<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 19, 1999
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5918 STONERIDGE MALL RD.
PLEASANTON, CALIFORNIA 94588-3229
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (925) 467-3000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
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 [ ]
As of August 3, 1999, there were issued and outstanding 497.6 million
shares of the registrant's common stock.
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<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements........................................ 3
Condensed Consolidated Balance Sheets as of June 19, 1999
and January 2, 1999......................................... 3
Condensed Consolidated Statements of Income for the 12 weeks
and 24 weeks ended June 19, 1999 and June 20, 1998.......... 4
Condensed Consolidated Statements of Cash Flows for the 24
weeks ended June 19, 1999 and June 20, 1998................. 5
Notes to the Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 19, JANUARY 2,
1999 1999
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 40.3 $ 45.7
Receivables............................................... 201.2 200.1
Merchandise inventories................................... 1,884.8 1,856.0
Prepaid expenses and other current assets................. 203.7 218.1
--------- ---------
Total current assets...................................... 2,330.0 2,319.9
--------- ---------
Property.................................................... 8,432.9 8,024.1
Less accumulated depreciation and amortization............ (3,019.5) (2,841.5)
--------- ---------
Property, net............................................. 5,413.4 5,182.6
Goodwill, net of accumulated amortization of $253.3 and
$211.0.................................................... 3,519.2 3,348.0
Prepaid pension costs....................................... 378.4 369.6
Investment in unconsolidated affiliate...................... 128.4 115.2
Other assets................................................ 44.3 54.3
--------- ---------
Total assets................................................ $11,813.7 $11,389.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes and debentures................ $ 153.2 $ 279.8
Current obligations under capital leases.................. 42.3 41.7
Accounts payable.......................................... 1,423.5 1,595.9
Accrued salaries and wages................................ 337.1 348.9
Other accrued liabilities................................. 667.5 627.3
--------- ---------
Total current liabilities................................. 2,623.6 2,893.6
--------- ---------
Long-term debt:
Notes and debentures...................................... 4,505.0 4,242.6
Obligations under capital leases.......................... 387.8 408.0
--------- ---------
Total long-term debt...................................... 4,892.8 4,650.6
Deferred income taxes....................................... 195.7 216.9
Accrued claims and other liabilities........................ 497.3 546.4
--------- ---------
Total liabilities........................................... 8,209.4 8,307.5
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $0.01 per share; 1,500 shares
authorized; 497.1 and 490.3 shares issued, after
deducting 60.4 and 60.6 treasury shares................ 5.6 5.5
Additional paid-in capital................................ 1,365.9 1,297.3
Retained earnings......................................... 2,241.2 1,799.0
Accumulated other comprehensive loss...................... (8.4) (19.7)
--------- ---------
Total stockholders' equity................................ 3,604.3 3,082.1
--------- ---------
Total liabilities and stockholders' equity.................. $11,813.7 $11,389.6
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
---------------------- ----------------------
JUNE 19, JUNE 20, JUNE 19, JUNE 20,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales......................................... $ 6,337.0 $ 5,583.3 $12,450.2 $10,972.6
Cost of goods sold............................ (4,442.0) (3,961.1) (8,733.6) (7,786.3)
--------- --------- --------- ---------
Gross profit............................. 1,895.0 1,622.2 3,716.6 3,186.3
Operating and administrative expense.......... (1,425.4) (1,241.3) (2,821.8) (2,474.2)
--------- --------- --------- ---------
Operating profit......................... 469.6 380.9 894.8 712.1
Interest expense.............................. (74.2) (51.5) (147.5) (104.4)
Equity in earnings of unconsolidated
affiliate................................... 5.2 4.6 13.2 10.4
Other income, net............................. 0.8 0.4 2.0 1.7
--------- --------- --------- ---------
Income before income taxes............... 401.4 334.4 762.5 619.8
Income taxes.................................. (165.0) (141.2) (320.3) (261.8)
--------- --------- --------- ---------
Net income.................................... $ 236.4 $ 193.2 $ 442.2 $ 358.0
========= ========= ========= =========
Basic earnings per share...................... $ 0.48 $ 0.40 $ 0.89 $ 0.75
========= ========= ========= =========
Diluted earnings per share.................... $ 0.46 $ 0.38 $ 0.86 $ 0.71
========= ========= ========= =========
Weighted average shares outstanding --basic... 496.5 480.2 494.6 479.2
========= ========= ========= =========
Weighted average shares
outstanding -- diluted...................... 513.0 508.2 512.9 507.4
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SAFEWAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS ENDED
--------------------
JUNE 19, JUNE 20,
1999 1998
-------- --------
<S> <C> <C>
Cash Flow from Operations
Net income.................................................. $ 442.2 $ 358.0
Reconciliation to net cash flow from operations:
Depreciation and amortization............................. 292.3 234.9
LIFO expense.............................................. 4.6 2.3
Equity in undistributed earnings of unconsolidated
affiliate.............................................. (13.2) (10.4)
Other..................................................... 21.8 (13.4)
Change in working capital items:
Receivables and prepaid expenses....................... (6.1) (21.7)
Inventories at FIFO cost............................... 29.6 1.8
Payables and accruals.................................. (244.8) (144.5)
------- -------
Net cash flow from operations..................... 526.4 407.0
------- -------
Cash Flow from Investing Activities
Cash paid for property additions............................ (374.7) (300.7)
Proceeds from sale of property.............................. 32.3 8.1
Net cash paid for acquisition of Carr-Gottstein Foods
Co. ...................................................... (91.3) --
Other....................................................... (6.7) (6.6)
------- -------
Net cash flow used by investing activities........ (440.4) (299.2)
------- -------
Cash Flow from Financing Activities
Additions to short-term borrowings.......................... 58.9 90.0
Payments on short-term borrowings........................... (111.0) (120.0)
Additions to long-term borrowings........................... 697.0 295.0
Payments on long-term borrowings............................ (749.5) (407.9)
Net proceeds from exercise of stock options and warrants.... 16.1 16.4
Other....................................................... (2.9) (2.7)
------- -------
Net cash flow used by financing activities........ (91.4) (129.2)
------- -------
Decrease in cash and equivalents............................ (5.4) (21.4)
Cash and Equivalents
Beginning of period....................................... 45.7 77.2
------- -------
End of period............................................. $ 40.3 $ 55.8
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Safeway
Inc. and subsidiaries ("Safeway" or the "Company") for the 12 weeks and 24 weeks
ended June 19, 1999 and June 20, 1998 are unaudited and, in the opinion of
management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1998 Annual Report to Stockholders. The results of
operations for the 12 weeks and 24 weeks ended June 19, 1999 are not necessarily
indicative of the results expected for the full year.
ACQUISITION OF DOMINICK'S SUPERMARKETS, INC. ("DOMINICK'S")
In November 1998, Safeway acquired Dominick's by purchasing all of the
outstanding shares of Dominick's for $49 cash per share, or a total of
approximately $1.2 billion (the "Dominick's Acquisition"). The Dominick's
Acquisition was accounted for as a purchase, and Dominicks' operating results
have been consolidated with Safeway's since approximately midway through the
fourth quarter of 1998. See Note D.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO. ("CARRS")
In April 1999, Safeway acquired Carrs by purchasing all of the outstanding
shares of Carrs for $12.50 cash per share, or a total of approximately $110
million (the "Carrs Acquisition"). Carrs is Alaska's largest food and drug
retailer and runs Alaska's largest food warehouse and distribution operation. On
the acquisition date, Carrs operated 49 stores. The Carrs Acquisition was
accounted for as a purchase and resulted in goodwill of $206 million which is
being amortized over 40 years. Safeway funded the Carrs Acquisition, and the
subsequent repayment of $238.7 million of Carrs' debt, with the issuance of
commercial paper. Safeway's income statement includes eight weeks of Carrs'
results for the second quarter of 1999. See Note D.
PROPOSED ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On July 23, 1999, Safeway and Randall's jointly announced that they signed
a definitive merger agreement pursuant to which Safeway will acquire Randall's
for total consideration of approximately $1.8 billion. Safeway will pay
approximately $1.425 billion for the equity of Randall's using approximately
$855 million in cash and approximately 10.9 million shares of Safeway common
stock and will assume or repay approximately $375 million of Randall's debt.
Randall's operates 116 stores in Texas with fiscal 1999 net sales of $2.6
billion.
The transaction will be accounted for as a purchase, and the cash portion
is expected to be funded initially with a combination of bank debt, commercial
paper and public debt.
The acquisition is subject to a number of conditions, including the
approval of a majority of Randall's outstanding shares, certain regulatory
approvals and other customary closing conditions.
An affiliate of Kohlberg Kravis Roberts & Co. ("KKR"), which owns
approximately 62% of Randall's outstanding shares and members of the Onstead
family, who own approximately 21% of Randall's outstanding shares, have agreed
to vote their shares in favor of the merger. Another affiliate of KKR is one of
Safeway's shareholders and four of its members sit on Safeway's board of
directors. The acquisition was approved by a special committee of Safeway's
board of directors comprised of three directors who are not affiliated with KKR.
6
<PAGE> 7
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
INVENTORY
Net income reflects the application of the LIFO method of valuing certain
domestic inventories, based upon estimated annual inflation ("LIFO Indices").
Safeway recorded LIFO expense $4.6 million during the first 24 weeks of 1999 and
$2.3 million in the first 24 weeks of 1998. Actual LIFO Indices are calculated
during the fourth quarter of the year based upon a statistical sampling of
inventories.
COMPREHENSIVE INCOME
Comprehensive income includes net income and foreign currency translation
adjustments. Total comprehensive income approximates net income.
NOTE B -- NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. This statement is effective for Safeway beginning in
the first quarter of 2001. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption of
this statement will have a material impact on its financial statements.
During the first quarter of 1999, the Company adopted SOP 98-5, "Reporting
on the Costs of Start-Up Activities," which requires that costs incurred for
start-up activities, such as store openings, be expensed as incurred. This SOP
did not have a material impact on Safeway's financial statements.
7
<PAGE> 8
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C -- FINANCING
Notes and debentures were composed of the following at June 19, 1999 and
January 2, 1999 (in millions):
<TABLE>
<CAPTION>
JUNE 19, 1999 JANUARY 2, 1999
-------------------- --------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Commercial paper.................................... $1,549.0 $1,745.0
Bank credit agreement, unsecured.................... 560.4 89.1
9.30% Senior Secured Debentures due 2007............ 24.3 24.3
6.85% Senior Notes due 2004, unsecured.............. 200.0 200.0
7.00% Senior Notes due 2007, unsecured.............. 250.0 250.0
7.45% Senior Debentures due 2027, unsecured......... 150.0 150.0
5.75% Notes due 2000, unsecured..................... 400.0 400.0
5.875% Notes due 2001, unsecured.................... 400.0 400.0
6.05% Notes due 2003, unsecured..................... 350.0 350.0
6.50% Notes due 2008, unsecured..................... 250.0 250.0
9.35% Senior Subordinated Notes due 1999,
unsecured......................................... -- -- $ 66.7
10% Senior Subordinated Notes due 2001, unsecured... 79.9 79.9 --
9.65% Senior Subordinated Debentures due 2004,
unsecured......................................... 81.2 81.2 --
9.875% Senior Subordinated Debentures due 2007,
unsecured......................................... 24.2 24.2 --
10% Senior Notes due 2002, unsecured................ 6.1 6.1 --
Mortgage notes payable, secured..................... 60.4 $ 34.5 69.6 46.3
Other notes payable, unsecured...................... 94.0 9.1 97.7 5.0
Medium-term notes, unsecured........................ 25.5 -- 25.5 --
Short-term bank borrowings, unsecured............... -- 109.6 -- 161.8
-------- ------ -------- ------
$4,505.0 $153.2 $4,242.6 $279.8
======== ====== ======== ======
</TABLE>
NOTE D -- PRO FORMA SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information is
based on the historical consolidated results of the operations of Safeway,
Dominick's and Carrs, as if these acquisitions had occurred as of the beginning
of the 24-week periods ended June 20, 1998 and June 19, 1999. This pro forma
financial information is presented for informational purposes only and may not
be indicative of what the actual consolidated results of operations would have
been if the acquisitions had been effective as of the period being presented.
Under purchase accounting, the purchase price is allocated to acquired
assets and liabilities based on their estimated fair values at the date of
acquisition, and any excess is allocated to goodwill. For Dominick's and Carrs,
such allocations are subject to adjustment when additional analysis concerning
asset and liability balances is finalized. The preliminary allocation of the
purchase price to the assets and liabilities acquired was based in part upon an
independent valuation which, in turn, was based upon certain estimates and cash
flow information provided by management. Management does not expect the final
allocations to differ materially from the amounts presented herein.
8
<PAGE> 9
SAFEWAY INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
24 WEEKS ENDED
------------------------------
(PRO FORMA) (PRO FORMA)
JUNE 19, 1999 JUNE 20, 1998
------------- -------------
(IN MILLIONS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C>
Sales...................................................... $12,593.3 $12,308.7
Net income................................................. $ 438.4 $ 327.1
Diluted earnings per share................................. $ 0.85 $ 0.64
</TABLE>
NOTE E -- CONTINGENCIES
LEGAL MATTERS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant litigation in which the
Company is involved. The material changes to that information are described
below.
On May 20, 1999, the Superior Court for Alameda County, California
sustained the Company's motion for judgment on the pleadings on plaintiffs'
contract claim in the case served on Safeway on July 10, 1998 relating to the
1998 Richmond warehouse fire. On March 5, 1999, the same Court sustained the
Company's demurrer to plaintiffs' fraud claim. The May 20, 1999 ruling included
entry of final judgment for the Company. Plaintiffs have filed a motion seeking
relief from that judgment and permission to file a fraud claim that is similar
to their prior claim. Plaintiffs have also filed a notice of appeal.
The trial of the class action lawsuit, McCampbell et. al. v. Ralphs Grocery
Company et. al. in the Super Court for San Diego County, alleging that Vons and
two other grocery store chains conspired to fix the price of eggs in Southern
California, began on July 12, 1999. The trial is expected to continue through
early September. During the trial, plaintiffs amended their damages study to
reduce the alleged damages (before trebling) attributable to Vons to between
$37.2 million to $49.7 million, depending upon the ending date for calculating
damages and whether Vons' discounts are taken into account.
On May 14, 1999, the Company filed an answer to the April 1999 class action
lawsuit entitled Sanders, et al. v. Lucky Stores, et al. in the California
Superior Court, San Francisco County. The lawsuit alleges, among other things,
that the Company conspired with the other defendants to fix the retail price of
milk in six San Francisco Bay Area counties. In the answer, the Company denied
the material allegations of the complaint and asserted several affirmative
defenses.
On July 23, 1999, the Company settled claims made by the U.S. Attorney,
Northern District of California that in March, 1996 Safeway employees caused
milk to enter storm drains at some of its Northern California stores, in
violation of the Clean Water Act. In the settlement, the Company agreed, among
other things, to pay $200,000 in civil fines, enhance training and compliance
programs and educate the industry on storm drain awareness.
9
<PAGE> 10
SAFEWAY INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Safeway Inc. net income was $236.4 million ($0.46 per share) for the second
quarter ended June 19, 1999, compared to $193.2 million ($0.38 per share) for
the second quarter of 1998, an increase of 22%.
Safeway acquired Dominick's in November 1998. Consequently, Safeway's
income statement for the first 24 weeks of 1999 includes Dominick's operating
results while the income statement for the first 24 weeks of 1998 does not.
Also, in April 1999 Safeway acquired all of the outstanding shares of
Carr-Gottstein Foods Co. ("Carrs") for approximately $110 million cash plus the
subsequent repayment of approximately $238.7 million of Carrs' debt.
Consequently, Safeway's income statement includes eight weeks of Carrs' results
for the second quarter of 1999 while the second quarter of 1998 does not.
In order to facilitate an understanding of Safeway's operations, the pro
forma amounts presented below were computed as if Safeway had owned Dominick's
for the first 24 weeks of 1998 and Carrs for the last eight weeks of the second
quarter of 1998.
Second quarter sales increased 13.5% to $6.3 billion in 1999 from $5.6
billion in 1998, primarily because of the Dominick's acquisition.
Comparable-store sales increased 1.5%, while identical-store sales (which
exclude replacement stores) increased 0.7%.
Safeway's continuing improvements in buying practices and product mix
helped increase gross profit to 29.90% of sales in the second quarter of 1999
from 29.05% in the second quarter of 1998 on a historical basis and 29.01% on a
pro forma basis. In addition, promotional spending related to the introduction
of the Safeway Club Card in a number of operating areas reduced gross profit in
1998. LIFO expense was $2.3 million in both the second quarter of 1999 and the
second quarter of 1998.
Operating and administrative expense increased to 22.49% of sales in the
second quarter of 1999 compared to 22.23% in 1998 because Dominick's and Carrs'
operating and administrative expense ratio had historically been higher than
Safeway's and because of increased goodwill amortization as a result of the
Dominick's and Carrs acquisitions. On a pro forma basis, operating and
administrative expense declined 17 basis points from 22.66% in 1998, reflecting
increased sales and ongoing efforts to reduce or control expenses.
Interest expense increased to $74.2 million in the second quarter of 1999
from $51.5 million for the second quarter of 1998 primarily due to debt incurred
to finance the Dominick's and Carrs acquisitions. However, strong operating
results pushed the interest coverage ratio (defined on page 12) for the last
four quarters to 8.57 times compared to 8.04 in the second quarter of 1998.
Operating cash flow (defined on page 12) as a percentage of sales also reached
all-time highs of 9.80% for the quarter and 9.19% for the last four quarters.
Equity in earnings of Casa Ley, Safeway's unconsolidated affiliate, was
$5.2 million for the quarter compared to $4.6 million in 1998.
For the first 24 weeks of 1999, sales were $12.5 billion compared to sales
of $11.0 billion in 1998. The gross profit margin improved to 29.85% from 29.04%
in 1998 on a historical basis and 29.00% on a pro forma basis. Operating and
administrative expense increased to 22.66% of sales in 1999 from 22.55% in 1998
because of the Dominick's and Carrs acquisitions. On a pro forma basis operating
and administrative expense improved from 22.89% in the first 24 weeks of 1998.
ACQUISITION OF CARR-GOTTSTEIN FOODS CO.
On April 16, 1999, Safeway acquired all of the outstanding shares of Carrs
for $12.50 cash per share, or a total of approximately $110 million (the "Carrs
Acquisition"). Carrs is Alaska's largest food and drug retailer and runs
Alaska's largest food warehouse and distribution operation. On the acquisition
date, Carrs operated 49 stores. A consent decree entered into with the state of
Alaska requires the disposition of six Safeway stores
10
<PAGE> 11
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
and one Carrs store following the Carrs Acquisition. Safeway funded the Carrs
Acquisition, and the subsequent repayment of $238.7 million of Carrs' debt, with
the issuance of commercial paper.
PROPOSED ACQUISITION OF RANDALL'S FOOD MARKETS, INC. ("RANDALL'S")
On July 23, 1999, Safeway and Randall's jointly announced that they signed
a definitive merger agreement pursuant to which Safeway will acquire Randall's
for total consideration of approximately $1.8 billion. Safeway will pay
approximately $1.425 billion for the equity of Randall's using approximately
$855 million in cash and approximately 10.9 million shares of Safeway common
stock and will assume or repay approximately $375 million of Randall's debt.
Randall's operates 116 stores in Texas with fiscal 1999 net sales of $2.6
billion.
The transaction will be accounted for as a purchase, and the cash portion
is expected to be funded initially with a combination of bank debt, commercial
paper and public debt.
The acquisition is subject to a number of conditions, including the
approval of a majority of Randall's outstanding shares, certain regulatory
approvals and other customary closing conditions.
An affiliate of Kohlberg Kravis Roberts & Co. ("KKR"), which owns
approximately 62% of Randall's outstanding shares and members of the Onstead
family, who own approximately 21% of Randall's outstanding shares, have agreed
to vote their shares in favor of the merger. Another affiliate of KKR is one of
Safeway's shareholders and four of its members sit on Safeway's board of
directors. The acquisition was approved by a special committee of Safeway's
board of directors comprised of three directors who are not affiliated with KKR.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operations was $526.4 million in the first 24 weeks of 1999
compared to cash flow from operations of $407.0 million in the first 24 weeks of
1998. This change is primarily due to improved operations offset by changes in
working capital. Working capital (excluding cash and debt) at June 19, 1999 was
a deficit of $138.4 million compared to a deficit of $117.2 million at June 20,
1998.
Cash flow used for investing activities for the first 24 weeks of the year
was $440.4 million in 1999 compared to $299.2 million in 1998, primarily due to
the acquisition of Carrs and increased capital expenditures in 1999.
Cash flow used for financing activities was $91.4 million in the first 24
weeks of 1999 and $129.2 in 1998, primarily due to the repayment of debt.
Net cash flow from operations as presented in the Condensed Consolidated
Statements of Cash Flows is an important measure of cash generated by the
Company's operating activities. Operating cash flow, as defined below, is
similar to net cash flow from operations because it excludes certain noncash
items. However, operating cash flow also excludes interest expense and income
taxes. Management believes that operating cash flow is relevant because it
assists investors in evaluating Safeway's ability to service its debt by
providing a commonly used measure of cash available to pay interest, and it
facilitates comparisons of Safeway's results of operations with those of
companies having different capital structures. Other companies may define
operating
11
<PAGE> 12
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
cash flow differently, and as a result, such measures may not be comparable to
Safeway's operating cash flow. Safeway's computation of operating cash flow is
as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
-------------------- --------------------
JUNE 19, JUNE 20, JUNE 19, JUNE 20,
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Income before income taxes............................ $401.4 $334.4 $ 762.5 $619.8
Interest expense...................................... 74.2 51.5 147.5 104.4
Depreciation and amortization......................... 148.4 118.0 292.3 234.9
LIFO expense.......................................... 2.3 2.3 4.6 2.3
Equity in earnings of unconsolidated affiliate........ (5.2) (4.6) (13.2) (10.4)
------ ------ -------- ------
Operating cash flow................................... $621.1 $501.6 $1,193.7 $951.0
====== ====== ======== ======
As a percent of sales................................. 9.80% 8.98% 9.59% 8.67%
As a multiple of interest expense..................... 8.37x 9.74x 8.09x 9.11x
</TABLE>
Based upon the current level of operations, Safeway believes that operating
cash flow and other sources of liquidity, including borrowings under Safeway's
commercial paper program and the bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance, however, that the Company's business will continue to generate
cash flow at or above current levels. The bank credit agreement is used
primarily as a backup facility to the commercial paper program. During the
second quarter of 1999, the acquisition of Carrs, including the subsequent
repayment of $238.7 million of Carrs' debt, was funded with the issuance of
commercial paper.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications is necessary to avoid system
failures and the temporary inability to process transactions or engage in other
normal business activities.
In 1997 the Company established a year 2000 project group, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
compliance efforts. The project group is staffed primarily with representatives
of the Company's Information Technology department and also uses outside
consultants on an as-needed basis. The Chief Information Officer reports
regularly on the status of the year 2000 project to a steering committee headed
by the Chief Executive Officer and to the Company's board of directors.
The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant, and has categorized these systems and
applications into three priority levels based on how critical the system or
application is to the Company's operations. The year 2000 project group has
determined the modifications or replacements necessary to achieve compliance, is
implementing the modifications and replacements, conducting tests necessary to
verify that the modified systems are operational and transitioning the compliant
systems into the regular operations of the Company. Management believes that all
critical Safeway systems and applications are now year 2000 compliant. The year
2000 project group will continue to evaluate and test any additional year
2000-related upgrades or changes which may be provided by software vendors
relating to software packages supporting Company systems and applications.
12
<PAGE> 13
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Safeway completed its acquisition of Dominick's in November 1998, and is in
the process of replacing or modifying systems that are not year 2000 compliant.
Safeway estimates that all critical systems and applications of Dominick's will
be year 2000 compliant by September 30, 1999.
Safeway also completed its acquisition of Carrs on April 16, 1999. The
majority of Carrs systems which are not year 2000 compliant will be replaced
with the core Safeway systems. Other Carrs systems will be modified as
necessary. Safeway estimates that all critical systems and applications of Carrs
will be year 2000 compliant by September 30, 1999.
The year 2000 project group is also examining the Company's relationships
with certain key outside vendors and others with whom the Company has
significant business relationships to determine, to the extent practical, the
degree of such outside parties' year 2000 compliance. The project group is
testing procedures with certain vendors identified as having potential year 2000
compliance issues. Management does not believe that the Company's relationship
with any third party is material to the Company's operations and, therefore,
does not believe that the failure of any particular third party to be year 2000
compliant would have a material adverse effect on the Company.
The year 2000 project group has established a contingency plan to provide
for viable alternatives to ensure that the Company's core business operations
are able to continue in the event of a year 2000-related systems failure. The
plan provides for several alternative responses to various possible failure
scenarios in each of the Company's primary functional areas. The plan is being
and will continue to be evaluated and refined by management for each functional
area. A central task force is being formed to manage all year 2000 contingency
preparation and activities for the Company. Each division of the Company will
form its own committee to manage and control contingency preparation and
activities for that division. Communication of the contingency plan and training
to support it are scheduled for August through October 1999. Testing and
contingency drills to validate the contingency plan and its effectiveness are
expected to be complete by November 30, 1999.
Through the second quarter of 1999 the Company has spent approximately
$23.7 million to address year 2000 compliance issues. The Company estimates that
it will incur an additional $6.3 million, for a total of approximately $30.0
million (including $5.0 million for Dominick's and Carrs) to address year 2000
compliance issues, which includes the estimated costs of all modifications,
testing and consultants' fees.
Management believes that, should the Company or any third party with whom
the Company has a significant business relationship have a year 2000-related
systems failure, the most significant impact would likely be the inability, with
respect to a group of stores, to conduct operations due to a power failure, to
deliver inventory in a timely fashion, to receive certain products from vendors
or to process electronically customer sales at the store level. The Company does
not anticipate that any such impact would be material to the Company's liquidity
or results of operations.
CAPITAL EXPENDITURE PROGRAM
During the first 24 weeks of 1999, Safeway invested $425.1 million in
capital expenditures (as defined on page 14 of the Company's 1998 Annual Report
to Stockholders) and opened 20 new stores. The Company expects to spend
approximately $1.4 billion in 1999 while opening 70 to 75 new stores and
completing approximately 250 remodels.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act of 1934. Such statements relate to, among other things,
capital expenditures, cost reduction, cash flow, operating improvements and year
13
<PAGE> 14
SAFEWAY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2000 disclosures, and are indicated by words or phrases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects", "management
believes," "the Company believes," "the Company intends" and similar words or
phrases. The following are among the principal factors that could cause actual
results to differ materially from the forward-looking statements: general
business and economic conditions in the Company's operating regions, including
the rate of inflation, population, employment and job growth in the Company's
markets; pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels; results of the Company's
efforts to reduce costs; the ability to integrate and achieve operating
improvements at companies Safeway acquires; increases in labor costs and
deterioration in relations with the union bargaining units representing the
Company's employees; issues arising from addressing year 2000 information
technology issues; opportunities or acquisitions that the Company pursues; 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.
14
<PAGE> 15
SAFEWAY INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note K to the Company's consolidated financial statements, under the
caption "Legal Matters" on pages 35 and 36 of the 1998 Annual Report to
Stockholders, provides information on significant litigation in which the
Company is involved. The material changes to that information are described
below.
On May 20, 1999, the Superior Court for Alameda County, California
sustained the Company's motion for judgment on the pleadings on plaintiffs'
contract claim in the case served on Safeway on July 10, 1998 relating to the
1998 Richmond warehouse fire. On March 5, 1999, the same Court sustained the
Company's demurrer to plaintiffs' fraud claim. The May 20, 1999 ruling included
entry of final judgment for the Company. Plaintiffs have filed a motion seeking
relief from that judgment and permission to file a fraud claim that is similar
to their prior claim. Plaintiffs have also filed a notice of appeal.
The trial of the class action lawsuit, McCampbell et. al. v. Ralphs Grocery
Company et. al. in the Super Court for San Diego County, alleging that Vons and
two other grocery store chains conspired to fix the price of eggs in Southern
California, began on July 12, 1999. The trial is expected to continue through
early September. During the trial, plaintiffs amended their damages study to
reduce the alleged damages (before trebling) attributable to Vons to between
$37.2 million to $49.7 million, depending upon the ending date for calculating
damages and whether Vons' discounts are taken into account.
On May 14, 1999, the Company filed an answer to the April 1999 class action
lawsuit entitled Sanders, et al. v. Lucky Stores, et al. in the California
Superior Court, San Francisco County. The lawsuit alleges, among other things,
that the Company conspired with the other defendants to fix the retail price of
milk in six San Francisco Bay Area counties. In the answer, the Company denied
the material allegations of the complaint and asserted several affirmative
defenses.
On July 23, 1999, the Company settled claims made by the U.S. Attorney,
Northern District of California that in March, 1996 Safeway employees caused
milk to enter storm drains at some of its Northern California stores, in
violation of the Clean Water Act. In the settlement, the Company agreed, among
other things, to pay $200,000 in civil fines, enhance training and compliance
programs and educate the industry on storm drain awareness.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 11, 1999 at which the
stockholders voted on proposals as follows:
<TABLE>
<CAPTION>
VOTES AGAINST VOTES BROKER
VOTES FOR OR WITHHELD ABSTAINED NON-VOTES
----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
Peter A. Magowan.............................. 398,783,876 7,299,411 N/A N/A
George R. Roberts............................. 399,035,402 7,047,885 N/A N/A
Rebecca A. Stirn.............................. 399,162,581 6,920,706 N/A N/A
Adopt the Company's 1998 Amended and Restated
Equity Participation Plan..................... 305,009,535 99,055,658 2,018,094 -0-
Reapproval of Performance Bonus Plan for
Executive Officers of Safeway................. 386,374,903 18,173,534 1,534,850 -0-
Adopt stockholder proposal tying executive
compensation to dividends paid................ 7,165,207 341,225,979 7,179,753 -0-
Adopt stockholder proposal requesting the Board
of Directors to take the necessary steps to
provide for cumulative voting................. 134,745,708 217,651,513 3,173,718 -0-
Ratification of appointment of Deloitte & Touche
LLP as independent auditors for fiscal year
1999.......................................... 403,857,061 1,151,149 1,075,077 -0-
</TABLE>
ITEM 6(a). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Exhibit 2.1 Agreement and Plan of Merger dated as of August 6, 1998,
among Carr-Gottstein Foods Co., Safeway Inc. and ACG Merger
Sub., Inc.; and Stockholder Support Agreement dated August
6, 1998 entered into by Green Equity Investors, L.P. for the
benefit of Safeway Inc. (incorporated by reference to
Exhibit 2.1 to Registrant's Form 10-Q for the quarterly
period ended September 12, 1998).
Exhibit 2.2 Agreement and Plan of Merger dated as of October 13, 1998,
by and among Safeway Inc., Windy City Acquisition Corp. and
Dominick's Supermarkets, Inc. (incorporated by reference to
Exhibit (c)(1) to Registrant's Schedule 14D-1 dated October
19, 1998), and Stockholders' Agreement dated as of October
12, 1998 between Safeway Inc., Windy City Acquisition Corp.,
and each of the stockholders of Dominick's Supermarkets,
Inc. named on the signature pages thereto (incorporated by
reference to Exhibit (c)(2) to Registrant's Schedule 14D-1
dated October 19, 1998).
Exhibit 3.1 Restated Certificate of Incorporation of the Company and
Certificate of Amendment of Restated Certificate of
Incorporation by the Company (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 15, 1996) and
Certificate of Amendment of Restated Certificate of
Incorporation of Safeway Inc. (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 20, 1998).
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); 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);
Amendment to Company's By-laws effective March 10, 1998;
Amendment to Company's By-laws effective May 11, 1999.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Exhibit 10(iii).1* The 1999 Amended and restated Equity Participation Plan of
Safeway, Inc.
Exhibit 11.1 Computation of Earnings Per Share.
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27.1 Financial Data Schedule (electronic filing only).
</TABLE>
- ---------------
* Management contract, or compensatory plan or arrangement.
ITEM 6(b). REPORTS ON FORM 8-K
On April 23, 1999, the Company filed a current report on Form 8-K under
"Item 5. Other Events" that on April 13 an Alaska court approved the February
Consent Decree governing Safeway's acquisition of Carr-Gottstein and that on
April 16, 1999 Safeway completed the acquisition of Carr-Gottstein.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 1999 /s/ STEVEN A. BURD
--------------------------------------
Steven A. Burd
Chairman, President and Chief
Executive Officer
Date: August 3, 1999 /s/ DAVID G. WEED
--------------------------------------
David G. Weed
Executive Vice President and Chief
Financial Officer
18
<PAGE> 19
SAFEWAY INC. AND SUBSIDIARIES
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED JUNE 19, 1999
<TABLE>
<S> <C>
Exhibit 10.1 The 1999 Amended and Restated Equity Participation Plan of
Safeway Inc.
Exhibit 3.2 Amendments to Company's By-laws Effective March 10, 1998 and
May 11, 1998.
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27.1 Financial Data Schedule (electronic filing only)
</TABLE>
19
<PAGE> 1
EXHIBIT 3.2
AMENDMENT TO BY-LAWS
OF
SAFEWAY INC.
(ADOPTED AS OF MAY 11, 1999)
Amendment of By-Laws to Increase Size of Board.
RESOLVED, that the first sentence of Article III, Section 1 of the
By-Laws of the Corporation is hereby amended to read as follows:
"The number of directors which shall constitute the whole Board shall be
nine (9)."
<PAGE> 2
AMENDMENT TO BY-LAWS
OF
SAFEWAY INC.
(ADOPTED MARCH 10, 1998)
Amendment of By-Laws to Reduce Size of Board.
RESOLVED, that the first sentence of Article III, Section 1 of the
By-Laws of the Corporation is hereby amended, effective immediately after the
conclusion of the 1998 Annual Meeting, to read as follows:
"The number of directors which shall constitute the whole Board shall be
eight (8)."
<PAGE> 1
EXHIBIT 10.1
THE 1999 AMENDED AND RESTATED
EQUITY PARTICIPATION PLAN
OF
SAFEWAY INC.
Safeway Inc., a Delaware corporation, previously adopted the Stock
Option and Incentive Plan for Key Employees of Safeway Inc., the Stock Option
Plan for Consultants of Safeway Inc. and the Safeway Inc. Outside Director
Equity Purchase Plan for the benefit of its eligible employees, consultants and
outside directors, respectively (collectively, the "Prior Plans"). The Prior
Plans have previously been amended from time to time and are herein amended and
restated in their entirety in order to constitute a consolidated equity
participation plan entitled "The 1999 Amended and Restated Equity Participation
Plan of Safeway Inc." (the "Plan"). Safeway Inc. has adopted the Plan, effective
upon approval by the stockholders as provided in Section 11.5 of the Plan, for
the benefit of its eligible employees, consultants and directors. The provisions
of the Plan that provide for the grant of Incentive Stock Options, as defined
below, shall be deemed to be a new plan for purposes of the application of
Section 422 of the Internal Revenue Code of 1986, as amended.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, Employees and
Consultants (as such terms are defined below) to further the growth, development
and financial success of the Company by personally benefiting through the
ownership of Company stock and/or rights which recognize such growth,
development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, Employees and Consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
1
<PAGE> 2
ARTICLE I.
DEFINITIONS
1.1. General. Wherever the following terms are used in the Plan they shall have
the meanings specified below, unless the context clearly indicates otherwise.
1.2. Administrator. "Administrator" shall mean the entity that conducts the
general administration of the Plan as provided herein. With reference to the
administration of the Plan with respect to Options granted to Independent
Directors, the term "Administrator" shall refer to the Board. With reference to
the administration of the Plan with respect to any other Award, the term
"Administrator" shall refer to the Committee unless the Board has assumed the
authority for administration of the Plan generally as provided in Section 10.1.
1.3. Award. "Award" shall mean an Option, a Restricted Stock award, a Dividend
Equivalents award, a Deferred Stock award, a Stock Payment award or a Stock
Appreciation Right which may be awarded or granted under the Plan (collectively,
"Awards").
1.4. Award Agreement. "Award Agreement" shall mean a written agreement executed
by an authorized officer of the Company and the Holder which shall contain such
terms and conditions with respect to an Award as the Administrator shall
determine, consistent with the Plan.
1.5. Award Limit.
(a) With respect to executive officers of the Company and with respect
to Employees (other than executive officers of the Company) solely for their
year of hire, "Award Limit" shall mean 2,000,000 shares of Common Stock, or as
the context may require, options to acquire 2,000,000 shares of Common Stock, as
adjusted pursuant to Section 11.3 of the Plan.
(b) With respect to Employees other than executive officers of the
Company for each year after their year of hire, "Award Limit" shall mean 800,000
shares of Common Stock or, as the context may require, Options to acquire
800,000 shares of Common Stock, as adjusted pursuant to Section 11.3 of the
Plan.
(c) With respect to Consultants for each year after the date on which
their engagement commences, "Award Limit" shall mean 1,600,000 shares of Common
Stock or, as the context may require, Options to acquire 1,600,000 shares of
Common Stock, as adjusted pursuant to Section 11.3 of the Plan.
1.6. Board. "Board" shall mean the Board of Directors of the Company.
1.7. Bonus Plan. "Bonus Plan" shall mean collectively the Operating Performance
Bonus Plan for Executive Officers of Safeway Inc. and the Operating Performance
Bonus Plan for Key Employees of Safeway Inc.
1.8. Change in Control. "Change in Control" shall mean a change in ownership or
control of the Company as such term may be defined in any individual's Award
Agreement.
2
<PAGE> 3
1.9. Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.10. Committee. "Committee" shall mean the Section 162(m) Committee of the
Board, or another committee or subcommittee of the Board, appointed as provided
in Section 10.1.
1.11. Common Stock. "Common Stock" shall mean the common stock of the Company,
par value $0.01 per share, and any equity security of the Company issued or
authorized to be issued in the future, but excluding any preferred stock and any
warrants, options or other rights to purchase Common Stock.
1.12. Company. "Company" shall mean Safeway Inc., a Delaware corporation.
1.13. Consultant. "Consultant" shall mean any consultant or adviser if:
(a) the consultant or adviser renders bona fide services to the Company;
(b) the services rendered by the consultant or adviser are not in
connection with the offer or sale of securities in a capital-raising transaction
and do not directly or indirectly promote or maintain a market for the Company's
securities; and
(c) the consultant or adviser is a natural person who has contracted
directly with the Company to render such services.
1.14. Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under
Article VIII of the Plan.
1.15. Director. "Director" shall mean a member of the Board.
1.16. Dividend Equivalent. "Dividend Equivalent" shall mean a right to receive
the equivalent value (in Common Stock) of dividends paid on Common Stock,
awarded under Article VIII of the Plan.
1.17. DRO. "DRO" shall mean a domestic relations order that would constitute a
"qualified domestic relations order" as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, if this Plan were
subject to regulation under Title I of the Employee Retirement Income Security
Act of 1974, as amended.
1.18. Effective Date. "Effective Date" shall mean the date the Plan is approved
by the stockholders, as provided in Section 11.5.
1.19. Employee. "Employee" shall mean any officer or other employee (as defined
in accordance with Section 3401(c) of the Code) of the Company, or of any
corporation which is a Subsidiary.
1.20. Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.21. Fair Market Value. "Fair Market Value" of a share of Common Stock as of a
given date
3
<PAGE> 4
shall be (a) the closing price of a share of Common Stock on the principal
exchange on which shares of Common Stock are then trading, if any (or as
reported on any composite index which includes such principal exchange), on such
date, or if shares were not traded on such date, then on the next preceding date
on which a trade occurred, or (b) if Common Stock is not traded on an exchange
but is quoted on NASDAQ or a successor quotation system, the mean between the
closing representative bid and asked prices for the Common Stock on such date as
reported by NASDAQ or such successor quotation system; or (c) if Common Stock is
not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Administrator acting in good faith. In determining the Fair
Market Value of the Company's Common Stock under subsection (a) of this Section
1.19, the Administrator 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.
1.22. Holder. "Holder" shall mean a person who has been granted or awarded an
Award.
1.23. Incentive Stock Option. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and which
is designated as an Incentive Stock Option by the Administrator.
1.24. Independent Director. "Independent Director" shall mean a member of the
Board who is not an Employee of the Company.
1.25. Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean an
Option which is not an Incentive Stock Option.
1.26. Option. "Option" shall mean a stock option granted under Article IV of the
Plan. An Option granted under the Plan shall, as determined by the
Administrator, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
Consultants shall be Non-Qualified Stock Options.
1.27. Performance Criteria. "Performance Criteria" shall mean the performance
goals determined by the Committee, in its discretion and in accordance with
Section 162(m) of the Code.
1.28. Plan. "Plan" shall mean The Amended and Restated 1999 Equity Participation
Plan of Safeway Inc.
1.29. Purchase Stock. "Purchase Stock" shall mean Common Stock of the Company
issued pursuant to Section 11.4 of the Plan.
1.30. Restricted Stock. "Restricted Stock" shall mean Common Stock awarded under
Article VII of the Plan.
1.31. Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
1.32. Section 162(m) Participant. "Section 162(m) Participant" shall mean any
Employee
4
<PAGE> 5
whose compensation for the fiscal year in which the Employee is to receive an
Award or a future fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code.
1.33. Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.34. Stock Appreciation Right. "Stock Appreciation Right" shall mean a stock
appreciation right granted under Article IX of the Plan.
1.35. Stock Payment. "Stock Payment" shall mean (a) a payment in the form of
shares of Common Stock, or (b) an option or other right to purchase shares of
Common Stock, as part of a deferred compensation arrangement, made in lieu of
all or any portion of the compensation, including without limitation, salary,
bonuses and commissions, that would otherwise become payable to an Employee or
Consultant in cash, awarded under Article VIII of the Plan.
1.36. Subsidiary. "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 fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
1.37. Substitute Award. "Substitute Award" shall mean an Option granted under
this Plan upon the assumption of, or in substitution for, outstanding equity
awards previously granted by a company or other entity in connection with a
corporate transaction, such as a merger, combination, consolidation or
acquisition of property or stock; provided, however, that in no event shall the
term "Substitute Award" be construed to refer to an award made in connection
with the cancellation and repricing of an Option.
1.38. Termination of Consultancy. "Termination of Consultancy" shall mean the
time when the engagement of a Holder as a Consultant to the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding terminations where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Consultancy, including, but not by way of limitation, the
question of whether a Termination of Consultancy resulted from a discharge for
good cause, and all questions of whether a particular leave of absence
constitutes a Termination of Consultancy. Notwithstanding any other provision of
the Plan, the Company or any Subsidiary has an absolute and unrestricted right
to terminate a Consultant's service at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
1.39. Termination of Directorship. "Termination of Directorship" shall mean the
time when a Holder who is an Independent Director ceases to be a Director for
any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death or retirement. The Board, in its sole
and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
5
<PAGE> 6
1.40. Termination of Employment. "Termination of Employment" shall mean the time
when the employee-employer relationship between a Holder and the Company or any
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding (a) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (b) at the discretion of the Administrator, terminations which
result in a temporary severance of the employee-employer relationship, and (c)
at the discretion of the Administrator, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for good cause,
and all questions of whether a particular leave of absence constitutes a
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, unless otherwise determined by the Administrator in its
discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship
shall constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1. Shares Subject to Plan.
(a) The shares of stock subject to Awards shall be shares of the
Company's Common Stock, par value $0.01 per share. The aggregate number of such
shares which may be issued pursuant to or upon exercise of any such Awards under
the Plan shall not exceed twenty-four million (24,000,000), of which no more
than one million two hundred thousand (1,200,000) may be granted or issued as
Restricted Stock (exclusive of stock issued pursuant to the Bonus Plan), Stock
Payments or Deferred Stock, or pursuant to Awards having an exercise or purchase
price, as applicable, of less than 100% of Fair Market Value on the date of
grant or issuance. Of the 24,000,000 shares, as of May 11, 1999, options to
purchase 1,764,256 shares of Common Stock had been granted under the Prior
Plans. The shares of Common Stock issuable pursuant to or upon exercise of any
such Awards may be either previously authorized but unissued shares or treasury
shares.
(b) The maximum number of shares which may be subject to Awards granted
under the Plan to any individual, other than an Independent Director, in any
fiscal year shall not exceed the Award Limit. To the extent required by Section
162(m) of the Code, shares subject to Options which are canceled continue to be
counted against the Award Limit.
(c) The Plan also covers 79.6 million shares of Common Stock issued or
issuable pursuant to awards of stock or stock options granted on or prior to
January 2, 1999 pursuant to the Prior Plans.
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2.2. Add-back of Options and Other Rights. If any Option, or other right to
acquire shares of Common Stock under any other Award under the Plan, expires or
is canceled without having been fully exercised, or is exercised in whole or in
part for cash to the extent permitted by the Plan, the number of shares subject
to such Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to
Section 11.3 and become exercisable with respect to shares of stock of another
corporation shall be considered cancelled and may again be optioned, granted or
awarded hereunder, subject to the limitations of Section 2.1. Shares of Common
Stock which are delivered by the Holder or withheld by the Company upon the
exercise of any Award under the Plan, in payment of the exercise price thereof
or tax withholding thereon, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any shares of Restricted Stock are
surrendered by the Holder or repurchased by the Company pursuant to Section 7.4
or 7.5 hereof, such shares may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. Notwithstanding the provisions of
this Section 2.2, no shares of Common Stock may again be optioned, granted or
awarded if such action would cause an Incentive Stock Option to fail to qualify
as an incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF AWARDS
3.1. Award Agreement. Each Award shall be evidenced by an Award Agreement. Award
Agreements evidencing Awards intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
3.2. Provisions Applicable to Section 162(m) Participants.
(a) The Committee, in its discretion, may determine whether an Award is
to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code.
(b) Notwithstanding anything in the Plan to the contrary, the Committee
may grant any Award to a Section 162(m) Participant, including Restricted Stock
the restrictions with respect to which lapse upon the attainment of performance
goals which are related to one or more of the Performance Criteria and any
performance or incentive award described in Article VIII that vests or becomes
exercisable or payable upon the attainment of performance goals which are
related to one or more of the Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect to
any Award granted under Articles VII and VIII which may be granted to one or
more Section 162(m) Participants, no later than ninety (90) days following the
commencement of any fiscal year in question or any other
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designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Committee shall, in
writing, (i) designate one or more Section 162(m) Participants, (ii) select the
Performance Criteria applicable to the fiscal year or other designated fiscal
period or period of service, (iii) establish the various performance targets, in
terms of an objective formula or standard, and amounts of such Awards, as
applicable, which may be earned for such fiscal year or other designated fiscal
period or period of service and (iv) specify the relationship between
Performance Criteria and the performance targets and the amounts of such Awards,
as applicable, to be earned by each Section 162(m) Participant for such fiscal
year or other designated fiscal period or period of service. Following the
completion of each fiscal year or other designated fiscal period or period of
service, the Committee shall certify in writing whether the applicable
performance targets have been achieved for such fiscal year or other designated
fiscal period or period of service. In determining the amount earned by a
Section 162(m) Participant, the Committee shall have the right to reduce (but
not to increase) the amount payable at a given level of performance to take into
account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or other
designated fiscal period or period of service.
(d) Furthermore, notwithstanding any other provision of the Plan or any
Award which is granted to a Section 162(m) Participant and is intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code shall be subject to any additional limitations set forth in Section
162(m) of the Code (including any amendment to Section 162(m) of the Code) or
any regulations or rulings issued thereunder that are requirements for
qualification as performance-based compensation as described in Section
162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent
necessary to conform to such requirements.
3.3. Limitations Applicable to Section 16 Persons. Notwithstanding any other
provision of the Plan, the Plan, and any Award granted or awarded to any
individual who is then subject to Section 16 of the Exchange Act, shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of
the Exchange Act) that are requirements for the application of such exemptive
rule. To the extent permitted by applicable law, the Plan and Awards granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule.
3.4. Consideration. In consideration of the granting of an Award under the Plan,
the Holder shall agree, in the Award Agreement, to remain in the employ of (or
to consult for or to serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year (or such shorter
period as may be fixed in the Award Agreement or by action of the Administrator
following grant of the Award) after the Award is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company).
3.5. At-Will Employment. Nothing in the Plan or in any Award Agreement hereunder
shall confer upon any Holder any right to continue in the employ of, or as a
Consultant for, the Company or any Subsidiary, or as a director of the Company,
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to
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discharge any Holder at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in a written employment
agreement between the Holder and the Company and any Subsidiary.
ARTICLE IV.
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
4.1. Eligibility. Any Employee or Consultant selected by the Committee pursuant
to Section 4.4(a)(i) shall be eligible to be granted an Option. Each Independent
Director of the Company shall be eligible to be granted Options at the times and
in the manner set forth in Section 4.5.
4.2. Disqualification for Stock Ownership. No person may be granted an Incentive
Stock Option under the Plan if such person, at the time the Incentive Stock
Option is granted, owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any then
existing Subsidiary or parent corporation (within the meaning of Section 422 of
the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3. Qualification of Incentive Stock Options. No Incentive Stock Option shall
be granted to any person who is not an Employee.
4.4. Granting of Options to Employees and Consultants.
(a) The Committee shall from time to time, in its absolute discretion,
and subject to applicable limitations of the Plan:
(i) Select from among the Employees or Consultants (including
Employees or Consultants who have previously received Awards under the
Plan) such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected Employees or
Consultants;
(iii) Subject to Section 4.3, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and whether
such Options are to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan; provided, however, that the terms and
conditions of Options intended to qualify as
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performance-based compensation as described in Section 162(m)(4)(C) of
the Code shall include, but not be limited to, such terms and conditions
as may be necessary to meet the applicable provisions of Section 162(m)
of the Code.
Notwithstanding the above, the Committee may delegate certain powers relating to
the granting of Options as it deems appropriate to executive officers of the
Company including the power to determine the number of shares to be subject to
Options (subject to a maximum amount set by the Committee), whether such Options
are to be Incentive Stock Options or Non-Qualified Options and to determine the
terms and conditions of such Options; provided, however, that the Committee
shall not delegate any powers that are required to be exercised by the Committee
under Section 16(b) of the Securities Exchange Act of 1934, as amended, or any
rules promulgated thereunder, or Section 162(m) of the Code, or any regulations
or rules issued thereunder.
(b) Upon the selection of an Employee or Consultant to be granted an
Option, the Committee shall instruct the Secretary of the Company to issue the
Option and may impose such conditions on the grant of the Option as it deems
appropriate.
(c) Any Incentive Stock Option granted under the Plan may be modified by
the Committee, with the consent of the Holder, to disqualify such Option from
treatment as an "incentive stock option" under Section 422 of the Code.
4.5. Granting of Options to Independent Directors.
(a) Any Independent Director who is serving as of the Effective Date of
the Plan, other than an Independent Director described in Subsection (c) of this
Section 4.5, and any Independent Director who is initially elected or appointed
to the Board on or after the Effective Date of the Plan, shall, upon the date of
the annual meeting of stockholders coinciding with the Effective Date of the
Plan or upon the date of such election or appointment, respectively, be granted
an Option to purchase the number of shares of the Company's Common Stock set
forth on the attached Schedule I (subject to adjustment as provided in Section
11.3), contingent upon the concomitant purchase by such Independent Director of
the number of shares of Purchase Stock set forth on Schedule I, to the extent
required pursuant to Section 11.4 hereof.
(b) During the term of the Plan, each Independent Director, as of the
date of each annual meeting of stockholders, other than an annual meeting with
respect to which such Independent Director was granted an Option pursuant to
Subsection (a) of this Section 4.5, shall be granted an Option to purchase 2,000
shares of Common Stock (subject to adjustment as provided in Section 11.3).
(c) Notwithstanding the foregoing, any Independent Director who has
received any grant of options to purchase Common Stock pursuant to Section 3.2
of the Safeway Inc. Outside Director Equity Purchase Plan, as amended by the
First Amendment to the Safeway Inc. Outside Director Equity Purchase Plan,
adopted as of July 5, 1994 (the "Outside Director Plan"), shall not be eligible
for any grant of Options under Subsection (a) of this Section 4.5.
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(d) Notwithstanding the foregoing, any Independent Director who has
received a grant of options to purchase Common Stock pursuant to Section 3.2(a)
of the Outside Director Plan, but who, as of the Effective Date, has not yet
received a grant of options to purchase Common Stock pursuant to Section 3.2(b)
thereof, shall, upon the date such Independent Director completes three (3)
continuous years of service as a member of the Board, be granted an Option to
purchase 100,000 shares of Common Stock (subject to adjustment as provided in
Section 11.3).
ARTICLE V.
TERMS OF OPTIONS
5.1. Option Price. The price per share of the shares subject to each Option
granted to Employees and Consultants shall be set by the Committee; provided,
however, that such price shall be no less than 100% of the Fair Market Value of
a share of Common Stock on the date the Option is granted. Notwithstanding the
foregoing, in the case of Incentive Stock Options granted to an individual then
owning (within the meaning of Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code), such price shall not be less than 110% of the Fair Market Value of a
share of Common Stock on the date the Option is granted (or the date the Option
is modified, extended or renewed for purposes of Section 424(h) of the Code).
5.2. Option Term. The term of an Option granted to an Employee or Consultant
shall be set by the Committee in its discretion; provided, however, that, in the
case of Incentive Stock Options, the term shall not be more than ten (10) years
from the date the Incentive Stock Option is granted, or five (5) years from the
date the Incentive Stock Option is granted if the Incentive Stock Option is
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or parent corporation thereof (within the
meaning of Section 422 of the Code). Except as limited by requirements of
Section 422 of the Code and regulations and rulings thereunder applicable to
Incentive Stock Options, the Committee may extend the term of any outstanding
Option in connection with any Termination of Employment or Termination of
Consultancy of the Holder, or amend any other term or condition of such Option
relating to such a termination.
5.3. Option Vesting
(a) The period during which the right to exercise, in whole or in part,
an Option granted to an Employee or a Consultant vests in the Holder shall be
set by the Committee, subject to a minimum vesting period of three (3) years in
order for any Option to become fully exercisable, and the Committee may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted ; provided, however, that, unless the
Committee otherwise provides in the terms of the Award Agreement or otherwise,
no Option shall be exercisable by any Holder who is then subject to Section 16
of the Exchange Act within the period ending six months and one day after the
date the Option is granted. At any time after
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grant of an Option, the Committee may, in its sole and absolute discretion and
subject to whatever terms and conditions it selects, accelerate the period
during which an Option granted to an Employee or Consultant vests.
(b) No portion of an Option granted to an Employee or Consultant which
is unexercisable at Termination of Employment or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee either in the Award Agreement or by action of the
Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by a Holder during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any parent or subsidiary
corporation, within the meaning of Section 422 of the Code) of the Company,
exceeds $100,000, such Options shall be treated as Non-Qualified Options to the
extent required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 5.3(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
5.4. Terms of Options Granted to Independent Directors. The price per share of
the shares subject to each Option granted to an Independent Director under
Section 4.5(a) shall equal 80% of the Fair Market Value of a share of Common
Stock on the date the Option is granted. The price per share of the shares
subject to any other Option granted to an Independent Director shall be set by
the Board; provided, however, that such price shall be no less than 100% of the
Fair Market Value of a share of Common Stock on the date the Option is granted.
Options granted to Independent Directors shall become exercisable in cumulative
annual installments of one-third on each of the first, second and third
anniversaries of the date of Option grant and, subject to Section 6.6, the term
of each Option granted to an Independent Director shall be ten (10) years from
the date the Option is granted. No portion of an Option which is unexercisable
at Termination of Directorship shall thereafter become exercisable.
5.5. Substitute Awards.
Notwithstanding the foregoing provisions of this Article V to the contrary, in
the case of an Option that is a Substitute Award, the price per share of the
shares subject to such Option may be less than the Fair Market Value per share
on the date of grant, provided, that the excess of:
(a) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares subject to the Substitute Award; over
(b) the aggregate exercise price thereof; does not exceed the excess of;
(c) the aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair market
value to be determined by the Committee) of the shares of the predecessor entity
that were subject to the grant assumed or substituted for by
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the Company; over
(d) the aggregate exercise price of such shares.
5.6 Expiration of Options of Employees and Consultants.
(a) No Option may be exercised to any extent by any Employee or
Consultant after the first to occur of the following events:
(i) In the case of an Incentive Stock Option, (1) the expiration
of ten years from the date the Option was granted or (2) in the case of
an Optionee owning (within the meaning of Section 424(d) of the Code),
at the time the Incentive Stock Option was granted, more than 10% of the
total combined voting power of all classes of stock of the Company, any
Subsidiary or any Parent Corporation, the expiration of five years from
the date the Incentive Stock Option was granted; or
(ii) In the case of a Non-Qualified Option, the expiration of
ten (10) years and one day from the date the Option was granted; or
(iii) The expiration of three (3) months from the date of the
Optionee's Termination of Employment or Consultancy for any reason other
than death or disability, within the meaning of Section 22(e)(3) of the
Code, or retirement on or after age 55 in accordance with the Company's
retirement policies, as then in effect; or
(iv) The engagement by the Optionee in willful misconduct which
injures the Company or any of its Subsidiaries.
(b) Subject to the provisions of Section 5.6(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Options that said Options
expire immediately upon a Termination of Employment or Consultancy for any
reason.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1. Partial Exercise. An exercisable Option may be exercised in whole or in
part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
6.2. Manner of Exercise. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his or her office:
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(a) A notice complying with the applicable rules established by the
Administrator stating that the Option, or a portion thereof, is exercised;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Administrator 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 notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to Section
11.1 by any person or persons other than the Holder, appropriate proof of the
right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However, the
Administrator, may in its discretion: (i) allow a delay in payment up to thirty
(30) days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common Stock
which have been owned by the Holder for at least six months, duly endorsed for
transfer to the Company with a Fair Market Value on the date of delivery equal
to the aggregate exercise price of the Option or exercised portion thereof;
(iii) allow payment, in whole or in part, through the surrender of shares of
Common Stock then issuable upon exercise of the Option having a Fair Market
Value on the date of Option exercise equal to the aggregate exercise price of
the Option or exercised portion thereof; (iv) allow payment, in whole or in
part, through the delivery of property of any kind which constitutes good and
valuable consideration; (v) allow payment, in whole or in part, through the
delivery of a full recourse promissory note bearing interest (at no less than
such rate as shall then preclude the imputation of interest under the Code) and
payable upon such terms as may be prescribed by the Administrator; (vi) allow
payment, in whole or in part, through the delivery of a notice that the Holder
has placed a market sell order with a broker with respect to shares of Common
Stock then issuable upon exercise of the Option, and that the broker has been
directed to pay a sufficient portion of the net proceeds of the sale to the
Company in satisfaction of the Option exercise price, provided that payment of
such proceeds is then made to the Company upon settlement of such sale; or (vii)
allow payment through any combination of the consideration provided in the
foregoing subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a
promissory note, the Administrator may also prescribe the form of such note and
the security to be given for such note. The Option may not be exercised,
however, by delivery of a promissory note or by a loan from the Company when or
where such loan or other extension of credit is prohibited by law.
6.3. Conditions to Issuance of Stock Certificates. The Company shall not be
required to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
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(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 Administrator shall, in its absolute discretion, deem necessary or
advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for reasons
of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the discretion of
the Administrator may be in the form of consideration used by the Holder to pay
for such shares under Section 6.2(d).
Notwithstanding the foregoing, to the extent and on the terms and conditions the
Administrator may determine, in its sole discretion, the Administrator may
permit a Holder to elect to defer receipt of shares that otherwise would be
issuable pursuant to the exercise of an Option under Section 6.2.
6.4. Rights as Stockholders. Holders shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such Holders.
6.5. Ownership and Transfer Restrictions. The Administrator, in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Award Agreement and
may be referred to on the certificates evidencing such shares. The Holder shall
give the Company prompt notice of any disposition of shares of Common Stock
acquired by exercise of an Incentive Stock Option within (a) two years from the
date of granting (including the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code) such Option to such Holder or (b)
one year after the transfer of such shares to such Holder.
6.6. Expiration of Options Granted to Independent Directors. No Option granted
to an Independent Director may be exercised to any extent by anyone after the
first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the Holder's
death;
(b) The expiration of twelve (12) months from the date of the Holder's
Termination of Directorship by reason of his or her permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
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(c) The expiration of three (3) months from the date of the Holder's
Termination of Directorship for any reason other than such Holder's death or his
or her permanent and total disability, unless the Holder dies within said
three-month period; or
(d) The expiration of ten (10) years from the date the Option was
granted.
6.7. Additional Limitations on Exercise of Options. Holders may be required to
comply with any timing or other restrictions with respect to the settlement or
exercise of an Option that may be imposed in the discretion of the
Administrator.
ARTICLE VII.
AWARD OF RESTRICTED STOCK
7.1. Eligibility. Subject to the Award Limit, Restricted Stock may be awarded to
any Employee or any Consultant who the Committee determines should receive such
an Award.
7.2. Award of Restricted Stock
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the Employees or Consultants (including
Employees or Consultants who have previously received other awards under
the Plan) such of them as in its opinion should be awarded Restricted
Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with the
Plan.
(b) The Committee shall establish the purchase price, if any, and form
of payment for Restricted Stock; provided, however, that such purchase price
shall be no less than the par value of the Common Stock to be purchased, unless
otherwise permitted by applicable state law. In all cases, legal consideration
shall be required for each issuance of Restricted Stock.
(c) Upon the selection of an Employee or Consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
(d) Any stock bonus awarded to any Employee under the Bonus Plan shall
be awarded as Restricted Stock pursuant to this Article VII.
7.3. Rights as Stockholders. Subject to Section 7.4, upon delivery of the shares
of Restricted Stock to the Holder, or to the escrow holder pursuant to Section
7.6, as applicable, the Holder shall have, unless otherwise provided by the
Committee, all the rights of a stockholder with respect to said shares, subject
to the restrictions, if any, in his or her Award Agreement, including the right
to receive all dividends and other distributions paid or made with respect to
the shares; provided, however, that in the discretion of the Committee, any
extraordinary distributions with respect to the Common Stock shall be subject to
the restrictions set forth in Section 7.4.
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7.4. Restriction. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to such restrictions as the Committee shall provide, which restrictions
may include, without limitation, restrictions concerning voting rights and
transferability and restrictions based on duration of employment with the
Company, Company performance and individual performance; provided, however,
that, by action taken after the Restricted Stock is issued, the Committee may,
on such terms and conditions as it may determine to be appropriate, remove any
or all of the restrictions imposed by the terms of the Award Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire.
7.5. Repurchase of Restricted Stock. The Committee may provide in the terms of
each individual Award Agreement that the Company shall have the right to
repurchase from the Holder the Restricted Stock then subject to restrictions
under the Award Agreement immediately upon a Termination of Employment or, if
applicable, upon a Termination of Consultancy between the Holder and the
Company, at a cash price per share equal to the price paid by the Holder for
such Restricted Stock; provided, however, that the Committee in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment following a "change of ownership or
control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or
any successor regulation thereto) of the Company or because of the Holder's
death or disability; provided, further, that, the Committee in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment or a Termination of Consultancy without
cause or following any Change in Control of the Company or because of the
Holder's retirement, or otherwise.
7.6. Escrow. The Secretary of the Company or such other escrow holder as the
Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7. Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Award Agreements, which legend or legends
shall make appropriate reference to the conditions imposed thereby.
7.8. Section 83(b) Election. If a Holder makes an election under Section 83(b)
of the Code, or any successor section thereto, to be taxed with respect to the
Restricted Stock as of the date of transfer of the Restricted Stock rather than
as of the date or dates upon which the Holder would otherwise be taxable under
Section 83(a) of the Code, the Holder shall deliver a copy of such election to
the Company immediately after filing such election with the Internal Revenue
Service.
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ARTICLE VIII.
DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS
8.1. Eligibility. Subject to the Award Limit, one or more Dividend Equivalents,
awards of Deferred Stock, and/or Stock Payments may be granted to any Employee
or Consultant whom the Committee determines should receive such an Award.
8.2. Dividend Equivalents.
(a) Any Employee or Consultant selected by the Committee may be granted
Dividend Equivalents based on the dividends declared on Common Stock, to be
credited as of dividend payment dates, during the period between the date a
Stock Appreciation Right or Deferred Stock is granted, and the date such Stock
Appreciation Right or Deferred Stock is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
additional shares of Common Stock by such formula and at such time and subject
to such limitations as may be determined by the Committee.
(b) Any Holder of an Option who is an Employee or Consultant selected by
the Committee may be granted Dividend Equivalents based on the dividends
declared on Common Stock, to be credited as of dividend payment dates, during
the period between the date an Option is granted, and the date such Option is
exercised, vests or expires, as determined by the Committee. Such Dividend
Equivalents shall be converted to additional shares of Common Stock by such
formula and at such time and subject to such limitations as may be determined by
the Committee.
(c) Any Holder of an Option who is an Independent Director selected by
the Board may be granted Dividend Equivalents based on the dividends declared on
Common Stock, to be credited as of dividend payment dates, during the period
between the date an Option is granted, and the date such Option is exercised,
vests or expires, as determined by the Board. Such Dividend Equivalents shall be
converted to additional shares of Common Stock by such formula and at such time
and subject to such limitations as may be determined by the Board.
(d) Dividend Equivalents granted with respect to Options intended to be
qualified performance-based compensation for purposes of Section 162(m) of the
Code shall be payable, with respect to pre-exercise periods, regardless of
whether such Option is subsequently exercised.
8.3. Stock Payments. Any Employee or Consultant selected by the Committee may
receive Stock Payments in the manner determined from time to time by the
Committee. The number of shares shall be determined by the Committee and may be
based upon the Performance Criteria or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
8.4. Deferred Stock. Any Employee or Consultant selected by the Committee may be
granted an award of Deferred Stock in the manner determined from time to time by
the Committee. The number of shares of Deferred Stock shall be determined by the
Committee and may be linked to
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<PAGE> 19
the Performance Criteria or other specific performance criteria determined to be
appropriate by the Committee, in each case on a specified date or dates or over
any period or periods determined by the Committee. Common Stock underlying a
Deferred Stock award will not be issued until the Deferred Stock award has
vested, pursuant to a vesting schedule or performance criteria set by the
Committee. Unless otherwise provided by the Committee, a Holder of Deferred
Stock shall have no rights as a Company stockholder with respect to such
Deferred Stock until such time as the Award has vested and the Common Stock
underlying the Award has been issued.
8.5. Term. The term of a Dividend Equivalent, award of Deferred Stock and/or
Stock Payment shall be set by the Committee in its discretion.
8.6. Exercise or Purchase Price. The Committee may establish the exercise or
purchase price of shares of Deferred Stock or shares received as a Stock
Payment; provided, however, that such price shall not be less than the par value
for a share of Common Stock, unless otherwise permitted by applicable state law.
8.7. Exercise Upon Termination of Employment, Termination of Consultancy or
Termination of Directorship. A Dividend Equivalent, award of Deferred Stock
and/or Stock Payment is exercisable or payable only while the Holder is an
Employee, Consultant or Independent Director, as applicable; provided, however,
that the Administrator in its sole and absolute discretion may provide that the
Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be
exercised or paid subsequent to a Termination of Employment following a "change
of control or ownership" (within the meaning of Section 1.162-27(e)(2)(v) or any
successor regulation thereto) of the Company.
8.8. Form of Payment. Payment of the amount determined under Section 8.2 or 8.3
above shall be in Common Stock and shall be subject to satisfaction of all
provisions of Section 6.3.
ARTICLE IX.
STOCK APPRECIATION RIGHTS
9.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any Employee or Consultant selected by the Committee. A Stock
Appreciation Right may be granted (a) in connection and simultaneously with the
grant of an Option, (b) with respect to a previously granted Option, or (c)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with the Plan as the Committee shall
impose and shall be evidenced by an Award Agreement.
9.2. Coupled Stock Appreciation Rights.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
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<PAGE> 20
(b) A CSAR may be granted to the Holder for no more than the number of
shares subject to the simultaneously or previously granted Option to which it is
coupled.
(c) A CSAR shall entitle the Holder (or other person entitled to
exercise the Option pursuant to the Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
9.3. Independent Stock Appreciation Rights.
(a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated
to any Option and shall have a term set by the Committee. An ISAR shall be
exercisable in such installments as the Committee may determine. An ISAR shall
cover such number of shares of Common Stock as the Committee may determine;
provided, however, that unless the Committee otherwise provides in the terms of
the ISAR or otherwise, no ISAR granted to a person subject to Section 16 of the
Exchange Act shall be exercisable until at least six months have elapsed from
(but excluding) the date on which the Option was granted. The exercise price per
share of Common Stock subject to each ISAR shall be set by the Committee. An
ISAR is exercisable only while the Holder is an Employee or Consultant; provided
that the Committee may determine that the ISAR may be exercised subsequent to
Termination of Employment or Termination of Consultancy without cause, or
following a Change in Control of the Company, or because of the Holder's
retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Holder (or other person entitled to
exercise the ISAR pursuant to the Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
9.4. Payment and Limitations on Exercise.
(a) Payment of the amounts determined under Section 9.2(c) and 9.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 6.3
above pertaining to Options.
(b) Holders of Stock Appreciation Rights may be required to comply with
any timing
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or other restrictions with respect to the settlement or exercise of a Stock
Appreciation Right that may be imposed in the discretion of the Committee.
ARTICLE X.
ADMINISTRATION
10.1. Committee. The Committee (or another committee or a subcommittee of the
Board assuming the functions of the Committee under the Plan) shall consist
solely of two or more Independent Directors appointed by and holding office at
the pleasure of the Board, each of whom is both a "non-employee director" as
defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m)
of the Code. Appointment of Committee members shall be effective upon acceptance
of appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
10.2. Duties and Powers of Committee. It shall be the duty of the Committee to
conduct the general administration of the Plan in accordance with its
provisions. The Committee shall have the power to interpret the Plan and the
Award Agreements, and to adopt such rules for the administration,
interpretation, and application of the Plan as are consistent therewith, to
interpret, amend or revoke any such rules and to amend any Award Agreement
provided that the rights or obligations of the Holder of the Award that is the
subject of any such Award Agreement are not affected adversely. Any such grant
or award under the Plan need not be the same with respect to each Holder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan except with respect to matters
which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or
rules issued thereunder, are required to be determined in the sole discretion of
the Committee. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration of
the Plan with respect to Options and Dividend Equivalents granted to Independent
Directors.
10.3. Majority Rule; Unanimous Written Consent. The Committee shall act by a
majority of its members in attendance at a meeting at which a quorum is present
or by a memorandum or other written instrument signed by all members of the
Committee.
10.4. Compensation; Professional Assistance; Good Faith Actions. Members of the
Committee shall receive such compensation, if any, for their services as members
as may be determined by the Board. All expenses and liabilities which members of
the Committee incur in connection with the administration of the Plan shall be
borne by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Holders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
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<PAGE> 22
interpretation made in good faith with respect to the Plan or Awards, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
10.5. Delegation of Authority to Grant Awards. The Committee may, but need not,
delegate from time to time some or all of its authority to grant Awards under
the Plan to a committee consisting of one or more members of the Committee or of
one or more officers of the Company; provided, however, that the Committee may
not delegate its authority to grant Awards to individuals (i) who are subject on
the date of the grant to the reporting rules under Section 16(a) of the Exchange
Act, (ii) who are Section 162(m) Participants or (iii) who are officers of the
Company who are delegated authority by the Committee hereunder. Any delegation
hereunder shall be subject to the restrictions and limits that the Committee
specifies at the time of such delegation of authority and may be rescinded at
any time by the Committee. At all times, any committee appointed under this
Section 10.5 shall serve in such capacity at the pleasure of the Committee.
ARTICLE XI.
MISCELLANEOUS PROVISIONS
11.1. Not Transferable.
(a) No Award under the Plan may be sold, pledged, assigned or
transferred in any manner other than by will or the laws of descent and
distribution or, unless and until such Award has been exercised, or the shares
underlying such Award have been issued, and all restrictions applicable to such
shares have lapsed. No Award or interest or right therein shall be liable for
the debts, contracts or engagements of the Holder or his or her 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, except to the extent that such disposition is permitted
by the preceding sentence.
(b) Notwithstanding the provisions of subsection (a) hereof, the
Administrator, in its absolute discretion, may determine to grant to any Holder
an Award which, by its terms as set forth in the applicable Award Agreement, may
be transferred by the Holder, in writing and with prior written notice to the
Administrator, (i) pursuant to a DRO, or (ii) by gift, without the receipt of
any consideration, to a member of Holder's immediate family, as defined in Rule
16a-1 under the Exchange Act, or to a trust for the exclusive benefit of, or any
other entity owned solely by, such members, provided, that an Award that has
been so transferred shall continue to be subject to all of the terms and
conditions of the Award as applicable to the original Holder, and the transferee
shall execute any and all such documents requested by the Administrator in
connection with the transfer, including without limitation to evidence the
transfer and to satisfy any requirements for an exemption for the transfer under
applicable federal and state securities laws.
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11.2. Amendment, Suspension or Termination of the Plan. Except as otherwise
provided in this Section 11.2, the Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Administrator. However, without approval of the Company's stockholders given
within twelve months before or after the action by the Administrator, no action
of the Administrator may (a) except as provided in Section 11.3, increase the
limits imposed in Section 2.1 on the maximum number of shares which may be
issued under the Plan or (b) materially increase the benefits available to
participants under the Plan. No amendment, suspension or termination of the Plan
shall, without the consent of the Holder alter or impair any rights or
obligations under any Award theretofore granted or awarded, unless the Award
itself otherwise expressly so provides. No Awards may be granted or awarded
during any period of suspension or after termination of the Plan, and in no
event may any Incentive Stock Option be granted under the Plan after the first
to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by the
Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 11.5.
11.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 11.3 (d), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Administrator's sole discretion, affects
the Common Stock such that an adjustment is determined by the Administrator to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Award, then the Administrator shall, in such manner as it may deem
equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Awards may be granted or
awarded (including, but not limited to, adjustments of the limitations
in Section 2.1 on the maximum number and kind of shares which may be
issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Awards, and
(iii) the grant or exercise price with respect to any Award.
(b) Subject to Section 11.3(d), in the event of any transaction or event
described in
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Section 11.3(a) or any unusual or nonrecurring transactions or events affecting
the Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Administrator, in its sole and absolute discretion,
and on such terms and conditions as it deems appropriate, either by the terms of
the Award or by action taken prior to the occurrence of such transaction or
event and either automatically or upon the Holder's request, is hereby
authorized to take any one or more of the following actions whenever the
Administrator determines that such action is appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan or with respect to any Award under the Plan, to
facilitate such transactions or events, or to give effect to such changes in
laws, regulations or principles:
(i) To provide for either the purchase of any such Award for an
amount of cash equal to the amount that could have been attained upon
the exercise of such Award or realization of the Holder's rights had
such Award been currently exercisable or payable or fully vested or the
replacement of such Award with other rights or property selected by the
Administrator in its sole discretion;
(ii) To provide that the Award cannot vest, be exercised or
become payable after such event;
(iii) To provide that such Award shall be exercisable as to all
shares covered thereby, notwithstanding anything to the contrary in
Section 5.3 or 5.4 or the provisions of such Award;
(iv) To provide that such Award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the stock
of the successor or survivor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of
shares and prices;
(v) To make adjustments in the number and type of shares of
Common Stock (or other securities or property) subject to outstanding
Awards, or Awards which may be granted in the future, and in the number
and kind of outstanding Restricted Stock or Deferred Stock subject to
outstanding Awards, or Awards which may be granted in the future; and
(vi) To provide that, for a specified period of time prior to
such event, the restrictions imposed under an Award Agreement upon some
or all shares of Restricted Stock or Deferred Stock may be terminated,
and, in the case of Restricted Stock, some or all shares of such
Restricted Stock may cease to be subject to repurchase under Section 7.5
or forfeiture under Section 7.4 after such event.
(c) Subject to Sections 11.3(d), 3.2 and 3.3, the Administrator may, in
its discretion, include such further provisions and limitations in any Award,
agreement or certificate, as it may deem equitable and in the best interests of
the Company.
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(d) With respect to Awards which are granted to Section 162(m)
Participants and are intended to qualify as performance-based compensation under
Section 162(m)(4)(C), no adjustment or action described in this Section 11.3 or
in any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause such Award to fail to so qualify under Section
162(m)(4)(C), or any successor provisions thereto, unless the Committee
determines otherwise, in its sole discretion. No adjustment or action described
in this Section 11.3 or in any other provision of the Plan shall be authorized
to the extent that such adjustment or action would cause the Plan to violate
Section 422(b)(1) of the Code, unless the Committee determines otherwise, in its
sole discretion. Furthermore, no such adjustment or action shall be authorized
to the extent such adjustment or action would result in short-swing profits
liability under Section 16 or violate the exemptive conditions of Rule 16b-3
unless the Administrator determines that the Award is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any Award
shall always be rounded up to the next whole number.
(e) Notwithstanding the foregoing, in the event that the Company becomes
a party to a transaction that is intended to qualify for "pooling of interests"
accounting treatment and, but for one or more of the provisions of this Plan or
any Award Agreement would so qualify, then this Plan and any Award Agreement
shall be interpreted so as to preserve such accounting treatment, and to the
extent that any provision of the Plan or any Award Agreement would disqualify
the transaction from pooling of interests accounting treatment (including, if
applicable, an entire Award Agreement), then such provision shall be null and
void. All determinations to be made in connection with the preceding sentence
shall be made by the independent accounting firm whose opinion with respect to
"pooling of interests" treatment is required as a condition to the Company's
consummation of such transaction.
(f) The existence of the Plan, the Award Agreement and the Awards
granted hereunder shall not affect or restrict in any way the right or power of
the Company or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the Company,
any issue of stock or of options, warrants or rights to purchase stock or of
bonds, debentures, preferred or prior preference stocks whose rights are
superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of the company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
11.4. Purchase and Terms of Purchase Stock.
(a) On the later to occur of (a) the adoption of the Plan by the Board,
or (b) such Independent Director's election or appointment to the Board, each
Independent Director must, as a condition to membership on the Board, purchase
the number of shares of Purchase Stock set forth on the attached Schedule I to
the extent such Independent Director does not then beneficially own or is not
then deemed to beneficially own such number of shares.
(b) Shares issued as Purchase Stock may be either previously authorized
but unissued
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shares or issued shares which have been acquired by the Company.
(c) The per share purchase price of Purchase Stock shall equal 80% of
the Fair Market Value of a share of Common Stock on the date of purchase.
(d) As soon as possible after an Independent Director purchases Purchase
Stock under this Section 11.4, the Secretary of the Company shall prepare for
execution a Stock Option and Purchase Agreement (which Agreement shall also
include the Option granted to the Independent Director pursuant to Section 4.5),
which shall be executed by the Independent Director and an authorized Officer of
the Company and which shall contain such terms and conditions as the Board shall
determine, consistent with the Plan. Upon execution of such agreement and
receipt of payment for such shares, the Secretary of the Company shall cause the
Company to issue to the Independent Director a certificate or certificates
representing the number of shares of such Purchase Stock.
(e) Purchase Stock may be purchased solely by delivery to the Secretary
of the Company each of the following:
(i) A purchase agreement, as approved by the Committee, executed
by the Independent Director,
(ii) Full payment of the purchase price of the Purchase Stock
which shall be made by delivery of a combination of (1) cash (or a
check) in the amount of not less than the aggregate par value of the
number of shares purchased; and (2) a promissory note for the balance of
the amount in the form approved by the Committee, and
(iii) 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.
11.5. Approval of Plan by Stockholders. The Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of the Plan. In addition, to the extent required
under Section 162(m) of the Code, if the Board determines that Awards other than
Options or Stock Appreciation Rights which may be granted to Section 162(m)
Participants should continue to be eligible to qualify as performance-based
compensation under Section 162(m)(4)(C) of the Code, the Performance Criteria
must be disclosed to and approved by the Company's stockholders no later than
the first stockholder meeting that occurs in the fifth year following the year
in which the Company's stockholders previously approved the Performance
Criteria.
11.6. Tax Withholding. The Company shall be entitled to require payment in cash
or deduction from other compensation payable to each Holder of any sums required
by federal, state or local tax law to be withheld with respect to the issuance,
vesting, exercise or payment of any Award. The Administrator may in its
discretion and in satisfaction of the foregoing requirement allow such Holder to
elect to have the Company withhold shares of Common Stock otherwise issuable
under such Award (or allow the return of shares of Common Stock) having a Fair
Market Value equal to the sums required to be withheld.
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11.7. Loans. The Committee may, in its discretion, extend one or more loans to
Employees in connection with the exercise or receipt of an Award granted or
awarded under the Plan, or the issuance of Restricted Stock or Deferred Stock
awarded under the Plan. The terms and conditions of any such loan shall be set
by the Committee.
11.8. Forfeiture Provisions. Pursuant to its general authority to determine the
terms and conditions applicable to Awards under the Plan, the Administrator
shall have the right to provide, in the terms of Awards made under the Plan, or
to require a Holder to agree by separate written instrument, that (a) (i) any
proceeds, gains or other economic benefit actually or constructively received by
the Holder upon any receipt or exercise of the Award, or upon the receipt or
resale of any Common Stock underlying the Award, must be paid to the Company,
and (ii) the Award shall terminate and any unexercised portion of the Award
(whether or not vested) shall be forfeited, if (b)(i) a Termination of
Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the Award, or (ii) the Holder at any time, or during a specified
time period, engages in any activity in competition with the Company, or which
is inimical, contrary or harmful to the interests of the Company, as further
defined by the Administrator or (iii) the Holder incurs a Termination of
Employment, Termination of Consultancy or Termination of Directorship for cause.
11.9. Effect of Plan Upon Options and Compensation Plans. The adoption of the
Plan shall not affect any other compensation or incentive plans in effect for
the Company or any Subsidiary, except as specifically set forth in the preamble
hereof. Nothing in the Plan shall be construed to limit the right of the Company
(a) to establish any other forms of incentives or compensation for Employees,
Directors or Consultants of the Company or any Subsidiary or (b) to grant or
assume options or other rights or awards otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
11.10. Compliance with Laws. The Plan, the granting and vesting of Awards under
the Plan and the issuance and delivery of shares of Common Stock and the payment
of money under the Plan or under Awards granted or awarded hereunder are subject
to compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Awards granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
11.11. Titles. Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of the Plan.
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11.12. Governing Law. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
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SCHEDULE I
DETERMINATION OF NUMBER OF SHARES
OF PURCHASE STOCK AND NUMBER OF
SHARES SUBJECT TO STOCK OPTIONS
I. PURCHASE STOCK
In accordance with Section 11.4 of the Plan, an Independent
Director is entitled to purchase the number of shares of Purchase Stock equal to
X where X equals:
$140,000.00
-----------
Y
(rounded up to the nearest whole share) where Y equals the purchase price
determined in accordance with Section 11.4 of the Plan.
II. STOCK OPTIONS
In accordance with Section 4.5(a) of the Plan, the Company shall
grant to an Independent Director an option to purchase the number of shares of
Common Stock equal to X where X equals:
$200,000.00
-----------
Y
(rounded up to the nearest whole share) where Y equals the purchase price
determined in accordance with Section 5.4 of the Plan; provided, however, that
no such grant shall be made unless and until the Independent Director purchases
the number of shares of Purchase Stock set forth above, to the extent required
by Section 11.4 of the Plan.
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* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of __________________ on ____________, 1999.
I hereby certify that the foregoing Plan was duly approved by the
stockholders of the Company on ____________, 1999.
Executed on this ____ day of _______________, 1999.
------------------------------------
Meredith Parry, Assistant Secretary
30
<PAGE> 1
EXHIBIT 11.1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 Weeks Ended
-----------------------------------------------------------
June 19, 1999 June 20, 1998
--------------------------- ------------------------
Diluted Basic Diluted Basic
--------- ---------- --------- -----
<S> <C> <C> <C> <C>
Net income $ 236.4 $ 236.4 $ 193.2 $193.2
========= ========== ========= ======
Weighted average common shares outstanding 496.5 496.5 480.2 480.2
========== ======
Common share equivalents 16.5 28.0
--------- ---------
Weighted average shares outstanding and
common share equivalents 513.0 508.2
========= =========
Earnings per share $ 0.46 $ 0.48 $ 0.38 $ 0.40
========= ========== ========= ======
Calculation of common share equivalents:
Options and warrants to purchase common shares 36.7 49.0
Common shares assumed purchased with potential
proceeds (20.2) (21.0)
--------- --------
Common share equivalents 16.5 28.0
========= ========
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options
to purchase common shares $ 1,008.3 $ 798.1
Common stock price used under the treasury
stock method $ 49.87 $ 37.97
Common shares assumed purchased with
potential proceeds 20.2 21.0
</TABLE>
<PAGE> 2
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENT (CONTINUED)
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
24 Weeks Ended
-----------------------------------------------------
June 19, 1999 June 20, 1998
----------------------- ---------------------
Diluted Basic Diluted Basic
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 442.2 $ 442.2 $ 358.0 $ 358.0
======= ======= ======= =======
Weighted average common shares outstanding 494.6 494.6 479.2 479.2
======= =======
Common share equivalents 18.3 28.2
------- -------
Weighted average common shares and common
share equivalents 512.9 507.4
======= =======
Earnings per share: $ 0.86 $ 0.89 $ 0.71 $ 0.75
======= ======= ======= =======
Calculation of common share equivalents:
Options and warrants to purchase common shares 30.1 49.7
Common shares assumed purchased with potential
proceeds (11.8) (21.5)
------- -------
Common share equivalents 18.3 28.2
======= =======
Calculation of common shares assumed purchased with
potential proceeds:
Potential proceeds from exercise of options
to purchase common shares $ 610.8 $ 784.3
Common stock price used under the treasury
stock method $ 51.44 $ 36.45
Common shares assumed purchased with
potential proceeds 11.8 21.5
</TABLE>
<PAGE> 1
SAFEWAY INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED) EXHIBIT 12.1
<TABLE>
<CAPTION>
24 Weeks Fiscal Year
--------------------- -------------------------------------------------------------
June 19, June 20,
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss $ 762.5 $ 619.8 $ 1,396.9 $ 1,076.3 $ 767.6 $ 556.5 $ 424.1
Add interest expense 147.5 104.4 235.0 241.2 178.5 199.8 221.7
Add interest on rental expense (a) 64.6 50.0 108.2 88.5 90.0 87.5 86.6
Less equity in earnings of
unconsolidated affiliate (13.2) (10.4) (28.5) (34.9) (50.0) (26.9) (27.3)
Add minority interest in
subsidiary 1.7 1.6 5.1 4.4 3.4 3.9 3.0
--------- --------- --------- --------- --------- --------- ---------
Earnings $ 963.1 $ 765.4 $ 1,716.7 $ 1,375.5 $ 989.5 $ 820.8 $ 708.1
========= ========= ========= ========= ========= ========= =========
Interest expense $ 147.5 $ 104.4 $ 235.0 $ 241.2 $ 178.5 $ 199.8 $ 221.7
Add capitalized interest 3.5 3.2 8.5 5.7 4.4 4.6 2.9
Add interest on rental expense (a) 64.6 50.0 108.2 88.5 90.0 87.5 86.6
--------- --------- --------- --------- --------- --------- ---------
Fixed charges $ 215.6 $ 157.6 $ 351.7 $ 335.4 $ 272.9 $ 291.9 $ 311.2
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges 4.47 4.86 4.88 4.10 3.63 2.81 2.28
========= ========= ========= ========= ========= ========= =========
</TABLE>
(a) Based on a 10% discount factor on the estimated present value of future
operating lease payments.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME
ON PAGES 3 THROUGH 5 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JUNE 19, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUN-19-1999
<CASH> 40,300
<SECURITIES> 0
<RECEIVABLES> 201,200
<ALLOWANCES> 0
<INVENTORY> 1,884,800
<CURRENT-ASSETS> 2,330,000
<PP&E> 8,432,900
<DEPRECIATION> 3,019,500
<TOTAL-ASSETS> 11,813,700
<CURRENT-LIABILITIES> 2,623,600
<BONDS> 4,658,200
0
0
<COMMON> 5,600
<OTHER-SE> 3,598,700
<TOTAL-LIABILITY-AND-EQUITY> 11,818,700
<SALES> 6,337,000
<TOTAL-REVENUES> 6,337,000
<CGS> (4,442,000)
<TOTAL-COSTS> (4,442,000)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (74,200,000)
<INCOME-PRETAX> 401,400
<INCOME-TAX> (165,000)
<INCOME-CONTINUING> 236,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,400
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.46
</TABLE>
