1
Amortization of excess cost
over net assets acquired
and other assets 16.4 16.0 16.1
Amortization of debt
discount and deferred
financing costs 6.2 6.8 6.2
LIFO charge 4.8 4.9 2.3
Deferred income taxes 11.2 1.5 (1.5)
Change in assets and
liabilities:
(Increase) decrease in
accounts receivable (13.3) 13.7 (9.1)
(Increase) decrease in
inventories at FIFO 10.6 3.7 21.9
costs
(Increase) decrease in
other current assets 1.7 (10.9) 3.2
(Increase) decrease in
noncurrent assets (3.6) (7.5) (9.3)
Increase (decrease)
in accounts payable 7.2 11.7 (25.5)
Increase (decrease)
in accrued liabilities 2.2 16.7 23.3
Increase (decrease) in
noncurrent liabilities 12.7 14.7 (9.5)
------- ------- -------
Net cash provided by operating
activities 260.4 239.4 179.8
------- ------- -------
Cash flows from investing activities:
Addition of property, plant
and equipment (117.8) (110.2) (128.0)
Disposal of property, plant
and equipment 18.5 19.0 10.5
------- ------- -------
Net cash used by investing
activities (99.3) (91.2) (117.5)
------- ------- -------
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
Cash flows from financing activities:
Net payments on revolving
debt (171.8) (122.1) (67.9)
Redemption and repurchases
of senior subordinated
debentures (15.6) (2.4) (6.2)
Increase (decrease) in net
outstanding drafts 27.8 (15.9) 19.4
Payments on other debt and
capital lease obligations (12.0) (8.2) (8.0)
Other 10.4 .8 .9
------ ------ ------
Net cash used by
financing activities (161.2) (147.8) (61.8)
------ ------ ------
Net cash increase (decrease) (0.1) .4 .5
Cash at beginning of year 9.4 9.0 8.5
------ ------ ------
Cash at end of year $ 9.3 $ 9.4 $ 9.0
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 51.3 $ 59.8 $ 64.9
====== ====== ======
Income taxes $ 72.0 $ 56.0 $ 33.7
====== ====== ======
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE> 6
THE VONS COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Number Common Paid-In Retained
All amounts in millions of Shares Stock Capital Earnings Notes Total
--------- ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 2,
1994 43.3 $ 4.3 $339.5 $181.2 $ (.1) $524.9
Net income -- -- -- 26.6 -- 26.6
Stock options exercised .1 -- .9 -- -- .9
------ ------ ------ ------ ------ ------
Balance at January 1,
1995 43.4 4.3 340.4 207.8 (.1) 552.4
Net income -- -- -- 68.1 -- 68.1
Stock options exercised .1 -- 2.8 -- -- 2.8
------ ------ ------ ------ ------ ------
Balance at December 31, 1995 43.5 4.3 343.2 275.9 (.1) 623.3
Net income -- -- -- 104.7 -- 104.7
Stock options exercised .5 0.1 10.3 -- -- 10.4
------ ------ ------ ------ ------ ------
Balance at December 29, 1996 44.0 $ 4.4 $353.5 $380.6 $ (.1) $738.4
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to these consolidated financial statements.
5
<PAGE> 7
THE VONS COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 1. Basis of Presentation
At December 29, 1996, the Company operated 320 supermarkets and food
and drug combination retail stores under the names Vons and Pavilions. The
Company's marketing territory includes Southern and Central California and Clark
County, Nevada. The Company also operates a fluid milk processing facility, an
ice cream plant, a bakery, and distribution facilities for meat, grocery,
produce and general merchandise to support the store network.
The Company's fiscal year is based on a 52-53 week fiscal year ending
on the Sunday closest to December 31. Fiscal years 1996, 1995 and 1994 included
52 weeks which ended on December 29, 1996, December 31, 1995 and January 1,
1995, respectively.
Note 2. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of December 29, 1996 and the
reported amounts of income and expenses for the fiscal year ended December 29,
1996. Actual results could differ from those estimates.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
Revenue Recognition. Sales are recorded when payment is tendered at
check-out.
Inventories. Inventories are stated at the lower of cost or market. The
cost of substantially all inventories is determined using the last-in, first-out
(LIFO) method.
Property and Depreciation. Property and equipment, including assets
under capital leases, are recorded at cost and depreciated or amortized over
forty years for buildings, up to ten years for fixtures and equipment and
generally between fifteen and twenty-five years, but not to exceed the lease
term, for leasehold improvements using principally the straight-line method for
financial reporting purposes and accelerated methods for tax purposes. Major
renewals and improvements are capitalized. Maintenance and repairs which do not
improve or extend the life of the respective assets are charged to expense.
Amortization of Intangible Assets. The excess of cost over net assets
acquired is amortized on a straight-line basis over forty years. The Company
assesses the recoverability of the excess of cost over net assets acquired based
on forecasted operating income. Other noncurrent assets include an agreement not
to compete acquired in connection with the 1992 acquisition of the Williams
Bros. Markets, Inc. supermarket business. The agreement not to compete is
amortized on a straight-line basis over five years.
6
<PAGE> 8
Income Tax Provision. The income tax provision includes amounts related
to current taxable income and deferred income taxes. A deferred income tax asset
or liability is determined by applying currently enacted tax laws and rates to
the expected reversals of the cumulative temporary differences between the
carrying value of assets and liabilities for financial statement and income tax
purposes. The deferred income tax provision is measured by the change in the net
deferred income tax asset or liability during the year. The Company accounts for
general business tax credits using the flow-through method.
Income per Common and Common Equivalent Share. Income per common and
common equivalent share is based on the weighted average number of common shares
outstanding during each year and common equivalent shares arising from stock
options when the effect is dilutive.
Disclosure About Fair Value of Financial Instruments. The fair value of
the Company's financial instruments is based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for
financial instruments of the same remaining maturities.
Derivatives. Premiums paid for purchased interest rate cap contracts
are amortized to interest expense over the terms of the contracts. Unamortized
premiums are included in other assets in the accompanying consolidated balance
sheets. Amounts earned under the interest rate cap contracts are reflected as a
reduction of interest expense.
Note 3. Proposed Merger
On December 15, 1996, Vons entered into an Agreement and Plan of
Merger, as amended (the "Merger Agreement"), with Safeway for a business
combination in which, among other things, Safeway will issue 1.425 shares of
Safeway common stock for each share of Vons common stock that Safeway does not
currently own and Vons will be merged with and into a wholly owned subsidiary of
Safeway (the "Merger"). The transaction, which was unanimously approved by a
special committee of the Vons Board of Directors, comprised of directors who are
not affiliated with Safeway, is subject to approval by a majority of the
outstanding Vons common shares not held by Safeway and its affiliates, and
certain other conditions. The combined company will be the second largest
grocery chain in North America, with 1,377 stores and sales in excess of $22
billion. The proposed merger is expected to close early in the second quarter of
1997.
Note 4. Inventories
The excess of estimated current cost over LIFO carrying value of
inventories was $37.1 million and $32.3 million at December 29, 1996 and
December 31, 1995, respectively. Application of the LIFO method resulted in a
charge to cost of sales, buying and occupancy of $4.8 million, $4.9 million and
$2.3 million for 1996, 1995 and 1994, respectively.
7
<PAGE> 9
Note 5. Property and Equipment
The components of property and equipment at December 29, 1996 and
December 31, 1995 were as follows (in millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
-------- --------
<S> <C> <C>
Land $ 237.5 $ 225.3
Buildings 412.1 386.6
Leasehold improvements 329.6 319.1
Fixtures and equipment 738.6 714.6
-------- --------
1,717.8 1,645.6
Less: accumulated depreciation
and amortization (563.4) (496.6)
-------- --------
Net property owned 1,154.4 1,149.0
-------- --------
Capital leases 68.9 69.4
Less: accumulated amortization (29.1) (25.9)
-------- --------
Net capital leases 39.8 43.5
-------- --------
Property and equipment, net $1,194.2 $1,192.5
======== ========
</TABLE>
Note 6. Accrued Current Liabilities
The components of accrued current liabilities at December 29, 1996 and
December 31, 1995 were as follows (in millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Accrued payroll, benefits and $ 147.8 $ 134.6
related taxes
Accrued self-insurance 33.2 37.2
Other 84.7 91.7
------- -------
Accrued current liabilities $ 265.7 $ 263.5
======= =======
</TABLE>
8
<PAGE> 10
Note 7. Senior and Subordinated Debt
Senior and subordinated debt as of December 29, 1996 and December 31,
1995 were as follows (in millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Senior debt:
Revolving Loan, interest at
prime or Eurodollar rate plus
designated amounts, due 2000 $ 6.0 $ 177.8
Mortgage, 9.25%, secured by
real property, due in monthly
installments of $1.0 million
including interest, due 1997 110.8 113.0
Mortgages, 6.00% to 11.50%,
secured by real property, due
in varying monthly
installments with maturity
dates from 1997 to 2009 23.8 13.5
------- -------
Total 140.6 304.3
Less: current portion 125.6 5.5
------- -------
Long-term portion $ 15.0 $ 298.8
======= =======
Subordinated debt:
Senior subordinated
debentures, 6-5/8%, less
unamortized discount of
$3.6 million and $7.2
million at December 29, 1996
and December 31, 1995,
respectively, based on an
effective interest rate of
12.5%, interest due in
semiannual installments $ 58.9 $ 70.9
Senior subordinated notes,
9-5/8%, interest due in
semiannual installments 150.0 150.0
Senior subordinated notes,
8-3/8%, interest due in
semiannual installments 100.0 100.0
------- -------
Total 308.9 320.9
Less: current portion 24.4 15.2
------- -------
Long-term portion $ 284.5 $ 305.7
======= =======
</TABLE>
On February 17, 1995, the Company entered into an agreement with a
group of banks for a $625 million Revolving Loan Agreement (the "Revolving
Loan"). The Revolving Loan expires on February 17, 2000; however, it provides
that the Company may
9
<PAGE> 11
request that the banks extend the maturity date by one year beginning in
September 1997 and each year thereafter. Interest for the revolving debt is at
prime or Eurodollar rate plus designated amounts. At the Company's option, the
revolving debt may be used to support commercial paper borrowings, other
unsecured bank borrowings and standby letters of credit outside the revolving
debt. At December 29, 1996, borrowings under the Revolving Loan were $6.0
million and available unused credit under the Revolving Loan was $616.8 million.
Weighted average interest costs for 1996, for the Revolving Loan were 7.0%
excluding commitment fees on unused borrowings. At December 29, 1996, the
corresponding bank prime rate was 8.25%. Commitment fees under the Revolving
Loan and Revolving Credit and Term Loan Facilities were $.8 million, $1.2
million and $1.5 million for 1996, 1995 and 1994, respectively.
The Company's involvement with derivative financial instruments has
been limited to interest rate cap contracts to reduce the impact of increases in
interest rates on revolving debt. The contracts were purchased in 1992 to hedge
principal amounts of $250 million for 1994, $200 million for 1995, and $100
million for 1996 and 1997 of interest rate exposure in excess of an approximate
8.225% effective borrowing rate under the revolving debt. The Company records
interest expense or interest income related to interest rate cap contracts on a
monthly basis.
The Company's $110.8 million mortgage loan requires monthly principal
and interest payments of approximately $1 million with a one-time principal and
interest payment of $110.7 million in July 1997.
The indenture related to the 6-5/8% Senior Subordinated Debentures (the
"6-5/8% Debt") provides for mandatory redemptions. As of December 29, 1996,
$25.0 million and $37.5 million are due on May 15, 1997, and May 15, 1998,
respectively. Interest on the 6-5/8% Debt is payable semiannually on May 15 and
November 15. The 6-5/8% Debt may be redeemed at any time at 100% of the
principal amount plus accrued interest. The 6-5/8% Debt was issued at a
discount which is being amortized over the related term of the indebtedness.
The indenture related to the 9-5/8% Senior Subordinated Notes (the
"9-5/8% Debt") due April 1, 2002, provides for principal repayment at maturity.
Interest on the 9-5/8% Debt is payable semiannually on April 1 and October 1.
The 9-5/8% Debt may be redeemed at the Company's option any time on or after
April 1, 1997, at varying percentages above par of the principal amount plus
accrued interest. On March 24, 1997, the Company requested the redemption of all
outstanding 9-5/8% Debt effective April 28, 1997. The Company is not required to
make mandatory redemption or sinking fund payments with respect to the 9-5/8%
Debt prior to maturity.
The indenture related to the 8-3/8% Senior Subordinated Notes (the
"8-3/8% Debt") due October 1, 1999, provides for principal repayment at
maturity. Interest on the 8-3/8% Debt is payable semiannually on April 1 and
October 1. The 8-3/8% Debt may be redeemed at the Company's option any time on
or after October 1, 1997, at 100% of the principal amount plus accrued interest.
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the 8-3/8% Debt prior to maturity.
10
<PAGE> 12
At December 29, 1996, and December 31, 1995, the carrying value of all
financial instruments approximated fair value.
The Company's debt agreements contain various restrictions on the
incurrence of additional indebtedness, payment or prepayment of senior
subordinated and subordinated debt, investments, acquisitions, capital
expenditures, dividends, common stock redemptions and purchases and dispositions
of assets. The covenants also require the Company to meet certain shareholders'
equity levels, debt leverage levels and fixed charge coverage ratios which can
vary each fiscal year. The Company is in compliance with these covenants as of
December 29, 1996. Under its most restrictive debt agreement, the Company had
$119.0 million available for dividends and distributions at December 29, 1996.
Principal payments required in future years are as follows (in millions
of dollars):
<TABLE>
<CAPTION>
Principal
Payments
---------
<S> <C>
1997 $ 150.6
1998 38.5
1999 101.1
2000 7.2
2001 1.3
2002-2006 153.7
2007-2011 .7
--------
Total principal payments 453.1
Less: current portion 150.6
--------
Long-term portion $ 302.5
========
</TABLE>
Standby letters of credit, primarily for self-insurance purposes, not
reflected in the accompanying consolidated financial statements, were
approximately $72.2 million and $73.3 million at December 29, 1996 and December
31, 1995 respectively.
Note 8. Leases
The Company currently leases certain of its stores, distribution
facilities, vehicles and equipment for periods up to 50 years with various
renewal options. The majority of such leases are noncancellable operating
leases. Certain operating and capital leases require contingent rentals based
upon a percentage of sales over a specified amount. Rental expense under
operating leases was as follows (in millions of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 29, December 31, January 1,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Minimum rentals $ 57.1 $ 55.7 $ 60.9
Contingent rentals 7.8 7.3 7.5
Sublease rentals received (7.8) (6.4) (4.7)
------- ------- -------
Rental expense, net $ 57.1 $ 56.6 $ 63.7
======= ======= =======
</TABLE>
11
<PAGE> 13
Capital lease obligations, relating primarily to buildings, vary in
amounts with interest rates ranging from 7.5% to 12.5%. Contingent rentals
associated with capital leases were $1.6 million, $1.5 million and $1.4 million
for 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating and
capital leases, together with the present value of the net minimum lease
payments, at December 29, 1996 were as follows (in millions of dollars):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
1997 $ 62.1 $ 9.8
1998 61.7 7.9
1999 60.1 7.3
2000 57.6 7.2
2001 54.3 6.0
2002-2006 247.6 29.8
2007-2011 158.2 20.2
2012-2016 81.5 11.2
2017-2021 9.6 5.4
Thereafter 1.5 --
------ ------
Total minimum lease
commitments $794.2 104.8
======
Less: interest portion 49.6
------
Present value of net minimum
lease commitments 55.2
Less: current portion 4.9
------
Long-term portion $ 50.3
======
</TABLE>
Minimum sublease rentals to be received in the future under
noncancellable operating and capital leases totaled $76.6 million at December
29, 1996.
12
<PAGE> 14
Effective September 1993, the Company became a partner of a California
general partnership. This partnership has obligations for 16 retail leases for
periods up to 21 years with various renewal options. It is the partnership's
intent to assign or sublease its leasehold interest in all of these sites.
Future minimum lease payments of the partnership under noncancellable operating
leases at December 29, 1996 were as follows (in millions of dollars):
<TABLE>
<CAPTION>
December 29,
1996
-------
<S> <C>
1997 $ 3.4
1998 3.5
1999 3.4
2000 3.1
2001 2.9
2002-2006 12.8
2007-2011 7.7
2012-2016 2.8
-------
Total minimum lease commitments $ 39.6
=======
</TABLE>
Minimum sublease rentals to be received by the partnership under
noncancellable operating leases totaled $25.2 million at December 29, 1996.
Note 9. Employee Benefit Plans
The Company sponsors a defined benefit pension plan for all nonunion
employees. An employee's benefit is based on years of credited service and the
employee's final average pay calculated on the highest five years of
compensation during the last ten years of employment. The Company's funding
policy is to contribute at least the minimum annual contribution required by
Internal Revenue Service regulations.
The following table sets forth the defined benefit pension plan's
funded status and amounts recognized in the Company's consolidated balance
sheets at December 29, 1996 and December 31, 1995 (in millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of
benefit obligation:
Accumulated benefit obligation,
including vested benefit of
$47.9 million at December 29,
1996 and $44.1 million at
December 31, 1995 $ 50.0 $ 46.2
======= =======
Projected benefit obligation for
service rendered to date $ (68.0) $ (63.6)
Plan assets at fair value,
primarily listed stocks and
U.S. bonds 64.2 56.4
------- -------
Projected benefit obligation
in excess of plan assets (3.8) (7.2)
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C>
Unrecognized net (gain) loss from
past experience different from
that assumed, unrecognized
prior service cost and effects
of changes in assumptions 10.2 15.0
----- -----
Pension asset included in other
noncurrent assets $ 6.4 $ 7.8
===== =====
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligation was 7.25% at December 29, 1996 and December 31,
1995. The expected long-term rate of return on assets and rate of increase in
compensation levels were 9.0% and 4.5%, respectively, at December 29, 1996 and
December 31, 1995. Net pension cost under the defined benefit pension plan for
1996, 1995 and 1994 included the following components (in millions of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
December 29, December 31, January 1,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Service cost $ 2.9 $ 2.3 $ 3.4
Interest cost on
projected
benefit
obligation 4.5 4.0 4.0
Actual return on
plan assets (8.3) (10.6) .9
Net amortization
and deferral 3.9 6.9 (4.4)
------- ------- -------
Net pension
cost $ 3.0 $ 2.6 $ 3.9
======= ======= =======
</TABLE>
The Company's supplemental executive retirement plan provides
supplemental income payments for certain officers during retirement. Total
pension expense for all plans was $4.3 million, $3.4 million and $5.1 million
for 1996, 1995 and 1994, respectively.
The Company's contributory profit sharing plan for nonunion employees
qualifies under Section 401(k) of the Internal Revenue Code. In 1996, the
Company's contribution was five percent of each eligible employee's pay plus a
one percent matching contribution for each eligible employee who elected to
contribute at least one percent of their pay. For 1996, 1995, and 1994 total
expense related to the Company's profit sharing plan was $6.3 million, $7.6
million and $5.3 million, respectively.
The Company sponsors a retiree medical plan covering substantially all
nonunion employees who retire under certain age and service requirements. The
retiree medical plan provides outpatient, inpatient and various other covered
services. Participants in the retiree medical plan who retire after June 30,
1990 receive a benefit based upon years of service and a benefit value
determined by the Company at the time of retirement. Effective December 31,
1995, the Company adopted modifications in its retiree medical plan which
reduced the net retiree medical plan cost. Unused benefits may be indexed each
year to the
14
<PAGE> 16
social security cost of living, up to a maximum of 4.0%. Such benefits are
funded from the Company's general assets. The Company has the right to modify or
terminate the plan.
The accumulated postretirement benefit obligation for the retiree
medical plan as of December 29, 1996 and December 31, 1995 was as follows (in
millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Accumulated retiree medical benefit obligation:
Retirees $ 10.7 $ 10.4
Fully eligible active plan
participants 1.5 1.7
Other active plan participants 5.7 5.9
Unrecognized net gain from
unrecognized prior service
cost and changes in assumptions 13.3 13.5
------- -------
Accrued retiree medical benefit
obligation $ 31.2 $ 31.5
======= =======
</TABLE>
For measurement purposes, a 6.0% annual increase in the cost of covered
retiree medical benefits was assumed. A 1.0% increase in the retiree medical
cost trend rate would increase the retiree medical benefit obligation at
December 29, 1996 by $.6 million and the 1996 annual expense by $.1 million. The
weighted average discount rate used in determining the accumulated retiree
medical benefit obligation was 7.25% at December 29, 1996 and December 31, 1995.
The net retiree medical plan cost for 1996, 1995 and 1994 included the following
components (in millions of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
December 29, December 31, January 1,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Service cost $ .3 $ .3 $ 1.2
Interest cost 1.2 1.3 2.1
Net amortization
and deferral (.7) (.9) --
--------- --------- ---------
Net retiree
medical plan
costs $ .8 $ .7 $ 3.3
========= ========= =========
</TABLE>
The Company contributes to multi-employer joint pension plans and
health and welfare plans administered by various trustees. Contributions to
these plans are based upon negotiated labor contracts. The pension plans may be
deemed to be defined benefit plans. Information relating to accumulated benefits
and fund assets as they may be allocable to the Company at December 29, 1996 is
not available. Total pension expense for the union plans was $42.0 million,
$19.8 million and $22.3 million for 1996, 1995 and 1994, respectively. The
health and welfare plans provide medical, dental and other benefits to certain
employees covered by union contracts. Total health and welfare expense for these
plans was $108.7 million, $108.6 million and $125.9 million for 1996, 1995 and
1994, respectively.
15
<PAGE> 17
Note 10. Income Taxes
The provision for income taxes for 1996, 1995 and 1994 was comprised of
the following amounts (in millions of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 29, December 31, January 1,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 55.5 $ 44.5 $ 24.7
State 14.1 12.7 5.2
------- ------- -------
Total current income tax
provision 69.6 57.2 29.9
------- ------- -------
Deferred:
Federal 8.1 .7 (.7)
State 3.1 .8 (.8)
------- ------- -------
Total deferred income tax
provision 11.2 1.5 (1.5)
------- ------- -------
Total income tax provision $ 80.8 $ 58.7 $ 28.4
======= ======= =======
</TABLE>
Reconciliation of the Federal statutory rate and effective rate for
1996, 1995 and 1994 was as follows (in millions of dollars):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 29, December 31, January 1,
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Federal statutory expected provision $ 64.9 $ 44.4 $ 19.3
Amortization of excess of cost over net
assets acquired 5.2 5.0 5.0
State income taxes, net of Federal income
tax benefit 10.3 8.1 3.1
Other .4 1.2 1.0
------- ------- -------
Total income tax provision $ 80.8 $ 58.7 $ 28.4
======= ======= =======
</TABLE>
16
<PAGE> 18
Deferred income taxes consisted of future tax liabilities (assets)
attributable to the following (in millions of dollars):
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Excess of book over tax bases $ 146.9 $ 143.8
Excess of tax over book depreciation 95.2 92.8
------- -------
Deferred tax liabilities 242.1 236.6
------- -------
Deferred tax assets:
Cash versus accrual basis (138.7) (144.0)
Other, net (4.2) (4.6)
------- -------
Deferred tax assets (142.9) (148.6)
------- -------
Deferred income taxes, net $ 99.2 $ 88.0
======= =======
</TABLE>
The Federal tax returns for all of the Company's fiscal periods ended
subsequent to and including December 31, 1989 are open for examination by the
Internal Revenue Service (the "IRS"). Additionally, certain tax returns of
entities acquired by the Company for earlier tax years are open for examination
by the IRS. Management believes that any adjustments arising out of the
examinations for which the Company would be liable would not have a material
effect on the Company's consolidated financial position.
Note 11. Related Party Transactions
Prior to July 1996, the Company leased a distribution facility from a
California general partnership whose general partners are Vons and a Texas
general partnership, of which a director of the Company is a general partner.
Vons and the Texas general partnership each had a 50% interest in the California
general partnership. In June 1996, the Company paid the Texas general
partnership $2.9 million to acquire the Texas general partnership's interest in
the assets of the California general partnership and the California general
partnership was dissolved. During 1996, 1995 and 1994, the Company paid rent of
$.8 million, $1.9 million and $1.9 million, respectively from which the
partnership distributed $80,000, $250,000 and $70,000 to the Texas general
partnership in such years, respectively. This distribution facility was closed
in third quarter 1995. See Note 15 to the Consolidated Financial Statements.
A wholly owned subsidiary of Safeway owns approximately 34.3% of the
outstanding voting stock of the Company. Safeway and its affiliates sold certain
inventory and other items to the Company for an aggregate amount during 1996,
1995 and 1994 of approximately $25.5 million, $27.0 million and $21.3 million,
respectively. During 1995 and 1994, the Company sold certain inventory items to
Safeway and its affiliates for an aggregate amount of approximately $6.4 million
and $6.6 million, respectively. In 1996, the Company entered into a purchasing
joint venture with Safeway and purchased $28.4 million of certain inventory and
other items from the joint venture. Three directors of the Company are also
directors of Safeway and a fourth director of the Company is both a director and
an officer of Safeway.
17
<PAGE> 19
The Company leases eight properties from a partnership that is 80%
owned by a subsidiary of Safeway and 20% owned by the principal stockholder of
Safeway. The rentals under the leases were $.5 million, $.6 million and $.7
million in 1996, 1995 and 1994, respectively. In addition, the Company is
secondarily liable to this partnership under four leases for which the annual
minimum rental is $.2 million, all of which is currently being paid by
assignees.
A director of the Company borrowed a total of $118,000 from the Company
for the purchase of 5,000 shares of the Company's common stock by notes dated
January 3, 1992 and July 22, 1992. The notes are secured by a pledge of the
5,000 shares of common stock. The notes accrue interest at the Federal midterm
rate in effect under Internal Revenue Code Section 1274(d), compounded
semiannually. All payments of principal and interest are due and payable on
December 31, 1997.
Note 12. Contingencies
The Company is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined with
certainty, management believes that their final outcome should not have a
material adverse effect on the Company's consolidated financial position. As a
result of the disposal of certain leasehold interests by the Company and by a
partnership of which the Company is a general partner, the Company is
contingently liable to certain landlords.
Note 13. Shareholders' Equity
The Company has various stock option plans. Options under the 1987
Stock Option Plan are fully vested. Options under the 1990 Stock Option Plan
vest as determined by the Compensation Committee of the Board of Directors.
Generally, options vest 25% one year from the date of grant and 25% per year
thereafter. However, options granted in May 1995 vest 15% per year beginning one
year from the date of grant and 15% per year thereafter until the options are
100% vested. Options granted in May 1996 vest 15% per year beginning two years
from the date of grant and 15% per year through the sixth year and 25% in the
seventh year. Additionally, a limited number of options vest 20% at the date of
grant and 20% per year thereafter and others vest 33-1/3% per year beginning one
year after grant. Options under the Directors' Stock Option Plan vest 25% six
months from the date of grant and 25% on the anniversary of the date of grant
thereafter. For all plans, the options expire ten years from the date of grant.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB25") and related
Interpretations in accounting for its employee stock options. Under APB25, if
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant no compensation expense is
recognized. In 1996, the Company issued employee stock options with an exercise
price below the market price of the underlying stock on the date of grant. In
accordance with APB25, $1.3 million, $1.4 million and $1.5 million has been
charged against income in 1996, 1995 and 1994, respectively.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards "Accounting for
Stock-Based Compensation",
18
<PAGE> 20
("SFAS No. 123"), and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.54%
and 6.69%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 28.0% and 31.1% and a
weighted-average expected life of the option of 6 years and 6 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information follows (in millions except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1996
---- ----
<S> <C> <C> <C>
Net Income As reported $ 104.7 $ 68.1
Pro forma $ 104.3 $ 67.8
Primary earnings per share As reported $ 2.34 $ 1.55
Pro forma $ 2.33 $ 1.54
</TABLE>
The effects of applying SFAS No. 123 for pro forma disclosure purposes
are not likely to be representative of the effects on future years disclosure
due to the timing of option vesting.
19
<PAGE> 21
Information regarding the Company's stock option plans is summarized
below:
<TABLE>
<CAPTION>
1987 Weighted 1990 Weighted Directors' Weighted
Stock Average Stock Option Average Stock Average
Option Exercise Plan Exercise Option Exercise
Plan Price Price Plan Price
------- -------- --------- ---------- ------- ----------
<S> <C> <C> <C>
Shares authorized 175,227 4,000,000 225,000 --
======= ======== ========= =======
Shares under option:
Outstanding at
January 2, 1994 48,519 $ 9.28 1,991,229 $ 23.34 99,043 $ 23.81
Granted -- -- 1,164,009 13.77 52,028 15.83
Exercised 7,000 9.28 34,240 2.50 --
Forfeited -- -- 416,142 23.11 20,144 25.32
------- -------- --------- ---------- ------- ----------
Outstanding at
January 1, 1995 41,519 $ 9.28 2,704,856 $ 19.53 130,927 $ 20.41
Granted -- -- 500,040 20.16 47,140 17.64
Exercised 22,801 9.28 130,666 8.28 --
Forfeited -- -- 273,922 23.33 --
------- -------- --------- ---------- ------- ----------
Outstanding at
December 31, 1995 18,718 $ 9.28 2,800,308 $ 19.79 178,067 $ 19.68
Granted -- -- 515,030 31.55 22,458 28.83
Exercised 15,843 9.28 434,945 23.75 -- --
Forfeited -- -- 50,135 20.99 -- --
------- -------- --------- ---------- ------- ----------
Outstanding at
December 29, 1996 2,875 $ 9.28 2,830,258 $ 21.30 200,525 $ 20.70
======= ======== ========= ========== ======= ==========
Weighted-average fair
value of options
granted during the
year:
1995 $ -- $ 8.96 $ 9.83
1996 $ -- $ 20.18 $ 14.64
Options exercisable:
At January 1, 1995 40,394 1,143,966 62,864
At December 31, 1995 17,593 1,372,726 109,290
At December 29, 1996 2,875 1,439,816 147,678
</TABLE>
20
<PAGE> 22
The following table summarizes information about stock options
outstanding at December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------
Numbers Number
Outstanding Weighted Weighted Exercisable Weighted
At Average Average At Average
December 29, Remaining Exercise December 29, Exercise
Range of Exercise Prices 1996 Life Price 1996 Price
-------------- ------------ ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
$ 4.00 - 6.00 272,500 7.3 years $ 4.15 181,666 $ 4.15
9.00 - 13.50 2,875 .6 9.28 2,875 9.28
14.23 - 21.35 1,390,115 7.2 18.13 675,565 17.97
$ 21.89 - 33.00 1,368,168 7.1 27.85 730,263 25.92
--------- ---------
3,033,658 7.2 21.25 1,590,369 20.03
========= =========
</TABLE>
21
<PAGE> 23
The Company's Employee Stock Purchase Plan (the "Stock Purchase Plan")
allows employees to purchase the Company's stock through payroll deductions. The
source of stock is weekly open market purchases by a third party administrator.
Administrative and purchase commission costs associated with the Stock Purchase
Plan are borne and paid by the Company according to the agreement with the third
party administrator.
Note 14. Advertising Expense
The Company expenses the costs of advertising as incurred. Total
advertising expense was $40.3 million, $44.1 million and $42.8 million in 1996,
1995 and 1994, respectively.
Note 15. Restructuring Charges
During 1993, the Company recorded a restructuring charge of $56.9
million, or $.77 per share. The 1993 charge reflected anticipated costs
associated with a program to accelerate the closing of underperforming
facilities, including 11 stores, and to eliminate approximately 300
administrative and support positions, which included 18 officers. The 1993
restructuring charge included $42.7 million for expenses relating to facility
closures and $14.2 million for severance and other related expenses.
In late 1994, the Company determined that the facility closures and
reductions in work force undertaken in 1993 would not achieve the Company's cost
reduction goals. The Company undertook additional restructuring initiatives
resulting in further facility closures and reductions in work force. During
1994, the Company recorded restructuring charges of $33.0 million, or $.45 per
share. The 1994 restructuring charges included $27.4 million for expenses
related to facility closures, including 16 stores and the San Diego distribution
facility. The remaining $5.6 million of the charges relates to severance and
other costs associated with the elimination of approximately 400 administrative
and support positions.
All of the cost containment and strategic restructuring initiatives
have been executed. Of the total $89.9 million restructuring reserve, $83.9
million of costs and payments have been charged against the reserve as of
December 29, 1996, representing asset write-offs and lease obligations for
closed facilities of $64.1 million and severance and other related expenses of
$19.8 million.
22
<PAGE> 24
Note 16. Quarterly Financial Data (Unaudited)
The results of operations for 1996 and 1995 were as follows (in
millions except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal Year 1996 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 1,205.6 $ 1,261.0 $ 1,676.6 $ 1,264.2
Gross profit (1) 307.3 323.6 419.9 323.9
Amortization of excess
cost over net assets
acquired 3.5 3.4 4.7 3.4
Operating income 45.3 53.1 68.2 74.5
Interest expense, net 13.5 13.3 16.6 12.2
Net income $ 17.5 $ 22.7 $ 29.4 $ 35.1
========= ========= ========= =========
Income per common
and common
equivalent share:
Net income $ .39 $ .51 $ .66 $ .78
========= ========= ========= =========
Weighted average
common and common
equivalent shares 44.5 44.6 44.7 45.0
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal Year 1995 (12 Weeks) (12 Weeks) (16 Weeks) (12 Weeks)
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Sales $ 1,142.5 $ 1,139.5 $ 1,565.3 $ 1,223.4
Gross profit (1) 291.5 289.6 390.7 308.7
Amortization of excess
cost over net assets
acquired 3.4 3.5 4.7 3.4
Operating income 42.2 42.8 54.4 54.7
Interest expense, net 16.1 15.7 20.1 15.4
Net income $ 14.0 $ 14.5 $ 18.5 $ 21.1
Income per common
and common equivalent
share:
Net income $ .32 $ .33 $ .42 $ .48
Weighted average
common and common
equivalent shares 43.8 43.8 44.0 44.3
</TABLE>
(1) Gross profit represents sales net of cost of sales, buying and
occupancy costs.
23
<PAGE> 1
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information is
based upon the historical consolidated financial statements of Safeway Inc.
("Safeway") included in Safeway's Annual Report on Form 10-K for the fiscal year
ended December 28, 1996 and The Vons Companies, Inc. ("Vons") which are filed
herewith as Exhibit 99.1 to this Form 8-K/A, and should be read in conjunction
with those consolidated financial statements and related notes. The pro forma
adjustments were applied to the respective historical financial statements to
reflect and account for the merger of SSCI Merger Sub, Inc., a Michigan
corporation and an indirect wholly owned subsidiary of Safeway, with and into
Vons with Vons as the surviving corporation and thereby becoming a wholly owned
subsidiary of Safeway ("the Merger") as a purchase. Under purchase accounting,
the purchase cost will be allocated to acquired assets and liabilities based on
their relative fair values at the effective time of the Merger, April 8, 1997,
based on valuations and other studies which are not yet complete. The purchase
price exceeds the fair value of the net assets acquired. This difference has
been allocated to goodwill which will be amortized over forty years. Such
allocations are subject to final determination based on real estate, leasehold
and equipment valuation studies and a review of the books, records and
accounting policies of Vons. These studies are expected to be completed before
the end of fiscal 1997. Accordingly, the final allocations will be different
from the amounts reflected herein. However, based on current information,
management does not presently expect the final allocations to differ materially
from the amounts presented herein.
The unaudited pro forma combined statements of income for the year
ended December 28, 1996 (December 29, 1996 for Vons) give effect to (i) the
acquisition of Vons applying the purchase method of accounting and (ii)
Safeway's repurchase (the "Repurchase") of 32.0 million shares of common stock
from a partnership controlled by an affiliate of Kohlberg Kravis Roberts & Co.
("KKR") as if these transactions were consummated on the first day of fiscal
1996.
The unaudited pro forma combined balance sheet presents the combined
financial position of Safeway and Vons as of December 28, 1996 for Safeway and
December 29, 1996 for Vons. The unaudited pro forma combined balance sheet
reflects (i) the acquisition of Vons applying the purchase method of accounting
and (ii) the Repurchase as if these transactions were consummated on December
28, 1996.
The unaudited pro forma combined financial statements are not
necessarily indicative of the results of operations or the financial position of
Safeway had the Merger or the Repurchase been consummated on the days discussed
above, nor do these statements purport to represent the expected results for
future periods. No pro forma adjustments were made to reflect any operational
efficiencies that could be derived as a result of the Merger.
<PAGE> 2
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED 1996
(in millions, except per share data)
<TABLE>
<CAPTION>
Safeway Vons Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 17,269.0 $ 5,407.4 $ (51.4)(1) $ 22,625.0
Costs of goods sold (12,494.8) (4,032.7) 317.5 (1)(2) (16,210.0)
----------- ---------- -------- -----------
Gross profit 4,774.2 1,374.7 266.1 6,415.0
Operating and administrative expense (3,882.5) (1,133.6) (294.5)(2)(3) (5,310.6)
----------- ---------- -------- -----------
Operating profit 891.7 241.1 (28.4) 1,104.4
Interest expense (178.5) (55.6) (82.6)(4) (316.7)
Equity in earnings of unconsolidated affiliates 50.0 -- (31.2)(5) 18.8
Other income, net 4.4 -- 4.4
----------- ---------- -------- -----------
Income before taxes 767.6 185.5 (142.2) 810.9
Income taxes (307.0) (80.8) 40.2 (6) (347.6)
----------- ---------- -------- -----------
Net income $ 460.6 $ 104.7 $ (102.0) $ 463.3
=========== ========== ======== ===========
Earnings per common share and common
share equivalents:
Primary $ 1.94 $ 2.34 $ 1.86
==========
Fully diluted 1.93 N.A. $ 1.86
Weighted average common shares and
common share equivalents:
Primary 237.8 44.8 (34.0)(7) 248.6
==========
Fully diluted 238.4 N.A. 11.2 (7) 249.6
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
<PAGE> 3
UNAUDITED PRO FORMA COMBINED
BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
Dec. 28, 1996 Dec. 29, 1996
Safeway Vons Pro Forma Pro Forma
Historical Historical Adjustments Combined
------------- ------------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and equivalents $ 79.7 $ 9.3 $ 89.0
Receivable 160.9 45.0 205.9
Merchandise inventories 1,283.3 335.3 $ 24.3 (8) 1,642.9
Prepaid expense and other 130.5 75.3 205.8
-------- -------- --------- --------
Total Current Assets 1,654.4 464.9 24.3 2,143.6
Property, net 2,756.4 1,194.2 3,950.6
Goodwill 312.5 467.8 1,212.2 (8)(10)(11) 1,992.5
Prepaid pension 328.7 6.4 (6.7)(8) 328.4
Investment in unconsolidated affiliates 362.4 -- (286.4)(9)(10) 76.0
Other assets 130.8 52.1 182.9
-------- -------- --------- --------
Total assets $5,545.2 $2,185.4 $ 943.4 $8,674.0
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 255.7 $ 154.9 $ 410.6
Accounts payable 1,153.1 339.2 25.0 (11) 1,517.3
Accrued salaries and wages 231.2 265.7 496.9
Other 390.0 -- 390.0
-------- -------- --------- --------
Total current liabilities 2,030.0 759.8 25.0 2,814.8
Notes, debentures and capital lease
obligations 1,728.5 349.8 1,376.0 (12) 3,454.3
Deferred income taxes 223.8 131.7 (23.0) (8) 332.5
Accrued claims and other 376.1 205.7 (25.7) (8) 556.1
-------- -------- --------- --------
Total liabilities 4,358.4 1,447.0 1,352.3 7,157.7
Contingencies
Stockholders' equity
Common stock 2.2 4.4 (4.0)(11) 2.6
Additional paid in capital 750.3 353.4 1,339.6 (11) 2,443.3
Unexercised warrants purchased (322.7) -- (322.7)
Treasury stock -- -- (1,376.0)(12) (1,376.0)
Cumulative translation adjustment 12.0 -- 12.0
Retained earnings 745.0 380.6 (368.5)(9)(11) 757.1
-------- -------- --------- --------
Total stockholders' equity 1,186.8 738.4 (408.9) 1,516.3
-------- -------- --------- --------
Total liabilities and stockholders' equity $5,545.2 $2,185.4 $ 943.4 $8,674.0
======== ======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
<PAGE> 4
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The following table sets forth the determination and preliminary allocation of
the estimated purchase price based on a market value of $38.50 per share of
Safeway common stock. This market value is based on the average of the closing
market price of Safeway common stock for three days, beginning the day before
the Merger was announced and ending the day following the Merger announcement.
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Merger exchange of shares (41.6 million shares of Safeway common stock in
exchange for 29.2 million shares of Vons common stock not owned by
Safeway immediately prior to the Merger) $1,602.5
Value of Vons stock options assumed
by Safeway
90.3
Estimated transaction costs and expenses
25.6
Estimated purchase price of Vons stock
not owned by Safeway immediately
prior to the Merger 1,718.4
Safeway's equity investment in Vons 298.6
--------
Estimated purchase price $2,017.0
========
</TABLE>
The preliminary allocation of the estimated purchase price is as follows:
<TABLE>
<S> <C>
Current assets $ 489.2
Property, plant and equipment
1,194.2
Prepaid pension and other assets 51.8
Current liabilities (except current
maturities of long-term debt
and capital lease obligations) (604.9)
Notes, debentures, and capital
lease obligations (504.7)
Other noncurrent liabilities
(288.7)
Goodwill
1,680.1
--------
$2,017.0
========
</TABLE>
1. To eliminate the sale of products from Safeway to Vons of $51.4 million in
1996.
2. To adjust Vons' income statements to reflect the reclassification of
approximately $266.1 million of store occupancy costs for the year ended
1996 from costs of goods sold to operating and administrative expense to
be consistent with Safeway's income statement presentation.
3. To increase goodwill amortization resulting from the allocation of the
purchase price of Vons by $28.4 million for the year ended 1996. Goodwill
is amortized over 40 years.
4. To reflect the pro forma impact of approximately $1,376 million in bank
borrowings at an interest rate per annum of 6.0% to effect the Repurchase.
The effect of a 1/8 percent change in the interest rate would be
approximately $1.7 million for the year ended 1996.
<PAGE> 5
5. To eliminate Safeway's equity in earnings of Vons. The remaining balance
represents Safeway's equity in the earnings of Casa Ley, S.A. de C.V.
which is recorded on a one-quarter delay basis.
6. To record the tax effect of all pro forma adjustments except goodwill
amortization, which is not deductible.
7. Pro forma earnings per common share and common share equivalent is
computed on the basis of Safeway's weighted average Common Stock and
common stock equivalents outstanding after giving effect to (i) the
issuance of 41.6 million additional shares of Safeway Common Stock and the
issuance of 1.6 million common stock equivalents (1.2 million for primary)
in order to consummate the Merger and (ii) the Repurchase of 32.0 million
shares from a partnership controlled by an affiliate of KKR.
8. To adjust Vons' balance sheet to preliminary estimates of fair value based
on Safeway's step-acquisition of an additional 65.6% of Vons, and to
reflect purchase accounting adjustments to conform Vons' accounting
methods to those of Safeway. These adjustments consist of the following:
adjusting inventory to eliminate a $24.3 million LIFO reserve, eliminating
a $6.7 million unrecognized net loss on pension assets, and adjusting
claims and other liabilities by $8.7 million to eliminate unrecognized net
gain on post-retirement liabilities and by $17.0 million to reduce Vons'
accrued self-insurance liability to a discounted basis (consistent with
Safeway's accounting policy). Also includes a net $23.0 million adjustment
to provide deferred taxes on each of the foregoing balance sheet
adjustments as well as adjustment 10 below.
9. To increase Safeway's equity investment in Vons to reflect Safeway's $12.2
million equity earnings in Vons' fourth quarter 1996 earnings. (Safeway
records equity from earnings in unconsolidated affiliates on a one quarter
delay basis).
10. To eliminate Safeway's adjusted $298.6 million equity in Vons, including a
reclassification to increase goodwill by $44.4 million for net goodwill
included in Safeway's equity investment in Vons.
11. To record Safeway's purchase of Vons outstanding common stock not owned by
Safeway prior to the Merger, which increases common stock by $0.4 million
and additional paid in capital by $1,693 million, and to record an
estimated accrued liability of $25.0 million for related transaction
costs. Includes adjustments to reduce Vons' common stock, additional paid
in capital and retained earnings by $4.4 million, $353.4 million and
$380.6 million, respectively.
12. To record the Repurchase (32.0 million shares of Safeway stock at $43.00
per share) and incurrence of related debt.
